After suspending ‘options on futures’ contracts, the National Commodity and Derivatives Exchange (NCDEX) has decided to launch ‘options on goods’ contracts in certain farm commodities on Monday.
Earlier, options were devolving into futures and settlement was at a fixed price. Now Sebi allows direct settlements in options, under which the farmer will benefir from price volatility.
Available in three commodities, namely, rapeseed/mustard seed, maize and wheat to begin with, these contracts would allow both, farmers and other participants in the value chain such as aggregators, farmers producers organisations (FPOs) and farmers producers companies (FPCs) to hedge the price risk in agricultural commodities before the actual sowing season begins. Through this, farmers and other participants can lock their prices by paying a small premium in ‘options in goods’ contracts and get the benefit of price volatility either side.
Through this mechanism, farmers and aggregators would be able to take a decision on sowing of any crops well ahead of the season by locking the price of their produce. This makes these contracts beneficial for both, farmers and aggregators. Processing mills and other value chain participants may also lock their raw material prices in anticipation of both lean and peak supply seasons.
“This is a game-changer in agricultural trade in India.
In case the price of any agricultural commodity rises at the expiry of the contract, farmers are free to sell their produce in the spot market and get greater value. On the
other hand, if the price of the traded commodity falls, participants will have to forego the premiums paid. Premiums on any commodity are determined based on market forces, that is, demand and supply,” said Vijay Kumar, managing director and chief executive officer, NCDEX.
NCDEX has also sought approval from the Securities and Exchange Board of India (Sebi) for the launch of ‘options in goods’ in guar gum, guar seed and a host of other commodities that are liquid on the exchange platform.
Differentiating between ‘options on futures’ and ‘options in goods’ contracts, Kapil Dev, head (Products and Business Development), said, “While settlement of both types of contracts would be done based on future prices, farmers are allowed to sell their produce in spot in case the price of the underlying commodity goes up under ‘options in goods’. This facility was not available under ‘options in futures’ contracts.”
In this new form of contracts, farmers and aggregator are protected through ‘put’ options, while processors and other participants in the value chain would be able to take advantage of ‘call’ options.
Meanwhile, NCDEX has decided to collect margins from participants only towards the end of contract expiry. Traders would have to pay premiums 1.5-2 per cent per month for any commodities traded in ‘options in goods’ contracts.
NCDEX plans to make these products popular without any provision of market making or liquidity enhancement scheme (LES) and wants to conduct numerous awareness programmes in various regions.