What ‘ware’ how: Derivative

A derivative, in the context of the commodities market, is a financial contract that derives its value from an underlying commodity. There are broadly four types of derivatives — forwards, futures, options and swaps.

In India, however, there are only two types of commodity derivatives — futures and options.

The Multi Commodity Exchange (MCX), the National Commodity and Derivatives Exchange (NCDEX) and the Indian Commodity Exchange (ICEX) are the three national-level commodity exchanges in the country. Recently, the two stock exchanges — the NSE and the BSE — too, entered the space. Derivatives of different commodities including gold, silver, diamond, crude oil, natural gas and agri commodities — sugar, wheat, chana, guar and soybean — are traded on these exchanges.

Derivative contracts are used by producers and users of commodities as a tool to manage price risk.

Speculators (retail investors) who eye trading gains also play in derivatives. Recently, mutual funds and portfolio managers got a green flag from the regulator to invest in commodity futures and options. Category III Alternative investment funds (AIFs), too, can put their money in these instruments. Foreign portfolio investors (FPIs), though, are not allowed. The commodity derivative market in India is regulated by the Securities exchange Board of India (SEBI).

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