The discussion initiated by Rough&Polished in early November attracted other views, once again ventured by experts from China.
This time our correspondent interiewed Zhang Wensuan, head of the Marketing Department of Xiang Yu Futures’ branch in Shanghai. The company is a listed member of the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange.
Do you think that diamond derivatives may have a possible future on the stock market like other commodity derivatives?
Of course, they have a future. For instance, gold, which is a consumer product from the luxury segment, has given rise to a developed market of derivatives where its financial aspect outstripped its commodity component by long odds. In my opinion, derivatives for polished diamonds, which are consumer luxury goods, will be able to find their niche in the market for derivative financial instruments.
There are many approaches used to compile a derivative contract for diamonds. Many experts believe that the so-called "diamond basket” can serve as a generally accepted benchmark. Other experts believe that a number of diamond indices or a basket of gems would be a more suitable tool for generating a standard underlying asset for such derivatives. What is your take and why?
I believe that we can think of calculating an index on the basis of a broad commodity group, making of it a representative diamond sampling, then combine their prices observing certain proportions and develop the index.
To your mind, what are the advantages and disadvantages of the diamond derivatives idea?
The key goal of derivative products is to generate price opening, which means that underlying asset holders have a hedge instrument protecting them from risks. Of course, the speculative derivatives market is characterized by high risks. Therefore, wrong control and risk management would inevitably backfire.
Where do you think it is better to organize trade in diamond derivatives - at the stock market or at the OTC market?
You have to be guided by a specific situation existing in various countries and take into account individual trends displayed at various stock exchanges.
Do you share the concern that the implementation of the diamond derivatives idea could potentially harm the "diamond brand" and that trail of glitter and sophistication, which is being promoted by the industry since people may start treating diamonds in the same way as any other commodity?
I do not agree with this concern. On the contrary, the derivative function of price opening will be able to encourage manufacturers of the underlying asset, which are diamonds in this case, to continuously improve their goods, upgrading innovative technologies.
Luo Sen, Director of the Shanghai Pudong Development Bank Branch, offered his opinion on the matter:
Do you think that diamond derivatives may have a future on the stock market like other commodity-based derivatives?
I believe that at present it you can’t say it for sure because there is great disagreement about making diamond prices transparent or creating sophisticated financial products in the global diamond industry.
The derivative contract on diamonds may be designed in a number of ways. Many experts mention the so-called “diamond basket” as an overall pricing benchmark. Other experts feel that a series of diamond indices or basket of stones would be more suitable than one overall benchmark basket. Please state which opinion you share and why.
Diamond indices or a basket of stones would fit better.
In your opinion, what are the pros and cons of the diamond derivatives idea?
In my opinion, the advantages are as follows:
1. Opportunities to establish a new market for financial products meaning new revenues from these operations for banks.
2. Increased liquidity of diamonds and as a result of this - a more transparent diamond market. For example, buyers there would have many advantages in pricing issues.
3. Facilitating lower market risks due to sharply increased diamond prices.
And the shortcomings will stem from qualitative difference between diamonds which will be the greatest obstacle to transacting such derivatives.
In your opinion, would diamond derivatives better be traded on stock exchanges or over-the-counter?
The best way to trade diamond derivatives will be at stock exchanges.
Do you share the concern that making the diamond derivatives idea come true could potentially damage the “diamond brand” and some of the associated glamour and luster promoted by the industry as diamonds will start to be treated like any other commodity?
I don’t think there will be any damage.
Or vice versa, the diamond industry would benefit from increased liquidity of diamonds and established legal, taxation and operational systems for derivative contracts based on diamonds? Which opinion do you support and why?
I believe that establishing a legal and operation system for diamond derivatives may create good development prospects for the diamond industry.
Olga Patseva, Editor of the Rough&Polished Asian Bureau in Shanghai
