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Largest commodity bourse Multi-Commodity Exchange of India Ltd (MCX) launched India’s first commodity options in gold. It was launched by Union Finance Minister Arun Jaitley.
The gold futures contract will have bi-monthly duration. The option will also have the existing gold kilo futures contract as its underlier.
Options are an instrument that gives buyer right to buy or sell an underlined at present price on a future date. They are of two types: puts (right to sell) and calls (right to buy). According to market experts, options are also a much better hedging instrument as compared to futures for hedgers.
MCX’s Gold Option contract is European-styled Gold options with Gold (1 Kg) futures as underlying asset. These options are hedge-friendly and physically settled. It means that on exercise at expiration options position develops into corresponding underlying MCX 1 KG Gold futures position at strike price of exercised options.
The options product is unique and first of its kind which gives buyers right to buy or sell underlying asset, but no obligation, at a specified price at expiry. Thus, for buyers, risk is limited only to premium paid to option seller (i.e. Option writer).
The launch of commodity options in gold denotes one of most significant reform measures since modern commodity derivatives trading started in 2003. It will give stakeholders new set of financial instruments to hedge their price risks. Moreover, introduction of options gives strong impetus towards systematic development and transformation of commodity derivatives market in India, ushering in new era in price risk management in response to stakeholder expectations
Multi Commodity Exchange Ltd (MCX)
MCX is country’s largest metals and energy commodity bourse. It is country’s first listed commodity futures exchange that facilitates online trading, and clearing and settlement of commodity futures transactions, thereby providing a platform for risk management.
It began functioning in November 2003 and operates within regulatory framework of the Forward Contracts Regulation Act, 1952 (FCRA, 1952). It offers futures trading in bullion, ferrous and non-ferrous metals, energy, and a number of agricultural commodities (mentha oil, cardamom, potatoes, palm oil and others). Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in futures trading.