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1.Multi Commodity Exchange (The Hindu)

Multi Commodity Exchange (The Hindu)

Synoptic line: It throws light on the launch of India’s first commodity options in gold. (GS paper III)

Overview

  • The Multi-Commodity Exchange of India Ltd (MCX) launched India’s first commodity options in gold, giving stakeholders a new set of financial instruments to hedge their price risks. With the introduction of a new financial instrument, India is a step closer to building a vibrant market for commodities.

New announcement

  • The Multi Commodity Exchange has introduced gold option contracts for the first time in India. The derivative instrument allows investors to enter into contracts to either buy or sell gold sometime in the future at a pre-determined price, thus allowing investors to hedge any volatility in the price of the metal, for a price. 
  • MCX has currently launched a Gold Option contract, keeping Gold (1 Kg) futures as the underlying asset, with expiry on November 28, 2017 and January 29, 2018. The European-styled Gold options are hedge-friendly and physically settled, which means on exercise at expiration the options position develops into a corresponding underlying MCX 1 KG Gold futures position at the strike price of the exercised options. 
  • The fact that options usually also turn out to be cheaper than binding future agreements will help in the wider participation of investors in the realm of commodity speculation.  
  • According to the Finance Minister, gold options will also help bring into formal channels more of the gold that is traded. The introduction of gold options is in line with the government’s announcement last year that it would take steps towards introducing new varieties of commodity derivatives in the market.  
  • However some concerns have been expressed over financial speculation. The benefits of well-regulated commodity speculation, however, are likely to outweigh the potential systemic risk from asset bubbles.
  • Options, like other financial derivatives, allow price risks to be transferred between market players in an efficient manner. The business of anticipating prices in the future is left to professional speculators while their clients benefit from the prospect of stable prices.
  • In the process, financial derivatives can facilitate the conduct of real economic activity in higher risk segments including in agriculture and industrial activity that would not happen otherwise. An unjustified hostility towards financial speculation, as well as some hasty policy measures. For example almost a decade ago, a rapid increase in food prices pushed the government to impose a blanket ban on any speculation on agricultural products.

Way ahead

  • The launch denotes one of the most significant reform measures since modern commodity derivatives trading started 14 years ago. There has been a very conscious effort by the government and SEBI to develop and integrate commodity markets in a phased manner.
  • There is need from government that it should now resist similar temptation and focus instead on real-time monitoring systems. Apart from the standardised derivatives approved by SEBI for trading in exchanges, a framework that promotes over-the-counter products will help improve the scope for risk mitigation.