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INDIA INTERNATIONAL

GOLD CONVENTION - 2017

Gold Options, Need for


Deepening Bullion Derivatives Markets

Mr. P. K. Singhal, Whole Time Director and President


MCX
12 August 2017

11 - 13 August 2017, Grand 1


Hyatt, Goa
Options on Gold Futures

• SEBI guidelines for Options trading released (June 13, 2017)


– Amongst top 5 commodities traded on the Exchange;
– Initially only one commodity per Exchange
• Approval for Options on Gold 1 Kg futures contracts on MCX platform
• Gold is flagship product of MCX
• Gold futures on MCX - liquid and vibrant * till July
– Participation from across the value chain – From bullion dealers to end
consumers
– A national benchmark - Pricing in physical markets is +/- to MCX gold futures
prices
– Physically settled contract – 1,417 Kgs of physical delivery through MCX
platform in 2017 (till July)
– Strong Correlation of above 95% with CME gold prices (INR equivalent)
• Easy information access on numerous gold price influencing factors
• Physically settled contract – enables three legs of trading via MCX platform i.e.
futures, options and physical delivery through futures/options.

11 - 13 August 2017, Grand 2


Hyatt, Goa
Benefits of Options
• More suitable to meet risk management requirements of smaller participants
– Functions virtually as an ‘insurance’ product
– No margin calls for buyers
– Only premium to be paid at the time of buying
• Option are more flexible than futures
– Enable hedgers to hedge against adverse price movement by locking in a price
– Provides flexibility to take advantage of any favourable price movement at the cost of just
the ‘Premium’
• Less costly as transaction charges are to be paid only on premiums
• Will enrich information flow in to the markets – About volatility, cost of holding
(interest rates), underlying price movement, etc.
• Will lead to more innovative trading and hedging strategies involving both
options and the underlying futures
• Will improve liquidity and efficiency of underlying futures contract

11 - 13 August 2017, Grand 3


Hyatt, Goa
Initiatives post-SEBI Merger

New Initiatives Policy recommendations


 Trading of commodity options  Gold ETFs to invest in gold futures

 Permission for Category III AIF  Other financial institution


participation participations – Banks, FPI’s,
Insurance and Pension Funds
 LODR Regulations 2015 mandated
all listed companies to disclose their  New products like derivatives on
commodity price risk and hedging indices (e.g. bullion index)
activities in their Annual Reports
 Custodians to extend custodial
 Integration of security and services to vault receipts of
commodity brokers exchange accredited vaults

 Enhanced risk management norms

11 - 13 August 2017, Grand 4


Hyatt, Goa
Benefits of Institutional Participation in Commodity Derivatives

• Improve liquidity, especially in farther month contracts

• Encourage participation from large hedgers, who need sustained liquidity in far-month
contracts

• Enhance institutional research in commodity derivatives

• Enhance reach of the market

• Banks can introduce products with hedging in-built into it, that will bring down cost of
credit

Key value proposition to investors


Portfolio diversification
Protection from inflation
Leverage

11 - 13 August 2017, Grand 5


Hyatt, Goa
Untapped Potential of India’s Commodity Market

 India has a lot of


potential to grow in
the commodity
futures market as
compared to the rest
of the world

 Institutional
participation and
Futures - Physical Multiplier (CY 2016)* more derivatives
200 181 Global instruments can help
India
increase India’s
150
future-physical
100 80 79
44.9 54 multiplier as well as
50
6.9 8.4 14
1.2 0.7
improve hedging
0 efficiency and help
Gold Silver Copper CPO Cotton
reduce credit
*Benchmark exchange in Global markets and India considered
exposure risk
11 - 13 August 2017, Grand 6
Hyatt, Goa
Thank You!

11 - 13 August 2017, Grand 7


Hyatt, Goa

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