The importance of commodity derivatives markets is increasing every day, especially for a developing nation like India, as the economy becomes more aligned with the global economy. Various sector of the economy that is stakeholders in base metals, energy, and agri commodities, are exposed to the price risks of international trade. To combat this treat, the Indian commodity exchanges have played unimportant role. Their contribution in modernizing the nation's commodity sector by bringing in more efficiency in the marketing value chain has been paramount.
In today's world industrial and technological advances have increased the requirement to improve physical infrastructure and developing economy thereby increasing the demand or base metals that have a variety of application in almost every industry ranging from construction, manufacturing and production. Factors such as currency movement rising inflation and interest rates in major develop countries affect the best metal demand and consequently its price. since India is among the fastest growing nations it is evident that the domestic demand for base metals will continue to remain strong.mcx provides an exchange platform to the participants of the base metal value chain for mitigating which they could be exposed to.mcx gives the base metal consumers an idea of the price at which the commodity would be available at a future point in time. With proper costing/financial planning they can cover their purchases. Exporters too, can benefit with an advance indication of the price likely to prevail which can be used to quote a realistic price to secure export contracts in a competitive market. Corporate entities using base metals as inputs, can benefit by hedging their risk on mcx irrespective of whether the commodity traded needs their a requirements of exact quality / technical specifications.
Many of the commodities consumed in India are imported so not surprisingly their prices follow common global price trends and global price volatility is reflected in the local price volatility. In addition, the markets for many commodities that are produced in the country are effectively integrated with global markets and their prices reflect global supply/demand conditions. in the past, it was very difficult for Indian corporate to protect themselves against global price fluctuations. Since 2003, however, Indian corporate have been able to protect themselves against volatility of globally referenced commodities by hedging on mcx, with the added convince of having accounts in Indian rupees and dealing with a broker in the same time zone.
With commodity futures a hedger locks in a price and therefore the profit margin. Commodity futures exchanges like mcx provide an almost costless mechanism for risk transfer. With insurance those who want to lay off their risks have to pay a premium to those assuming these risks. But commodity futures exchanges bring together various segments of the market place with differing objectives in price outlook. No premium is required to lay off risks a futures market allows producers and consumers to meet their requirements of securing their margins. The first by selling future contract and the later by buying. In a typical producers hedging scenario ,producers sell future contracts and lock in their price realization. On the contrary, users from infrastructure industries cover their forward purchases by going long on future contracts.
Benefits of commodity futures contract:-
- Avoid the effects of fluctuations in prices for producers who, because of their limited production volume or seasonal factors, are not able to spread out their sales over the year, or for consumers who, because of their limited size, cannot spread out their purchases.
- Protect the value of inventories, or partly finance the cost of storage;
- Secure a processing margin;
- Lock-in future prices at an attractive level;
- Improve marketing policies and financial planning and forecasting.
Advantages of MCX Commodity Trading