Context:–

Gold prices declined 50 rupees at Multi Commodity Exchange for October 2023.

What is the Multi-Commodity Exchange of India?

• The Multi Commodity Exchange of India Limited (MCX), India’s first listed exchange, is a cutting-edge commodity derivatives exchange that allows for online commodity derivatives trading and risk management.
• The Exchange, which first opened its doors in November 2003, is governed by the Securities and Exchange Board of India (SEBI) after the merger of FMC with SEBI.
• It provides derivatives across various domains such as bullion, industrial metals, energy and agricultural commodities.
• It is the first exchange in India that offers commodity options contracts, bullion index futures and base metals index futures contracts.
• It has a flagship index series, called MCX iCOMDEX.
• MCX iCOMDEX includes real-time commodity futures price indices, which give information on market movements in key commodities/ segments traded on MCX.
• First options security with gold as the underlying asset was launched on MCX.

Major Commodity Exchange in India:

• Multi Commodity Exchange (MCX)
• National Commodities and Derivative Exchange (NCDEX)
• National Multi-commodity Exchange (NMCE)
• Of these commodity exchanges, the NCDEX and NCME focus primarily on agricultural commodities trading.

What are the benefits of Gold Options?

The derivative instrument allows investors to enter into contracts to either buy or sell gold sometime in the future at a pre-determined price, thus allowing investors to hedge any volatility in the price of the metal, for a price.

• Options usually are cheaper than binding future agreements will help in the wider participation of investors in the realm of commodity speculation.
• Helps in formalising Gold trade.
• The introduction of a new financial instrument in India clears a path to building a vibrant market for commodities.
• The benefits of well-regulated commodity speculation are likely to outweigh the potential systemic risk from asset bubbles.

The commodity options would be taken up initially by hedgers, professionals and high net worth individuals. Retail investors will participate only if mini gold contracts are launched as the lot size is not manageable for retail as per the current specification.

Options in Commodity Trading

• They are derivative securities in which the price of an option is intrinsically linked to the price of another item.
• Such derivatives allow investors to enter into contracts to either buy or sell gold sometime in the future at a predetermined price.
• Therefore it provides a hedge against future risks.
• Options are cheaper as compared to binding future agreements.
• They allow the participation of a greater number of investors.

Conclusion

SEBI has approved various standardized derivatives for trading in exchanges. This framework promotes over-the-counter products that could help in improving the scope for risk mitigation. The functioning of the Multi Commodity Exchange has also enabled research, product development, innovation and ethical business practices.

MCQs about Multi-Commodity Exchange of India

Question 1: What is the primary purpose of the Multi Commodity Exchange of India (MCX)?

A) To provide online stock trading services.

B) To facilitate currency exchange.

C) To offer commodity derivatives trading and risk management.

D) To regulate the Indian stock market.

Question 2: Which regulatory body governs the Multi Commodity Exchange of India (MCX)?

A) Reserve Bank of India (RBI)

B) Securities and Exchange Board of India (SEBI)

C) Ministry of Finance, Government of India

D) Multi Commodity Exchange Regulatory Authority

Question 3: What is the significance of MCX iCOMDEX?

A) It’s a flagship index series that includes real-time stock market indices.

B) It’s a platform for trading agricultural commodities.

C) It offers options trading for precious metals.

D) It provides real-time commodity futures price indices for key commodities traded on MCX.

Question 4: Which of the following commodity exchanges in India primarily focuses on agricultural commodities trading?

A) Multi Commodity Exchange (MCX)

B) National Commodities and Derivative Exchange (NCDEX)

C) National Multi-commodity Exchange (NMCE)

D) All of the above

Question 5: What purpose do gold options serve for investors?

A) To invest directly in physical gold.

B) To speculate on the price of gold in the stock market.

C) To hedge against volatility in the price of gold.

D) To trade gold in the forex market.

Question 6: How do options in commodity trading differ from binding future agreements?

A) Options provide a hedge against future risks.

B) Options are always more expensive than binding future agreements.

C) Options require physical delivery of the commodity.

D) Options can only be traded by high net worth individuals.

Question 7: What is the potential impact of introducing commodity options in India’s financial market?

A) Increase in asset bubbles and systemic risk.

B) Limited participation by investors.

C) Improved risk mitigation and a vibrant market for commodities.

D) Decrease in the trading of traditional derivatives.

Question 8: Who is likely to be the primary audience for commodity options initially?

A) Retail investors

B) Speculators

C) Hedgers, professionals, and high net worth individuals

D) Government institutions

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