Quarterly report pursuant to Section 13 or 15(d)

Hedging Transactions

v2.4.0.8
Hedging Transactions
 6 Months Ended
Dec. 31, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Hedging Transactions
HEDGING TRANSACTIONS
The Company manages the value of certain specific assets and liabilities of its trading business, including trading inventories, by employing a variety of strategies. These strategies include the management of exposure to changes in the market values of the Company's trading inventories through the purchase and sale of a variety of derivative products such as metal's forwards and futures.
The Company's trading inventories and purchase and sale transactions consist primarily of precious metal bearing products. The value of these assets and liabilities are linked to the prevailing price of the underlying precious metals.
The Company's precious metals inventories are subject to market value changes, created by changes in the underlying commodity markets. Inventories purchased or borrowed by the Company are subject to price changes. Inventories borrowed are considered natural hedges, since changes in value of the metal held are offset by the obligation to return the metal to the supplier.
Open sales and purchase commitments are subject to changes in value between the date the purchase or sale price is fixed (the trade date) and the date the metal is received or delivered (the settlement date). The Company seeks to minimize the effect of price changes of the underlying commodity through the use of forward and futures contracts.
The Company's policy is to substantially hedge its inventory position, net of open sales and purchase commitments that is subject to price risk. The Company regularly enters into precious metals commodity forward and futures contracts with major financial institutions to hedge price changes that would cause changes in the value of its physical metals positions and purchase commitments and sale commitments. The Company has access to all of the precious metals markets, allowing it to place hedges. However, the Company also maintains relationships with major market makers in every major precious metals dealing center.
Due to the nature of the Company's global hedging strategy, the Company is not using hedge accounting as defined under Topic 815 of the ASC. Gains or losses resulting from the Company's futures and forward contracts are reported as unrealized gains or losses on commodity contracts with the related unrealized amounts due from or to counterparties reflected as a derivative asset or liability (see Notes 3 and 7). Gains or losses resulting from the termination of hedge contracts are reported as realized gains or losses on commodity contracts. Realized and unrealized net gains (losses) on derivative instruments in the condensed consolidated statements of income for the six months ended December 31, 2013 and 2012 were $(10.0) million and $(8.2) million, respectively, and recorded to cost of sales.
The Company’s management sets credit and position risk limits. These limits include gross position limits for counterparties engaged in sales and purchase transactions with the Company. They also include collateral limits for different types of purchase and sale transactions that counterparties may engage in from time to time.

A summary of the market values of the Company’s physical inventory positions, sales and purchase commitments, and its outstanding forward and futures contracts is as follows at December 31, 2013 and at June 30, 2013:
in thousands
December 31, 2013
 
June 30, 2013
Inventory
$
160,029

 
$
162,378

Less unhedgable inventory:
 
 
 
Premium on metals position
(3,336
)
 
(1,787
)
Subtotal
156,693

 
160,591

Commitments at market:
 

 
 

Open inventory purchase commitments
391,320

 
461,883

Open inventory sales commitments
(138,805
)
 
(272,044
)
Margin sales commitments
(15,765
)
 
(13,651
)
In-transit inventory no longer subject to market risk
(15,522
)
 
(24,221
)
Unhedgable premiums on open commitment positions
1,601

 
2,107

Inventory borrowed from suppliers
(11,226
)
 
(20,117
)
Product financing obligation
(25,506
)
 
(38,554
)
Advances on industrial metals
(3,254
)
 
33

Inventory subject to price risk
339,536

 
256,027

Inventory subject to derivative financial instruments:
 
 
 
Precious metals forward contracts at market values
167,928

 
84,999

Precious metals futures contracts at market values
171,728

 
171,272

Total market value of derivative financial instruments
339,656

 
256,271

Net inventory subject to price risk, Company consolidated basis
$
(120
)
 
$
(244
)

in thousands
December 31, 2013
 
June 30, 2013
Effects of open related party transactions between A-Mark and affiliates:
 
 
 
   Net inventory subject to price risk, Company consolidated basis
$
(120
)
 
$
(244
)
   Open inventory sales commitments with affiliates
(256
)
 
(1,402
)
   Open inventory purchase commitments with affiliates
287

 
1,282

Net inventory subject to price risk, Company stand-alone basis
$
(89
)
 
$
(364
)

As of December 31, 2013 and June 30, 2013, the Company had the following outstanding commitments:
in thousands
 
December 31, 2013
 
June 30, 2013
 
 
 
 
 
Purchase commitments
 
$
391,320

 
$
461,883

Sales commitments
 
(138,805
)
 
(272,044
)
Margin sales commitments
 
(15,765
)
 
(13,651
)
Open forward contracts
 
167,928

 
84,999

Open futures contracts
 
171,728

 
171,272


The contract amounts of these forward and futures contracts and the open sales and purchase orders are not reflected in the accompanying condensed consolidated balance sheet. The difference between the market price of the underlying metal or contract and the trade amount is recorded at fair value.
The Company’s open sales and purchase commitments typically settle within 2 business days, and for those commitments that do not have stated settlement dates, the Company has the right to settle the positions upon demand. Futures and forwards contracts open at December 31, 2013 are scheduled to settle within 30 days.
The Company is exposed to the risk of failure of the counterparties to its derivative contracts. Significant judgment is applied by the Company when evaluating the fair value implications. The Company regularly reviews the creditworthiness of its major counterparties and monitors its exposure to concentrations. At December 31, 2013, the Company believes its risk of counterparty default is mitigated as a result of such evaluation and the short-term duration of these arrangements.

Offsetting Derivative Instruments
In respect to the Company's derivative contracts with the same counterparty, the receivables and payables have been netted on the condensed consolidated balance sheets. Such derivative contracts include open sales and purchase commitments, futures, forwards and margin accounts. In the table below. the aggregate gross and net derivative receivables and payables balances are presented by contract type, as of December 31, 2013 and June 30 2013.
 
 December 31, 2013
 
June 30, 2013
 
 
 
 
in thousands
Gross Derivative
 
Amounts Netted
 
Cash Collateral Pledge
 
Net Derivative
 
Gross Derivative
 
Amounts Netted
 
Cash Collateral Pledge
 
Net Derivative
Nettable derivative receivables:
Open sales and purchase commitments
$
3,631

 
$
(338
)
 
$
—

 
$
3,293

 
$
—

 
$
—

 
$
—

 
$
—

Future contracts
10,921

 
—

 
—

 
10,921

 
14,967

 
—

 
—

 
14,967

Forward contracts
4,933

 
—

 
—

 
4,933

 
471

 
—

 
—

 
471

 
$
19,485

 
$
(338
)
 
$
—

 
$
19,147

 
$
15,438

 
$
—

 
$
—

 
$
15,438

Nettable derivative payables:
Open sales and purchase commitments
$
32,528

 
$
(501
)
 
$
—

 
$
32,027

 
$
48,015

 
$
(17,823
)
 
$
—

 
$
30,192

Margin accounts
15,765

 
—

 
(9,296
)
 
6,469

 
13,651

 
—

 
(7,015
)
 
6,636

Forward contracts
10

 
—

 
—

 
10

 
—

 
—

 
—

 
—

 
$
48,303

 
$
(501
)
 
$
(9,296
)
 
$
38,506

 
$
61,666

 
$
(17,823
)
 
$
(7,015
)
 
$
36,828