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Options and the Commodity Market
The necessity of options in commodity markets in India has been discussed for a long time. It aids in improving market liquidity, information transmission, and acts as a risk transfer mechanism. However, given the nature of farm and non-farm commodity markets, fi nancial investors may be attracted more towards non-farm commodity options. This would eventually lead to illiquidity in farm commodities. The regulator and exchanges should therefore work in unison to launch options in a prudent manner, especially in farm commodities, to benefi t the concerned stakeholders, including producer groups and processors.
The authors have benefi ted from the working paper “Options: A Critical Missing Link in India’s Commodity Market,” Multi Commodity Exchange of India, 2014.
The Ministry of Finance allowed options trading in commodities in 2015–16. The Securities and Exchange Board of India (SEBI), the new regulator of commodity derivative markets, has recently approved, in principle, options trading in commodities. The approval came after a few rounds of discussion between the Commodity Derivatives Advisory Committee (CDAC) and the regulator (Sahgal 2016). Now, with this risk management instrument, will the breadth and depth of commodity derivative market increase and would this factor in the efficiency of price risk transfer mechanism?
To address this, serious work in product development and market regulation with reference to amendments to the relevant by-laws and rules needs to be accomplished in a stipulated period. How the regulator, SEBI, and exchanges would go about this can generate considerable attention and debate in academic and policy circles. The regulator has released the framework related to settlement and delivery in June 2017. Drawing a critical perspective from the mechanics of options market, we aim to discuss some of them in this article.
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