Excerpt from the article Platinum Outlook 2021: Strong Price Performance ExpectedGeorgia

Williams - January 14th, 2021

Platinum prices endured a rollercoaster ride in 2020, hitting a two year high in January before plummeting to a 17-year low in March.

Although the rest of the precious metals suite recovered quickly from the slump, platinum wasnt able to regain its early-year momentum until the second half of 2020. By the end of December,the metal had surpassed its previous 2020 high to add 8.3 percent to its value for the year.

...........2020 saw platinum ETF inflows reach record-setting levels, surpassing 3.8 million ounces.The growth in investor demand contributed to the metals overall deficit in 2020.

Platinum trends 2020: Supply challenges propel prices

Unsurprisingly, widespread COVID-19 lockdowns in South Africa greatly impacted platinum output in the top-producing country. That was further compounded by production challenges at Anglo American Platinums (Amplats) (LSE:AAL,OTC Pink:AGPPF) converter plant. Although Amplats and South Africa have resumed mining activity, global refined platinum production is expected to slip 22 percent year-over-year, largely off the South Africa closures.

Platinum trends 2020: Depressed automotive demand

The largest end-use segment for platinum is the automotive industry, a sector that was significantly impeded by COVID-19 restrictions, keeping buyers out of show rooms and production lines muted.

As noted in a S&P Global report, auto sector sales are anticipated to fall 20 percent globally for 2020. Depressed sales are set to continue into 2022, with an average decline of 6 percent from 2019 tallies.

...........With the South African lockdown stretching two months, platinum prices began to spike at the end of June. The metal added 31 percent to its value, rising from US$608 on March 20 toUS$800 on July 3.

Platinum outlook 2021: What to expect?

A key factor that is expected to help both platinum and palladium is the ample liquidity as a resultof accommodative monetary and fiscal policy amid improving economic conditions, said CPM Groups Savant. Being industrial precious metals, they should benefit from this environment.

The fundamentals for both metals are promising, but platinum does seem to be poised to perform slightly better. While both metals are expected to rise during the year, platinum is expected to outperform palladium, he added. Platinums price performance is expected to lag only that of silver among the exchange-traded precious metals.

...........The platinum-focused firm sees growth in the automotive, jewelry and industrial segments slowly returning to pre-pandemic levels and benefiting the demand side.

However, as investment demand is not expected to repeat the record in 2020 it will decline, it explains. Total platinum demand in 2021 is therefore expected to increase 2 percent (+150 koz)to 8,089 koz.

Another demand catalyst for prices could be the continued substitution of palladium with platinum in

catalytic convertors, as well as increased sales in gasoline-powered vehicles over diesel.

Platinum prices are at a discount to palladium, and even relative to its own price level, platinum prices are at multi-year lows despite the sharp gains in recent months, said Savant.

This relative undervalued status of platinum coupled with improving medium- to long-term fundamentals for the metal are expected to help platinum perform strongly during 2021.

Source: Investingnews.com

Required:

(a) Assume you are General Motors (GM), a leading manufacturer of automobiles in the US. Based on the above article, would you recommend GM, to hedge its exposure to platinum price risk, given the conditions described in the article? Why or why not? What factors needto be considered when making your recommendation to hedge or not? (350 words)

(8 marks)

(b) Irrespective of your answer to (a), assume you are required to hedge platinum price risk. Between futures, forwards, and options (single and multiple option strategies) which strategy/instrument would you choose and provide the reason for your choice above all other strategies. (350 words)

(7 marks)