China leads the world as rubber options begin trading in Shanghai

Source: Xinhua | 2019-01-29

The world’s first natural rubber options trading began on the Shanghai Futures Exchange yesterday, in a move that will help risk management and boost China’s commodities pricing power.

Options give a holder the right to buy or sell a commodity at a particular strike price and allow greater hedging flexibility for commercial hedgers such as processors and traders.

“The launch of the options for natural rubber will provide more refined risk management tools for relevant enterprises, help reduce the cost of the natural rubber ‘insurance-plus-futures’ project and better serve the national poverty alleviation strategy and the rural revitalization strategy,” said Cheng Shen, deputy director of the futures supervision department of the China Securities Regulatory Commission.

The insurance-plus-futures project uses a combination of insurance and futures to help spread price risks for agricultural products.

Shanghai’s development as an international financial center has entered the final stage, and the listing of natural rubber options marks a step forward in the innovation and development of derivatives on exchanges in China, according to Li Jun, deputy director of the Shanghai Financial Supervision Administration.

“Natural rubber options will offer more abundant and more flexible financial derivatives for entity enterprises and institutions in the relevant industrial chain,” Li said.

“So, this is of great significance to improving the price discovery function of the futures market and strengthening the pricing power and global influence of Shanghai as an international financial center.”

The options are set as an American option, which means they can be exercised anytime during their life, and not only at expiration.

Options for cotton and corn also started trading yesterday on the Zhengzhou Commodity Exchange and the Dalian Commodity Exchange, respectively. The launch of the three new options doubled the amount of options listed on the country’s three major commodities exchanges.

The options for natural rubber included eight trading contracts, those for cotton included four contracts while corn options had five contracts.

Price fluctuations

China had previously launched options for soybean meal and sugar in 2017 and copper options in September 2018.

Earlier this month, Gao Li, spokesman for the CSRC, said that spot prices for natural rubber, cotton and corn had seen frequent fluctuations in recent years and the use of options would help companies manage risk.

It will also help reduce insurance costs for farmers and better serve the vitalization of rural areas, Gao said.

Cotton futures, listed on the Zhengzhou Commodity Exchange in June 2004, have become one of the most sophisticated products in China’s futures market with a daily volume of 138,000 shares.

Research shows that China has seen fluctuations in cotton prices over the years because of more influences in the pricing section. Textile companies thus have growing expectations for cotton options to accommodate more diversified demands for risk management.

“Cotton options, along with other financial tools including cotton futures and insurance, will contribute to the reform of the target price,” said Luo Hongsheng, director of CSRC’s futures department.

With cotton options and futures and relevant over-the-counter derivative and PTA (purified terephthalic acid) futures in place, the Zhengzhou Exchange has become an international trading center of textile products and derivatives.

Natural rubber is considered a vital industrial raw material as well as a strategic material, and its pricing policies are mostly framed in Asia, including Tokyo, Singapore and Shanghai. Shanghai, albeit its large trading volume, has less global influence on pricing compared with the other two markets, said Cai Luoyi, an expert in the futures market.

Options for natural rubber will better serve companies in the relevant industrial chain and the real economy, said Zheng Wenrong, vice president of China Natural Rubber Association.