Feasibility analysis report on carrying out commodity futures hedging business
1、 The purpose of the company’s futures hedging business
The company is involved in the purchase and sale of bulk commodities in the daily operation process. In order to effectively avoid the risk of price fluctuation of urea, sulfur and other operating products and prevent the adverse impact of large price fluctuation on the company, the company and its holding subsidiaries plan to use their own funds to carry out futures hedging business.
2、 Overview of futures hedging business to be carried out by the company
1. Futures and trading methods
The futures hedging business to be carried out by the company is limited to urea and sulfur futures traded in the on-the-spot market, and shall not be carried out in the off-the-spot market or speculative trading for the purpose of profit.
2. Amount and term of capital to be invested
In 2022, the maximum margin of futures hedging business to be carried out by the company is RMB 100 million, which can be recycled within the limit. The term of validity is from the date of adoption of the resolution of the board of directors to the date of convening the board of directors to consider the matter in the next year (no more than 12 months).
3. Source of funds
The source of funds is the company’s own funds, which does not involve raised funds or bank credit funds.
3、 Feasibility analysis of the company’s futures hedging business
The purpose of the company’s futures hedging business is to avoid and prevent the operating risks brought to the company by the price fluctuation of main products and reduce the impact of the price fluctuation of main products on the company. The company has formulated the management system of commodity futures hedging business, which clearly stipulates the operation principles, approval authority, business management, internal operation process, internal risk control and handling procedures of futures hedging business, which can effectively ensure the smooth progress of futures hedging business and effectively control risks. At the same time, the company is equipped with relevant professionals to carry out specific work, and the company has its own funds matching the futures hedging business to be carried out.
4、 Risk analysis of the company’s futures hedging business
The company’s futures hedging business follows the basic principle of locking the purchase price or product sales price, and strictly implements the risk control system when selecting hedging contracts and closing positions to ensure the normal business operation of the company. However, the futures hedging business itself may face certain risks, including:
1. Market risk: when the futures market changes greatly, there will be price fluctuation risk and position closing risk under the margin system.
2. Credit risk: when the futures price fluctuates sharply, the customer may violate the relevant provisions of the contract and cancel the product order, resulting in losses to the company.
3. Operational risk: futures hedging business is highly professional and may cause losses due to staff operation errors, system failures and other reasons.
4. Legal risk: major changes in relevant laws and regulations may cause the contract to be unable to be executed normally and bring losses to the company.
5、 Risk control measures for the company to carry out futures hedging business
In order to control the risk of futures hedging business, the company has formulated the management system of commodity futures hedging business to control the risk of futures hedging business. It mainly includes:
1. Match the futures hedging business with the company’s production and operation to hedge the risk of price fluctuation to the greatest extent. Reasonably allocate its own funds for futures hedging business, strictly control the capital scale of futures hedging business, and close its positions in time in case of sharp market price fluctuations to avoid risks.
2. The company will establish a customer’s credit management system, review the credit of the counterparty before the transaction, and determine that the counterparty is capable of performing relevant contracts.
3. According to the internal control system, strengthen the company’s futures hedging business monitoring process, strengthen management and prevent operational risks. Set up computer systems and related facilities that meet the requirements to ensure the normal operation of transactions. 4. The company will choose to cooperate with futures brokerage companies with good credit and strong business strength to closely track the laws and regulations related to futures and avoid possible legal risks.
6、 Accounting policies and accounting principles
The company will conduct corresponding accounting and disclosure of futures hedging business in accordance with relevant provisions and guidelines such as accounting standards for Business Enterprises No. 22 – recognition and measurement of financial instruments, accounting standards for Business Enterprises No. 24 – hedge accounting and accounting standards for Business Enterprises No. 37 – presentation of financial instruments.
7、 Conclusion of feasibility analysis on the company’s futures hedging business
The purpose of the company’s futures hedging business is to avoid the risks caused by product price fluctuations in production and operation. Without speculation and arbitrage transactions, the company can use the price discovery and risk hedging functions of the futures market to avoid the risk of market price fluctuations and stabilize the profit level, Improve the company’s sustainable profitability and comprehensive competitiveness. The company has formulated the management system of commodity futures hedging business, standardized the business process and implemented risk prevention measures by strengthening internal control. To sum up, the company’s futures hedging business is feasible and beneficial to the company’s operation.
Zjamp Group Co.Ltd(002758) board of directors February 28, 2022
