PROFIT BOOKING

New Delhi, Aug.11 (Reuters): Domestic metal producers and consumers are flocking to commodity exchanges to hedge their exposure to volatile prices after the government relaxed restrictions.

However, firms are likely to face new perils if they dabble in this potentially expensive and high-stakes game.

In April, the RBI amended rules that limited hedging to importers and exporters of metals, allowing firms to hedge even if their price risk was solely in the domestic market.

“Within a couple of years, a majority of companies in the commodities market will be at least prepared for hedging,” said Vikram Dhawan, head of commodities in Reliance Mutual Fund.

Hedging allows firms to lock in prices at set levels by offsetting a physical position with an equal and opposite position in a futures market.

However, hedging brings its own risks. Nickel prices have fallen nearly 50 per cent from record highs in May, but if a consumer had put on a hedge at those higher numbers, the company would not benefit from the recent price move.

The main drawback of hedging is the cost. Clearing houses insist that position holders pay margins — lines of credit or deposits that cover the largest likely one or two day move in prices of an asset — on open positions to guard against the risk of default.

“If you hedge excessively, then you can create cash flow problems,” Dhawan said, adding that paying the margin money alone could pose problems.

On the other hand, hedging too little may not insulate from volatility.

“After the regulation change, we see an increasing interest from Indian metal producers to hedge on the London Metal Exchange,” a London-based trader said.

“Usually a brokerage firm based in India contacts us rather than the company itself,” she added.