Gold Option Contract

Gold Option Contract

Gold Option Contract

In News: Recently Multi Commodity Exchange has introduced gold option contracts for the first time in India.

Gold Option

  • It is a derivative instrument, which allows investors to buy or sell gold bullion at a future date at a predetermined price.

  • An option is similar to a futures contract in that the price, date and amount are pre-set for both.

  • The main difference between the two is that a futures contract is an obligation, or promise, made by the investor to uphold the contract whereas an option is not obligation.

Advantages

 

  • It allows investors to evade any volatility in the price of the metal, for a price.

  • These options usually also turn out to be cheaper than binding future agreements

  • It will help in the wider participation of investors in the realm of commodity speculation

  • Gold options will also help bring into formal channels more of the gold that is traded.

  • Options, like other financial derivatives, allow price risks to be transferred between market players in an efficient manner.

  • The business of anticipating prices in the future is left to professional speculators while their clients benefit from the prospect of stable prices.

  • These derivatives can facilitate the conduct of real economic activity in higher risk segments including in agriculture and industrial activity that would not happen otherwise.

Areas of Concerns

  • Almost a decade ago, a rapid increase in food prices pushed the government to impose a blanket ban on any speculation on agricultural products.

  • The wide-ranging nature of the move slowed the development of a healthy market for commodity speculation.

  • The government is now rising similar temptation and focus on gold market,instead on real-time monitoring systems.

Futures and Options

  • Derivatives are financial instruments with a price that is dependent upon or derived from one or more underlying assets.

  • Futures and options represent two of the most common form of “Derivatives”.

  • An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract.

  • In futures contract buyer has the obligation to purchase a specific asset, and the seller has to sell and deliver that asset at a specific future date.

  • An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

  • Commodities are of two types: hard and soft commodities.

  • Hard commodities are typically natural resources that must be mined or extracted (such as gold, rubber and oil).

  • Soft Commodities are agricultural products or livestock (such as corn, wheat, coffee, sugar, soybeans and pork).

  • FuturesContracts:The sale and purchase of commodities is usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. 

  • It is the most direct way of investing in commodities.

  • Speculator: The second type of commodities trader is the speculator.

  • These are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements.

  • Theses traders never intend to make or take delivery of the actual commodity when the futures contract expires.

Multi Commodity Exchange (MCX)

  • MCX is a platform for commodity traders that facilitate online trading, settlement and clearing of commodity futures transactions.

  • It was initially under the regulation of Forward Market Commission (FMC).

  • After the merger of FMC with SEBI, MCX comes under the purview of SEBI.

  • The government has recently launched gold as an option under futures trading in MCX for the first time.

  • Thus it allows investors to enter into contracts to either buy or sell gold in the future at a pre-determined price.

  • MCX offers more than 40 commodities across various segments such as bullion, metals and other agricultural commodities.

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