SHFE launches aluminium, zinc options trading; more risk management tools on the way

The Shanghai Futures Exchange launched aluminium and zinc options contracts on Monday August 10 to meet growing desire for the important risk management tool, the exchange chairman said.

The launch comes after the exchange received approval from the China Security Regulatory Commission in mid-June, Fastmarkets reported at the time.

SHFE set the minimum trading amount for aluminium and zinc options contracts at one lot or five tonnes, and the trading periods will be 09:00-11:30 and 13:30-15:00 Shanghai time on every trading day in China.

The two new options contracts come almost two years after copper options, which started trading in September 2018.

A key difference with the latest options contracts is the copper options contract adopts a European-style option, meaning it can only be exercised at the end of its life (the date of maturity), whereas the options contracts for zinc and aluminium will employ an American-style option which allows the option buyer to exercise the option at any time up to and including the expiration date.

Jiang Yan, chairman of the bourse, stated that after the futures contracts of aluminium and zinc were listed on the SHFE in 1992 and 2007 respectively, the exchange observed a large market size, good contract liquidity and reasonable investor structure, and futures trading has become an important risk management tool in China’s commodity industry.

In addition, the outbreak of the Covid-19 epidemic in China in early 2020 caused drastic fluctuations in the commodity market, increasing market need for new trading methods such as futures options to hedge risks - “especially for aluminium,” according to Li Guangfei, deputy general manager of Chinalco International Trade Group Co.

“Options trading is not only conducive to improve the function of price discovery in the futures market, but also provides diversified risk management tools for enterprises. The market has long been looking forward to [the launch of] aluminium options, particularly in this year. Due to the impact of the epidemic, aluminium prices fluctuated greatly, and the launch of aluminium options contract today could hardly be more timely,” Li said.

The SHFE daily aluminium contract closed at 11,310 yuan ($1,624) per tonne on March 23, the lowest since March 4, 2016, and recently bounced to 14,925 yuan on July 27, the highest since January 8, 2018. That represents a 32% rebound in around four months between late March and late July. The front month aluminium contract closed at 14,355 yuan per tonne on Monday.

“The credit risk for floor aluminium option trading is low, and is more popular among all kinds of enterprises, institutions and individual investors. For entity enterprises and relevant trading houses, using futures and options simultaneously can build more targeted, more cost-effective and more flexible risk management schemes, especially in tail risk management,” Li continued.

Aluminium and zinc are both important metal varieties in the non-ferrous metal industry.

Aluminium is widely used in construction and infrastructure, electronics, transportation, consumer durables, machinery and equipment, packaging and containers, while zinc is mostly used in the automotive, construction, shipping and battery industries.

China is the biggest producer, processer and consumer of the two metals, with numerous enterprises, large trading scale and strong risk demand.

In response to the continuing need from the commodity market, SHFE’s Jiang said the bourse will accelerate the pace of reform and innovation in the next stage. Serving under the development goal of “one body and two wings,” the SHFE will continue to launch options products for existing futures contracts and derivatives such as a shipping index, and steadily expand the tradable varieties of standard warehouse orders to achieve the target of building the SHFE into a more internationalized, open, transparent, standardized, dynamic and resilient capital market.

In November 2019, during an interview, the exchange told Fastmarkets that it is moving closer to opening up to overseas investment with a feasibility study for the launch of qualified foreign institutional investors (QFII) and RMB qualified foreign institutional investors (RQFII) programs for copper and other products.

So far, the SHFE facilitates the trading of options for copper, natural rubber and gold alongside the latest aluminium and zinc options trading.

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