It is in this regard, both jewellery exporters and their bankers feel permitting hedging in bullion's international trade is essential, more with liberalised trade and fluctuating bullion prices. The Reserve Bank of India, which permitted on September 28 this year, corporates to hedge their commodity related price and foreign risk on the international commodity exchange, has not explicitly barred gold and silver from the list of such commodities. Hence there is a sort of "confused optimism" on this front.

The need for hedging in bullionincreases more so after the announcement last month by London Metals Exchange chairman Lord Bagri that LME will introduce a silver contract and a metals index contract next year (1999) to increase trading by speculators and industrial users.

With wider price fluctuations in the global bullion trade, and with increased liberalisation of international trade it is time the bullion jewellery exporters too are allowed to hedge their requirements like any other corporates engaged in metals trade, including manufacturing.

According to Ramesh Ganesan, head, Trade & Commodity Finance, ABN Amro Bank NV, gold loans and price hedging products (forwards, futures, and options) are two popular tools available abroad for jewellery manufacturers against price risk. This calls for a better understanding of the various components in pricing of gold to price exports the most competitively.

Hedging products for bullion will soon be on offer with further liberalisation in bullion trading, feels Ganesan who recently madepresentation to exporters at Chennai outlining various aspects of financing schemes for bullion for exporters. Even other foreign bankers engaged in advising, financing and helping corporates in taking plunge in the global commodities hedging activities, have begun advising their prospective clients even on hedging in bullion, especially for exporters on the availability of hedging instruments for minimisation of losses, if not maximisation of profits, through list of select hedging instruments available in the global markets.

A silver contract, when introduced on LME, would put the LME in direct competition with London inter-bank market and the New York Mercantile Exchange. The LME last introduced a new contract in 1992, when it started trading in aluminium alloy. "We believe we can bring an added dimension to futures and options trading in it", Bagri said of silver.

Unlike gold, industrial applications such as photography and electronics account for more than half of all silver consumption, making themetal a good fit with the industrial metals, including copper and aluminium, that are already traded o the LME.

The proposed metals index contract is aimed at speculators, including investment and hedge funds, more than mining companies and metal consumers, the LME's traditional users.

Traditionally bullion is available to Indian exporters through various schemes under the export import policy of the ministry of commerce -- replenishment basis after exports; outright sale before exports and against gold replenishment licence. Also, the bullion exporters can even avail of direct purchases through 15-odd nominated agencies under two main schemes: One supply by foreign buyer (sort of suppliers credit) and two as replenishment after exports through exhibitions and tours.

Gold loans are very popular abroad as they serve as a hedging mechanism for jewellery manufacturers against price risk. Interest payable is usually on the value of the metal on loan and it is as low as two to three per cent per annum. Fundsare also not blocked in holding the metal on own account. Further, purchases could take place at any time during the loan period, thus a jeweller could take advantage of the price movements.

The exporter could approach a nominated agency for a loan. A gold loan agreement is signed with the nominated agency. The exporter will have to submit a bank guarantee/cash margin for the value of gold loaned and customs duty etc. The gold is released to the exporter without fixing the price. Interest is payable on the value of metal, usually in terms of US dollars.

The loan gets transformed into a purchase when the price is fixed. The principal plus interest will be payable on fixing the price. Exports are to be effected within 120 days from release of the loan. The nominated agency will release the bank guarantee /security deposit on submission of proof of exports.

These products will be on offer with further liberalisation in bullion trading. However, three main hedging products are available in the internationalmarkets. These are: forwards, futures and options.

In forwards deals, purchase or sale for delivery and payment at an agreed future date which is usually one, three, six months after the deal.

Futures is a contract to deliver a specified quantity of metal at a specified time in future at an agreed price. This is done through a commodity exchange like Comex, New York Mercantile Exchange and London Metals Exchange.

Options give the holder--in return for premium--a right but not the obligation to buy or sell metal at a predetermined price by an agreed date. The holder of an option pays a price called premium for acquiring the option. Also, the option gives the holder the right to purchase a given quantity of metal from the writer of option at a predetermined price within a specified time period. A put option gives the holder the right to sell a specified quantity of metal to the writer at a predetermined price within a specified time frame.

In uncertain times it is essential to understand the variouscomponents in pricing of bullion so that the exports are priced competitively.

The prevailing international price is the spot price quoted in the international market. Bid/Ask rates are quoted by international dealers which appear in the form of say $282.20/287.70 per troy ounce. This means that the international trade is willing to sell at US $282.70 per oz. (In case the London AM or PM rate is used to fix the price a fixing commission of 25 cents (approx) is added to the fix). This price is for a delivery in the centre of trading and not for delivery in India, and the rate is valid for large bars such as 12.5 kgs. In case the delivery is required in Mumbai and the delivery is required in the form of say Kilo bar (995) the international trader loads premium or local delivery charges which for a kilo bar could be appprox 75 cents.

The effective rate quoted by by the trader thus comes to US $283.45 per oz. One KG bar of 995 fineness has 31.00 fine ounces. Therefore, the value of one kg bar works out to US$9067.57. If the forex rate for the rupee is one US dollar equals Rs 42.50, the rupee equivalent works out to Rs 3,85,371.73.