Future Trading and Sugar2 The future trading in commodities is allowed in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952. In April 2001, the Government of Indias Cabinet Committee on Economic Affairs (CCEA) and the Ministry of Food permitted futures trading in white sugar to stabilize the market and safeguard the interest of farmers, stockists and exporters.
Two Major Commodities Exchange in India3 MCX ( Multi Commodity Exchange) NCDEX ( National Commodities & Derivative Exchange)
Commodities Traded on the exchanges4 Agri Products – Pepper, Sugar, Chilli, Turmeric Precious Metals – Gold, Silver, Platinum Base Metals – Copper, Lead, Zinc, Aluminum Energy – Crude Oil, Natural gas
What are Commodity futures?5 A financial contract; The underlying commodity is bought and sold at the future date; A tool used by Investors, Hedgers, Arbitrageurs, Day Traders.
Why future trading in Commodities?6 Portfolio diversification and risk management. Additional investment opportunity Low cost business No transportation, storage, insurance, security charges. Low margins – high leverage Intrinsic value of the commodity Domain knowledge of industry. Hedging/Arbitrage
Benefits of Future Trading7 Price discovery for commodity players - A farmer can plan his crop by looking at prices prevailing in the future market. Accordingly, a farmer can plan his plantation and put his effort in the right direction.
8 Hedging against price risk - A farmers can sell in future to ensure remunerative prices - A processor/ manufacturing firm can buy in futures to hedge against volatile raw material cost - An exporter can commit to a price to his foreign clients - A stockist can hedge his carrying risk to ensure smooth prices of the seasonal commodities around the year.
Continue…..9 Easy availability of finance - Based on hedged positions commodity market players (farmers, processors, manufacturers, exporters) may get easy financing from the banks. Risk Management - Growers – Short Hedge on upcoming produce - Traders – Short Hedge on stored quantity - Manufacturers – Long Hedge on input, Short Hedge on finished products Price Discovery - Future prices can be used as indicative prices for negotiating the export prices and also upcountry sales.
Practices at National Commodity Exchange10 Particulars MCX NCDEX Contract Size Benchmark market Operational Cost Transaction Cost Channel Trade Transparency Channel Financial Integrity Lead Transaction Cost Physical Delivery