Case Study: Hedging Soybeans in China
Background
A Brazilian soybean exporter is targeting the Chinese export market and offers a buyer in China to price the soybeans based on the domestic Dalian Commodity Exchange (DCE) Soybean No.2 (B) contract, which generally targets imported soybeans. While this can make the offer more attractive to the Chinese buyer, it also means the exporter is now exposed to the risk that the price of the Soybean No.2 (B) contract in Dalian may have fallen by the time of delivery.
Trading Soybeans in China
Hedging Process:
- Sell the Soybean No.2 (B) futures contract on the DCE to lock in the export price.
- Upon delivery, buy back the futures contract at a lower price if the market price has fallen.
- The profit from the futures market offsets the lower price received in the physical market.
Managing the Exchange Rate Risk with FX Futures
Exchange Rate Risk:
- The Chinese futures contract is traded in RMB, while the exporter receives USD.
- If the RMB weakens relative to the USD, the exporter's hedge is at risk.
Mitigation Strategy:
- Take a long position in the SGX or HKEX USD/RMB futures contract.
- Both the price of soybeans and the USD/RMB exchange rate are now locked in.
- Consider using the CME USD/BRL contract to convert export earnings back into reais at a fixed rate.
