Benefits of Trading in Derivatives

Given the budgetary constraint and the ever-looming threat of inflation, the prospect of attaining the high growth rates needed for full employment may not be very bright in the volatile future in country. A decline in government deficit and private sector wasteful spending along with a rise in savings and productive investment could be very helpful, but this may not be possible when the value system is taking more time lags to implement the mandatory act regarding to its financial sectors.
These days, the market price of every consumable product tends to rise day by day due to numerous reasons and this has been continuously increasing from last three years. Moreover, all of us are compelled to pay it without speaking a single word. And government alone is not able to have control over the market volatility. Had if all the people are aware about the margin trading in commodity derivative the expected price can be extracted through trading in derivative exchange. Derivative is the financial assets whose value is derived from the underlying assets and the price is predetermined between two parties at future expiry date. Various types of derivative instruments are future, forward, swap and option. Among all only future contracts are traded in our country. Though the introduction of commodity is in early stage in Nepal but if we consider the history in global market it has started from 18th century. As from the worldwide prospective, 97% of commodities are traded in OTC derivative and only 3% are deal in physical market.
In fact, a sophisticated market mechanism can of course eliminate the hurdles of agricultural economy. And technically, Commodity exchange mechanism can be identified as the right fit. Therefore, it can be understood that, implementing the principle of commodity market in the agricultural sector can literally inflate the volume of the agro-economy and ultimately increasing the national economy. In top of that, it seems to be that Commodity market is making a bullish run and even exceeding its trade volume against stock exchange within the short-period of 5 years of establishment in Nepal. This certainly proves that there exists high positive sentiment over commodity market.
The commodity derivative works on behalf of beneficial not only to a consumer, producer, corporate, investors, government but the whole derivative ecosystem that will assist in strengthening the economy of the country. Commodity market establishes the (certified) agricultural products as a financial instrument or a sector of investment which must be a standardized quantity and quality, which sought for the standard warehousing/function to preserve the product. Certainly, if the agro-industry enters the commodity market then, the agriculture products can take advantage of the standard warehousing stores available in the market. Furthermore, the positive sentiment of market is enough to encourage the needed investment and entrepreneurship in the warehouse system. Availability of warehousing system certainly mitigates the compulsion of the farmer to have their products sold as soon as possible at any minimum price in order to escape product loss.
An individual can trade in exchange at a price upon which the commodity will be available at future point of time which will added advantage to them since the prices are translucent and predictable. In addition, they could also expose to hedging techniques which minimizes the price risk movement in underlying assets. In the same way producers can safeguard own price by introducing his product in derivative market. Again it would be more beneficial when Ministry of Finance implement the Public Warehouse Act through which people can give and take delivery of commodity as per their need. Speculators are the main players till now in our country who are more benefited through this market. It is the innovative investment platform where an individual can earn maximum profit with required margin money in short time period if he is provided with sufficient knowledge and information regarding the market. So, they are only the opportunist of the market volatility who generally impede in generating benchmark price.
Our neighboring country, China and India are successfully entertaining the benefits of this market from last five years. If we take the example of India where big multinational companies like Hindustan Copper ltd, Mahindra and Mahindra, Bajaj Electricals are dealing in commodity as raw material and also involve in hedging risk associated with the price tomorrow. However, due to lack of regulatory body and Public Ware house Act corporate in our country are not trading in derivative exchange.
Majority of commodities traded on global commodity exchanges are ago-based. Commodity exchanges therefore are of great importance and hold a great potential in case of economies like Nepal, where more than 65 percent of the people are dependent on agriculture. In the present scenario, it is expedient to focus on local farmers to explore their possible roles as aggregator for price risk management and collateralized finance. These aggregators can assume the role of facilitating agents or a risk-bearing layer between the farmers and the commodity exchanges which will motivate them to promote our local product in international market contributing to national Gross Domestic Product.
So far when Ministry of Finance will regulate the exchanges in our country then local commodity market will get integrated with international commodity market. This will encourage making Nepalese commodity viable in international market entailing the advantage of import and export in Nepal. Furthermore, we can also take advantage of our geographical structure between our neibouring countries by establishing the financial hub acting the intermediately role.
Students of Bachelors level are also getting the opportunities to transfer their theoretical knowledge in practical form in existed exchanges since financial derivative is included in course of curriculum in BBA and MBA.
Government not being the exception is earning more tax revenues rather than other business sectors in our country. Hence, implementation of the regulatory body in the country helps to encourage the exchanges but also have crucial role in the upliftment of the economic condition of Nepal. When the commodity market ecosystem gets benefited the whole economy of the country would also benefit. So, proficient and organized commodity exchange plays a complementary role in the overall development of economy thereby generating the employment opportunities, business generation, investment platform and growth in the financial market. Not only this, the trading of standardized and graded commodities help to bring quality products in market that protects consumer right and so far we could control the level of inflation to some extent.

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