Report Industry Investment Rating - Not provided in the report Core Viewpoints - In the iron ore trade and production sectors, price volatility risk is one of the core challenges faced by enterprises. Financial derivative tools such as futures, swaps, and options provide diversified means for enterprises to manage price risks or optimize supply chain costs. The report analyzes from three aspects: tool types and selection, application scenarios, and operation processes [2][6] Summary by Directory I. Market Environment and Tool Selection Analysis - **Choose domestic futures when market transparency and liquidity are high**: When enterprises need high transparency, active trading, and sufficient liquidity in the iron ore market, the Dalian Commodity Exchange's iron ore futures are an ideal choice. In a stable supply - demand relationship and without major market shocks, enterprises can use standardized contracts and centralized trading mechanisms for hedging or speculation [7] - **Choose swaps or over - the - counter transactions when personalized needs are prominent**: If enterprises have special trading needs such as customizing non - standard contract terms, swaps or over - the - counter transactions are more advantageous. They can negotiate contract details with counterparties to accurately hedge risks [8] - **Tool selection under specific market trends**: - **Unilateral price increase trend**: Iron ore demanders can use domestic futures for buy - side hedging to lock in future procurement costs [9] - **Unilateral price decrease trend**: Enterprises holding a large amount of iron ore can use sell - side hedging in domestic futures to offset losses from price drops [11] - **Highly volatile and uncertain price**: Swaps or over - the - counter transactions can be used to negotiate stable price settlement methods, and can be combined with a small amount of domestic futures for dynamic position adjustment [12] II. Analysis of Iron Ore Futures, Swaps, and Over - the - Counter Hedging Scenarios and Operation Plans (1) Analysis of scenarios and operation plans for hedging with iron ore futures - **Suitable scenarios**: Physical delivery, hedging for domestic port spot prices, and pursuing standardized and highly liquid trading [14] - **Operation process**: - **Pre - trading preparation**: Risk assessment, fund planning, and contract selection [17][18][19] - **Trading process operation**: Hedging operations and risk management (setting stop - loss and take - profit intervals) [20][21] - **Post - trading management**: Closing positions or physical delivery, and evaluating the hedging effect [23][24] (2) Analysis of scenarios and operation plans for hedging with iron ore swaps - **Suitable scenarios**: International market trading and US - dollar - denominated needs, the need to customize contract terms flexibly, and long - term hedging [25] - **Operation process**: - **Selecting trading counterparties**: Credit assessment and communication of cooperation intentions [27][28] - **Negotiating contract terms**: Determining core terms and setting risk terms [29][30] - **Executing and monitoring the transaction**: Strictly fulfilling contract obligations and closely monitoring the market and counterparties' performance [31][32] - **Transaction settlement and follow - up management**: Completing settlement operations and maintaining good relationships with counterparties [35][36] (3) Analysis of scenarios and operation plans for hedging with options - **Suitable scenarios**: Avoiding price increase risks, avoiding price decrease risks, hedging basis trade risks, and hedging in high - uncertainty markets [37][38][39] - **Operation process**: - **Defining hedging goals**, **analyzing the market environment**, **selecting option contracts**, **determining option positions**, **building and monitoring positions**, and **closing positions or exercising options** [40][41][42] - **Specific operation plans for different scenarios**: - **Avoiding price increase risks**: Buying call options. For example, a steel mill can lock in the purchase cost while retaining the opportunity for low - price procurement [47] - **Avoiding price decrease risks**: Buying put options. A trader can lock in the selling price while retaining the opportunity for inventory appreciation [59] - **Hedging basis trade risks**: Traders need to choose to sell call or put options according to the spot position and the steel mill's price - setting operation [70] - **High - uncertainty market**: Using a straddle option combination to profit from significant price fluctuations in either direction [83] - **Risk management and precautions**: Setting stop - loss and take - profit points, diversifying investments, monitoring market volatility, choosing appropriate option contracts, understanding exercise and delivery rules, and complying with policies and regulations [87][88] III. Comparative Analysis of Different Tools and Combination Strategies (1) Comparison of core characteristics of different derivative tools - **Futures**: High standardization, high liquidity, cost structure of margin + handling fees, low credit risk, suitable for large - scale risk hedging of main iron ore varieties [91] - **Swaps**: Low standardization, medium liquidity, cost structure of spread + service fees, credit risk depending on counterparties, suitable for non - standard ore varieties [91] - **Over - the - counter options**: Low standardization, low liquidity, cost structure of premium + exercise fees, high credit risk, suitable for "insurance - type" hedging in extreme market conditions [91] (2) Combination strategies: - **Futures + options**: A steel mill can buy futures contracts to lock in the basic cost and buy call options to retain the potential benefits of price drops [91][92] - **Futures + swaps**: A trader can conduct arbitrage by taking advantage of the price difference between the domestic futures market and the Singapore iron ore swap market [97][98]