DERIVATIVES
MARKETS
CQC7015
SEMESTER 2, SESSION 2017/18
FOR : DR JACINTA CHAN
INDIVIDUAL PROJECT :
ALUMINIUM FUTURES &
SPECIFICATIONS
BY : CHONG KOK KEAN
CQC170002
DERIVATIVES MARKETS ALUMINIUM FUTURES CHONG KOK KEAN
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Contents
1.0 INTRODUCTION ………………………………………………………………… 3
2.0 CONTRACT SPECIFICATIONS ……………………………………………….. 5
3.0 JUSTIFICATIONS ……………………………………………………………….. 7
4.0 MARKET DYNAMICS ………………………………………………………….. 8
5.0 COMPARATIVE ANALYSIS …………………………………………………. 11
6.0 RISK MANAGEMENT ……………………………………………………….. 12
7.0 CHART …………………………………………………………………………… 14
8.0 FAIR VALUE CALCULATION ……………………………………………….. 17
9.0 CONCLUSION …………………………………………………………………. 18
10.0 REFERENCES ……………………………………………………….………….. 20
DERIVATIVES MARKETS ALUMINIUM FUTURES CHONG KOK KEAN
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1.0 INTRODUCTION
This white paper seeks to recommend and introduce a proposed aluminium futures under
abbreviated contract code “FAL” as a US Dollar-denominated aluminium futures contract on
Bursa Malaysia Derivatives Bhd’s (“BMDB”) Exchange. This proposed aluminium futures is
regarded as a commodity derivatives instrument to complement the existing range of
commodity-indexed futures on BMDB’s Exchange as well as to widen the product offerings
on the said Exchange to traders, hedgers and arbitrageurs alike. As such, the proposed
underlying instrument for this commodity futures contract shall naturally be Aluminium.
According to the International Aluminium Institute, aluminium is by far the world’s most
widely used non-ferrous metal. The application and usage of this metal commodity is
synonymous to our daily lives as aluminium is used to manufacture a wide variety of products
from construction & transportation industries to food & packaging industries, including power
& utilities plus many more such industries.
In the last 2 decades, the aluminium industry has witnessed tremendous demand growth with
an almost 3-fold increase in global production of aluminium from 21.8 million metric tonnes
in 1997 to 63.4 million metric tonnes in 2017. This figure has exceeded that of any other
metals except for iron, which stood at 837.5 million metric tonnes in 2017. Therefore, the
global demand for aluminium as a metal commodity is second only to iron/ferrous metal and
it is considered as the most highly traded non-ferrous metal in the world.
The International Aluminium Institute further predicted that global production of aluminium
will exceed 70 million tonnes per annum by 2020 with more than 60% likely to remain
produced and consumed in China. Increasingly during the corresponding period, growing
markets in Asia (ex-China), particularly in South East Asia, has also seen a 2-fold jump in
aluminium production from 1.9 million tonnes in 1997 to approximately 4 million tonnes in
2017 with Malaysia currently accounting close to 22% of this 2017 figure with combined
smelter capacities of approximately 880,000 tonnes a year. Therefore, as a major producer
and exporter of aluminium in this region and given the huge existing market demand in Asia
& China, the proposed offering of aluminium futures contract on BMDB Exchange will enable
Malaysia to tap the growing needs and market potential for aluminium hedging in Asia.
Presently, most of aluminium futures contract are traded via Shanghai Futures Exchange
(“SFE”) in China, London Metal Exchange (“LME”) in London and Chicago Mercantile Exchange
(“CME”) in Chicago. The launching of FAL will consolidate BMDB as a premier futures
exchange cum price discovery centre for aluminium particularly in Asia & South East Asia. This
will also provide arbitrage opportunities to traders alike.
DERIVATIVES MARKETS ALUMINIUM FUTURES CHONG KOK KEAN
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DERIVATIVES MARKETS ALUMINIUM FUTURES CHONG KOK KEAN
2.0 CONTRACT SPECIFICATIONS
FAL is a USD-denominated derivatives contract to be listed on BMDB Exchange. As this
proposed aluminium futures shall be physically settled, the deliverable aluminium on the
exchange must conform and meet the stringent specifications with regards to the
quality, lot size and shape. Similar to the rules and regulations in other exch anges
in the world presently, each traded futures contract shall be governed by rules &
regulations and terms & conditions, which inter alia include but not limited to
delivery dates, point of delivery, settlement terms, minimum tick size, daily price
limits etc.
Summary of the proposed contract specifications for FAL as follows:-
Contract Code
FAL
Underlying Instrument
High Grade Primary Aluminium
Quality
Primary aluminium with impurities no greater than
the chemical composition of one of the registered
designations:
