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With gold prices at an 8-year hike, crude oil at its hike since the Iraq war, wheat, copper, silver, oilseeds markets at growth, many equity investors are keen on shifting to commodity derivatives. This is possible only when separate regulatory framework is established for the same, which will benefit both the hedgers by lowering the transaction costs and the arbitragers with efficient price recovery.
Impersonal online system, Exorbitant admission and membership fees and subscription, heavy security deposits, high variety and special margins, daily clearing, narrow price fluctuations with circuit breakers, limits on open positions and trading have adversely affected investor interest in commodity derivatives, ultimately affecting liquidity in the market. Elimination of the underground and illegal commodity derivative market can further accelerate the growth.

A soft interest rate and a weak dollar have increased the demand for commodities around the world. Increasing demand from china for commodities and global economic recovery can help grow it further. Commercial banks are chasing this opportunity with attractive lending rates between 8%-8.5percent as against normal rates of 11-14%. SEBI is also considering altering Regulation 43 thereby allowing mutual funds to float commodity focused funds, which invest in commodity derivatives which will further encourage smooth markets, help better price recovery and translate into more efficient distribution of commodities. With extended interest from FIIs, banks and mutual funds, the commodity derivative market is heading towards north.

Forex Derivatives

The economic liberalization in the early nineties provided the economic rationale for the introduction of FX derivatives. Foreign markets were approached for capital and direct investment opportunities. Increase convertibility on the capital account and the current account aided the process of integration of the Indian financial markets with international markets. With limited convertibility on the trade account being introduced in 1993, the environment became even more conducive for the introduction of these hedge products. forex derivatives provide better opportunities for the Corporate to Hedge their currency exposures (ECBs, forex trade, etc.), reduce borrowing costs using the comparative advantage of borrowing in local markets.

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* Contributed by -
Nidhi Sethi,
Batch of 2006,
IMT Ghaziabad.