More NewsBooming Derivatives Market Makes Iron Ore Options Flavour of the Month

Booming Derivatives Market Makes Iron Ore Options Flavour of the Month

Freight Investor Services, a freight and commodity derivatives broker, says the January rise in cleared iron ore options volumes is indicative of the need to hedge against increasing volatility in iron ore prices. The recent jump in iron ore swaps trading activity has led to a rapid expansion of iron ore options volumes. So far in 2012, iron ore swaps volumes at 8.7m tonnes, are 150% higher than in the same period of 2011 at 3.5m tonnes.

So far in 2012, 2.1m tonnes of iron ore options were traded – more than double December’s volume, with FIS’ new iron ore options team of Salman Majid and Saurab Joshi noting strong interest in this emerging derivative.

Options are also of increasing interest to traders with exposure to the iron ore market as they can be efficiently tailored to physical positions and can provide a cost-efficient means of hedging. Underlying iron ore market volatility came close to 50% towards the end of 2011 compared to less than 7% at the start of last year.

John Banaszkiewicz, managing director of Freight Investor Services, said: “The volatility in iron ore is here to stay and even when levels are lower, the price movement makes swaps and options tools that miners, traders and end-users should be making more use of. Mining companies can protect their downside risk buying Cal13 puts in the market at US$115 for a US$13.75 premium while a steelmaker can buy a Cal13 call at US$140 for US$12, these are tools that everybody should have in the armoury.”

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