Indian Commodity Market: Derivatives and Risk Management

Forward/ Futures trading performs two Important functions, namely price discovery and price risk management with reference to given commodity. It is useful to all segments of economy. It ensures balance in supply and demand position throughout the year and leads to integrated price structure throughout the country. It also helps in removing risk of price uncertainty, encourages competition and acts as a price barometer to farmers and other functionaries in the economy. The main benefits of futures trading are: (1) Price stabilization in terms of violent price fluctuations-this mechanism dampens the peaks and lifts up the valleys I.e., the amplitude of price variation is reduced, (2) Leads to integrated price structure throughout the country, (3) Ensures balance in supply and demand position throughout the year, and (4) Encourages competition and acts as a price barometer to farmers and other trade functionaries. The Commodity Futures Market in India has witnessed unprecedented growth since 2003, the year which saw the real breakthrough in the direction of liberalization and growth of this market. Three national level Multi Commodity Exchanges became operational during this period and futures trading started in a large number of agricultural and industrial commodities. The market has grown over 60 times to a volume of Rs.40.66 lakh crore (2007-08) during the period. Despite this phenomenal growth, the economic rationale and functioning of the futures market is not clearly understood by many. This has led the potential beneficiaries from the real sector to stay away from these markets. Realizing this it is felt that there is a necessity to educate various constituents of the commodity value chain about the functioning of the market. This book is a compilation of 43 research papers contributed by academicians and research scholars in the field of commodity derivatives and risk management. The articles are focused on 5 thrust areas: 1. Inter-relation between Commodity Futures and Spot Markets. A critical evaluation. 2. Critical evaluation of the performance of Indian Commodity Future Markets and the need and scope of reforms. 3. Regulatory landscape of Indian Commodity Market with special reference to APMC Act and FCR Act: Scope for synergy and convergence. 4. Emergence of Commodities as an Investment class. 5. Price Discovery and Convergence in Futures and Spot Commodity Markets in India. This volume is designed to contribute to the existing body of literature available on commodity derivatives trading in India and risk management and also to meet the need for a comprehensive guide to the complexities in commodity derivatives. Hence it will commend itself to all category of readers, particularly academicians, researchers, commodity market stakeholders, investors, speculators and to the student community.