1. Joseph Anbarasu on 12 1 - 2011

2. A potato producer could purchase potatofutures on a commodity exchange to lockin a price for a sale of a specified amountof potato at a future date, while at thesame time a speculator could buy and sellpotato futures with the hope of profitingfrom future changes in potato prices. 3. A revolution in Commodity derivatives andrisk management Commodity options banned in India between1952 and 2002 Commodity market began from 2003 onwards Almost all stock exchanges have commoditymarket segments apart from 3 national levelelectronic exchanges Almost Eighty commodities are in the list now 4. The NMCE has mostmajor agriculturalcommodities andmetals under its fold, The NCDEX, has alarge number ofagriculture, metal andenergy commodities. MCX also offers manycommodities for futurestrading (We will see thisexchange in detail atthe end). 5. Cotton Trade Associationstarted futures trading in 1875 Derivatives trading started inoilseeds in Bombay (1900), rawjute and jute goods in Calcutta(1912), wheat in Hapur (1913)and in Bullion in Bombay(1920) The Government of Bombayprohibited options business incotton in 1939 In 1943, forward trading wasprohibited in oilseeds andsome other commoditiesincluding food-grains, spices,vegetable oils, sugar and cloth. 6. The Parliament passed Forward Contracts (Regulation) Act,1952 The Act envisages three-tier regulation: The Exchange which organizes forward trading in commodities canregulate trading on a day-to-day basis; the Forward Markets Commission provides regulatory oversight underthe powers delegated to it by the central Government, and the Central Government - Department of Consumer Affairs, Ministry ofConsumer Affairs, Food and Public Distribution is the ultimate regulatoryauthority. In 1960s, following several years of severe draughts thatforced many farmers to default on forward contracts (and evencaused some suicides), forward trading was banned in manycommodities considered primary or essential. 7. Government set up aCommittee in 1993 toexamine the role of futurestrading. The KabraCommittee recommendedallowing futures trading in 17commodity groups. It recommended certainamendments to ForwardContracts (Regulation) Act1952, particularly allowingoptions trading in goods andregistration of brokers withForward MarketsCommission. 8. The Government acceptedmost of theserecommendations andfutures trading waspermitted in allrecommended commodities. Derivatives do perform arole in risk management ledthe government to changeits stance. Liberalization facilitatesmarket forces to act freely The next decade is beingtouted as the decade ofcommodities. 9. The possibility of adverseprice changes in futurecreates risk for businesses. Derivatives are used toreduce or eliminate pricerisk arising from unforeseenprice changes. A derivative is a financialcontract whose pricedepends on, or is derivedfrom, the price of anotherasset. Two important derivativesare futures and options. 10. A futures contract is anagreement for buying orselling a commodity for apredetermined deliveryprice at a specific futuretime. They are StandardizedContracts Traded in FutureExchanges (Default istaken care) Chicago Board of Trade in1848 11. Like futures, options are alsofinancial instruments used forhedging and speculation. The commodity option holderhas the right, but not theobligation, to buy (or sell) aspecific quantity of acommodity at a specified priceon or before a specified date. Buyer and Selling. Call Option and Put option The option holder will exercisethe option only if it is beneficialto him; otherwise he will let theoption lapse. 12. For example, suppose a farmer buys a put option to sell 100 Quintalsof wheat at a price of $25 per quintal and pays a premium of $0.5 perquintal (or a total of $50). If the price of wheat declines to say $20before expiry, the farmer will exercise his option and sell his wheat atthe agreed price of $25 per quintal. However, if the market price ofwheat increases to say $30 per quintal, it would be advantageous forthe farmer to sell it directly in the open market at the spot price, ratherthan exercise his option to sell at $25 per quintal. 13. MultiCommodity Exchange (MCX) is anindependent commodity exchange based inIndia. Established in 2003 and Based in Mumbai Turnover in 2009 was USD 1.24 trillion Sixth largest commodity exchange It was established in 2003 and is based in Mumbai. MCX offers futures trading in bullion, ferrous and non-ferrous metals, energy, and a number of agricultural commodities (menthol oil, cardamom, potatoes, palm oil and others). 14. MCX has also set up in jointventure the MCX StockExchange. Earlier spin-offs from thecompany include the NationalSpot Exchange, an electronicspot exchange for bullion andagricultural commodities, and National Bulk HandlingCorporation (NBHC) Indiaslargest collateral managementcompany which provides bulkstorage and handling ofagricultural products. 15. It is regulated by the Forward Markets Commission. MCX is Indias No. 1 commodity exchange with 83% marketshare in 2009 Competitor is National Commodity & Derivatives Exchange Ltd Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 incrude oil and gold in futures trading The highest traded item is gold. MCX has several strategic alliances with leading exchangesacross the globe As of early 2010, the normal daily turnover of MCX was aboutUS$ 6 to 8 billion MCX now reaches out to about 800 cities and towns in India withthe help of about 126,000 trading terminals MCX COMDEX is Indias first and only composite commodityfutures price index 16. 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 StockLtd.Exchange 17. 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 Economyof Scale Tax and Legal bottlenecks Across States impossible Indoctrinationis ineffective 18. 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 MCXwebsite SEBI website