A potato producer could use potato futures contracts to lock in a future sale price for potatoes, while a speculator could buy and sell potato futures to profit from price changes. The document then provides background on the development of commodity derivatives markets in India, including a historical overview of commodity trading beginning in the late 1800s and the banning of options trading between 1952-2002. It discusses the establishment of electronic commodity exchanges beginning in 2003 and provides operational details about the Multi Commodity Exchange of India (MCX), one of the largest commodity exchanges in the country.

1. Joseph Anbarasu on 12 – 1 - 2011

2. A potato producer could purchase potato
futures on a commodity exchange to lock
in a price for a sale of a specified amount
of potato at a future date, while at the
same time a speculator could buy and sell
potato futures with the hope of profiting
from future changes in potato prices.

4. A revolution in Commodity derivatives and
risk management
 Commodity options banned in India between
1952 and 2002
 Commodity market began from 2003 onwards
 Almost all stock exchanges have commodity
market segments apart from 3 national level
electronic exchanges
 Almost Eighty commodities are in the list now

5.  The NMCE has most
major agricultural
commodities and
metals under its fold,
 The NCDEX, has a
large number of
agriculture, metal and
energy commodities.
 MCX also offers many
commodities for futures
trading (We will see this
exchange in detail at
the end).

6.  Cotton Trade Association
started futures trading in 1875
 Derivatives trading started in
oilseeds in Bombay (1900), raw
jute and jute goods in Calcutta
(1912), wheat in Hapur (1913)
and in Bullion in Bombay
(1920)
 The Government of Bombay
prohibited options business in
cotton in 1939
 In 1943, forward trading was
prohibited in oilseeds and
some other commodities
including food-grains, spices,
vegetable oils, sugar and cloth.

7.  The Parliament passed Forward Contracts (Regulation) Act,
1952
 The Act envisages three-tier regulation:
• The Exchange which organizes forward trading in commodities can
regulate trading on a day-to-day basis;
• the Forward Markets Commission provides regulatory oversight under
the powers delegated to it by the central Government, and
• the Central Government - Department of Consumer Affairs, Ministry of
Consumer Affairs, Food and Public Distribution is the ultimate regulatory
authority.
 In 1960s, following several years of severe draughts that
forced many farmers to default on forward contracts (and even
caused some suicides), forward trading was banned in many
commodities considered primary or essential.

8.  Government set up a
Committee in 1993 to
examine the role of futures
trading. The Kabra
Committee recommended
allowing futures trading in 17
commodity groups.
 It recommended certain
amendments to Forward
Contracts (Regulation) Act
1952, particularly allowing
options trading in goods and
registration of brokers with
Forward Markets
Commission.

9.  The Government accepted
most of these
recommendations and
futures trading was
permitted in all
recommended commodities.
 Derivatives do perform a
role in risk management led
the government to change
its stance.
 Liberalization facilitates
market forces to act freely
 The next decade is being
touted as the decade of
commodities.

10.  The possibility of adverse
price changes in future
creates risk for businesses.
 Derivatives are used to
reduce or eliminate price
risk arising from unforeseen
price changes.
 A derivative is a financial
contract whose price
depends on, or is derived
from, the price of another
asset.
 Two important derivatives
are futures and options.

11.  A futures contract is an
agreement for buying or
selling a commodity for a
predetermined delivery
price at a specific future
time.
 They are Standardized
Contracts
 Traded in Future
Exchanges (Default is
taken care)
 Chicago Board of Trade in
1848

12.  Like futures, options are also
financial instruments used for
hedging and speculation.
 The commodity option holder
has the right, but not the
obligation, to buy (or sell) a
specific quantity of a
commodity at a specified price
on or before a specified date.
 Buyer and Selling.
 Call Option and Put option
 The option holder will exercise
the option only if it is beneficial
to him; otherwise he will let the
option lapse.

13.  For example, suppose a farmer buys a put option to sell 100 Quintals
of wheat at a price of $25 per quintal and pays a „premium‟ of $0.5 per
quintal (or a total of $50). If the price of wheat declines to say $20
before expiry, the farmer will exercise his option and sell his wheat at
the agreed price of $25 per quintal. However, if the market price of
wheat increases to say $30 per quintal, it would be advantageous for
the farmer to sell it directly in the open market at the spot price, rather
than exercise his option to sell at $25 per quintal.

14.  Multi Commodity Exchange (MCX) is an
independent commodity exchange based in
India.
• Established in 2003 and Based in Mumbai
• Turnover in 2009 was USD 1.24 trillion
• Sixth largest commodity exchange
• It was established in 2003 and is based in Mumbai.
 MCX offers futures trading in
• bullion, ferrous and non-ferrous metals, energy, and a
number of agricultural commodities (menthol oil,
cardamom, potatoes, palm oil and others).

15.  MCX has also set up in joint
venture the MCX Stock
Exchange.
 Earlier spin-offs from the
company include the National
Spot Exchange, an electronic
spot exchange for bullion and
agricultural commodities, and
 National Bulk Handling
Corporation (NBHC) India's
largest collateral management
company which provides bulk
storage and handling of
agricultural products.

16.  It is regulated by the Forward Markets Commission.
• MCX is India's No. 1 commodity exchange with 83% market
share in 2009
• Competitor is National Commodity & Derivatives Exchange Ltd
• Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in
crude oil and gold in futures trading
• The highest traded item is gold.
• MCX has several strategic alliances with leading exchanges
across the globe
• As of early 2010, the normal daily turnover of MCX was about
US$ 6 to 8 billion
• MCX now reaches out to about 800 cities and towns in India with
the help of about 126,000 trading terminals
• MCX COMDEX is India's first and only composite commodity
futures price index

17.  Financial Technologies  Corporation Bank,
(I) Ltd.,  Union Bank of India,
 State Bank of India and  Canara Bank,
its associates,  Bank of India,
 National Bank for  Bank of Baroda ,
Agriculture and Rural  HDFC Bank,
Development  SBI Life Insurance Co.
(NABARD), Ltd.,
 National Stock  ICICI ventures,
Exchange of India Ltd.  IL & FS, Merrill Lynch,
(NSE), and
 Fid Fund (Mauritius)  New York Stock
Ltd. Exchange

18.  Commodity Options
• Farmers not beneficiaries in price rise
 The Warehousing and Standardization
• Physical Delivery needs backup
 Cash Versus Physical Settlement
 The Regulator
• weak FMC
 Lack of Economy of Scale
 Tax and Legal bottlenecks
• Across States impossible
 Indoctrination is ineffective

19.  Narender L. Ahuja for his article “Commodity Derivatives
Market in India: Development, Regulation and Future Prospects” International
Research Journal of Finance and Economics, ISSN 1450-2887 Issue 2 (2006), Euro-
Journals Publishing, Inc. 2006
 http://www.eurojournals.com/finance.htm
 Investopedia
 MCX website
 SEBI website