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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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