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Essay On Commodity Derivatives Market

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1 Commodity Derivative Market 1.1 Understanding Market Dynamics Derivatives are financial instruments used to hedge the risk associated with price fluctuation. Industries that are dependent upon the raw materials input or commodities they need, are significantly impacted by any price fluctuation of these commodities. Hence the companies operating in these industries use commodity derivatives where they trade in the basic raw materials input using standardize contracts in regulated commodity exchanges. Commodity exchange is a market where multiple buyers and seller trade commodities related contracts on the basis of rules and procedures determined by the exchange. Two types of trade are provided by the exchange – spot trade and forward trade. In case of forward trade there is immediate delivery while forward trade results into a future delivery. Because of the exchange the transaction cost required for finding a buyer or a seller is reduced and the price discovery function of the future market helps in efficient …show more content…

Before World War II there were commodities derivatives for wheat, rice, sugar, groundnut, jute products etc. But because of the problem of unnecessary speculation and illegal hoarding, forward trading on commodities was banned during the World War II. Post-independence a legislation called Forward Contract Act 1952 was enacted which provided legal framework to trade in forward and futures. The Forward Market Commission (FMC) was instituted as a regulated body in 1953 to monitor and regulate the trading of forward contract. However for the next four decades (1950-1990) these markets were not so popular because of the overly regulated nature of the economy due to which future trade in many commodities were prohibited during this

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