India has a long history of commodity futures trading, extending over 125 years. Still, such trading was interrupted suddenly since the mid seventies in the fond hope of ushering in an elusive socialistic pattern of society. As the country embarked on economic liberalization policies and signed the GATT agreement in the early nineties, the government realized the need for futures trading to strengthen the competitiveness of Indian agriculture and the commodity trade and industry. Futures trading began to be permitted in several commodities, and the ushering in of the 21-century saw the emergence of new National Commodity Exchanges with countrywide reach for trading in almost all primary commodities and their products.
A commodity futures contract is essentially a financial instrument. Following the absence of futures trading in commodities for nearly four decades, the new generation of commodity producers, processors, market functionaries, financial organizations, broking agencies and investors at large are, unfortunately, unaware at present of the economic utility, the operational techniques and the financial advantages of such trading.
[...] Profit Cotton futures price Loss Figure 5.4 Payoff for a seller of cotton futures USING COMMODITY FUTURES For a market to succeed, it must have all three kinds of participants - hedgers, speculators and arbitragers. The confluence of these participants ensures liquidity and efficient price discovery on the market. Commodity markets give opportunity for all three kinds of participants. In this chapter we look at the use of commodity derivatives for hedging, speculation and arbitrage. HEDGING: The primary purpose of futures markets is to provide an efficient and effective mechanism to manage price risk. [...]
[...] VISION AND MISSION: The vision of MCX is to revolutionize the Indian commodity markets by empowering the market participants through innovative product offerings and business rules so that the benefits of futures markets can be fully realized. Offering 'unparalleled efficiencies', 'unlimited growth' and 'infinite opportunities' to all the market participants. EXCHANGE OF CHOICE: At MCX we believe that performance excellence and affordability would be the key drivers in promoting and popularizing Commodities Futures trading in the country. Exchanges in the new economy will be driven by strong service availability backed by superior technology and MCX is well poised to emerge as the "Exchange of Choice" for the commodity futures trading community. [...]
[...] RISK MANAGEMENT: NCDEX has developed a comprehensive risk containment mechanism for its commodity futures market. The salient features of risk containment mechanism are: 1. The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent NCDEX charges an upfront initial margin for all the open positions of a member. It specifies the initial margin requirements for each futures contract on a daily basis. [...]
[...] The futures market permits him to sell futures contracts to establish the approximate sale price at any time between the time he buys his calves for feeding and the time the fed cattle are ready to market, some four to six months later. He can take advantage of good prices even though the cattle are not ready for market Hedging protects inventory values. For example, a merchandiser with a large, unsold inventory can sell futures contracts that will protect the value of the inventory, even if the price of the commodity drops Hedging permits forward pricing of products. [...]
[...] Following the absence of futures trading in commodities for nearly four decades, the new generation of commodity producers, processors, market functionaries, financial organizations, broking agencies and investors at large are, unfortunately, unaware at present of the economic utility, the operational techniques and the financial advantages of such trading, there is essential need to study the tone of the commodity markets in India. TRADING METHODOLOGY: Trading in an inter connected market would permit members of one exchange to trade directly with the member of another participating exchange. [...]
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