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Price Discovery in LME

Price Discovery in LME

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Published by rajivmoh

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Categories:Types, Research
Published by: rajivmoh on May 10, 2010
Copyright:Attribution Non-commercial

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10/12/2011

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Study of Price Discovery Process inLondon Metal Exchange
Submitted by
Rajiv MohapatraIFMR, Chennai
Under the supervision of 
Satyabrata BeheraJr Manager (Marketing), NALCO
 
 2
Contents
Introduction to LME ................................................................................................................................. 3Trading in LME ......................................................................................................................................... 5LME Market and Price Data ..................................................................................................................... 6Futures prices from the Ring ................................................................................................................ 6Member contributed prices ................................................................................................................. 7Futures and options prices from LMEselect .......................................................................................... 7Open interest reports .......................................................................................................................... 7Warehouse stocks ................................................................................................................................ 7Additional LME market data................................................................................................................. 8Features of Futures .................................................................................................................................. 9Price Discovery ...................................................................................................................................... 10Importance of Price Discovery in LME .................................................................................................... 11Determinants of Price ............................................................................................................................ 12Market efficiency in Futures markets ................................................................................................. 12Theory of storage and cost-of-carry model......................................................................................... 16Liquidity ............................................................................................................................................. 17Price volatility .................................................................................................................................... 20Market risk ........................................................................................................................................ 20Market Microstructure and other aspects .......................................................................................... 20Bibliography .......................................................................................................................................... 21
 
 3
Introduction to LME
The London Metal Exchange (LME) is the major international market for the main industriallyused non-ferrous metals, namely aluminium, aluminium alloy, copper, lead, nickel, tin, zinc, andsilver. It is used worldwide by producers and consumers of nonferrous metals as a centre forspot
1
, futures
2
and options trading in these metals. The results for the spot and futures prices mayerve as guidelines for allocation and hedge
3
strategies involving several metal markets atdifferent time horizons across the world.
1
 
Spot 
– A market of commodities or securities in which goods are sold for ready cash and deliveredimmediately i.e transactions take place on the spot. Also known as the Cash Market since cash changeshands.
 
2
 
Futures
– A contract to exchange specific quantities of a commodity, not today, but at a specified datein the future, at a price that is agreed upon today.
 
3
 
Hedging
– 
A transaction intended to protect or reduce risk from subsequent adverse price movementsof a physical commodity already bought or sold.

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