Market regulator Sebi could announce the operational framework for introduction of options in commodities.
Lets have a lowdown on what this will entail.
1. How many functional commodity futures exchanges exist?
Three, the largest being metal and energy bourse MCX, agri bourse NCDEX and plantations exchange NMCE. Of these, NMCE was the first to commence trading in late 2002. MCX and NCDEX began a year later.
2. What products do these exchanges offer?
Trading in futures contracts of commodities only. Unlike in equity markets, options or index trading is not allowed. Also, participation is restricted to retail and wholesale traders, and corporate hedgers. No foreign, NRI or bank participation is permitted at present.
3. What’s in the works?
Sebi, which took over regulation of this market in September 2015 is strengthening regulation -trading, client, broking or exchange related. It also plans to give exchanges permission to start trading in options contracts. Two options -one agri and one non agri could be allowed initially . Also, in due course, it could expand participation to institutional investors.
4. How will options be settled?
Unlike in the equity market, Sebi does not regulate the cash market in commodities.Therefore how to settle options is being worked out. It’s possible that Sebi might allow options to be converted into futures to work around the problem. Therefore the options prices will be influenced by the futures contracts.Spot markets in India are controlled by state governments who issue licenses to markets to function.
5. What’s the difference between an option and futures contract?
A futures contract facilitates purchase or sale of an underlying commodity at a preset price on a future date. Profits and losses in such contracts can be unlimited.
Options similarly facilitate purchase or sale of an underlier. However, loss are limited to the premium paid by buyer to the seller of a call (right to buy) option or a put (right to sell) option.