In 2020, due to the coronavirus pandemic, thousands of small and medium-sized businesses went bankrupt around the world. The main reason for the bankruptcy was the lack of readiness of companies not only to global economic problems but also to problems in a particular industry. Such problems affect business particularly acutely in the CIS countries, where entrepreneurs do not have a rich experience of competent financial protection of business in the event of crises, market stagnation or high volatility of commodity prices. With the right approach to the company’s capital management, aimed at hedging (protecting) the business, it is possible to avoid such problems, in the worst case, significantly reduce their impact on the business.
Hedging is the protection of price risks. Insurance against adverse movements in the price of raw materials. Hedging is usually carried out by entering into multidirectional transactions on the exchange for a specific asset or financial instrument, as well as using futures contracts or options.
With the development of financial markets in the CIS, hedging becomes an integral part of successful business and its sustainability in times of economic turmoil. The international metal trading company TRM, which is one of the largest enterprises in the CIS market for working with secondary non-ferrous metals, with an annual turnover of $100 million, decided to share its own hedge experience with us. Over 10 years of active activity, the leaders of TRM realized that stock market fluctuations carry risks that need to be eliminated in order to steadily grow and increase their volumes.
Particularly high volatility was observed in 2020. The consequences of the pandemic first led to a 30% drop in the price of copper — from 6,300 to 4,400 points, after which there was a sharp increase of 75%, and now it is trading around 7960. Such fluctuations are not just dangerous for large losses, they can lead to ruin.
Hedging is used by large companies to minimize losses when adverse market conditions occur. For example, a large contract is signed for the sale of copper wire rod for a year at a fixed price. If the price of copper on the stock exchange falls, then this is good for the transaction, but if the price of copper rises, then the transaction will be unprofitable, and given the fact that the transaction is made for a year, then the losses can be large. To ensure ourselves against an undesirable price increase, we, at the time of signing the supply contract, make a transaction on the exchange, which allows us to level the price increase and keep our earnings at the planned level. However, you need to understand that in this case, if the price falls, we will also not get more than earnings.
We also use the opportunity to hedge currency risks. Here the principle is the same as in metal hedging — multidirectional transactions on the real market and on the stock exchange. First, we hedged the risks with the help of brokers on the LME exchange, then on COMEX (these are the largest exchanges for trading copper futures). Their main drawback is the large volume of lots: on the LME, one lot is 25 tons, on the COMEX-about 11 tons. If you need to buy, for example, 17 or 5 tons, you had to either abandon hedging or work with a larger lot.
The problem was solved thanks to cooperation with the crypto exchange BitExStage.com. It has the ability to hedge the metal from one pound. The platform also offers a lower level of the cost of opening a transaction. One of the main advantages of BitExStage.com — this is an online platform through which we can independently make transactions, excluding the extra link in the person of the broker and the time required for his reaction to the placed order.
This applies not only to non-ferrous metals, but also to oil and other commodities. On BitExStage you can trade tokens (tokenized contracts), the value of which is linked to world prices on international commodity exchanges. In addition, BitExStage has a number of other, equally important advantages and amenities that allow businesses to cooperate with the platform without any problems.