The study on Commodity derivatives

and emerging markets: An analysis of

the use of commodity derivatives in
emerging markets
INTRODUCTION :
Commodity derivatives are financial instruments that allow investors to trade on the
future price of commodities such as oil, gold, and wheat. These derivatives are
becoming increasingly popular in emerging markets as a way to manage price risk
and speculate on future price movements. These derivatives are traded on commodity
exchanges, which are specialized exchanges that facilitate the buying and selling of
commodities and their derivatives.
There are two main types of commodity derivatives: futures and options. A futures
contract is an agreement between two parties to buy or sell a specific commodity at a
future date and at a predetermined price. Futures contracts are standardized and
traded on exchanges.
Options, on the other hand, give the holder the right, but not the obligation, to buy or
sell a commodity at a predetermined price on or before a specified date. Options are
used for speculation or hedging purposes, and are traded on exchanges as well as
over-the-counter (OTC) markets.
Literature Review :
• Alibekov (1994) found that Commodity exchanges are envisaged as a key
element. There is a need for widespread education of agricultural producers in
fundamentals of business and marketing, and also essential for organization of
futures trading in grain, sugar, and vegetable oils, creation of proper futures
market infrastructure, introduction of clearing accounts for participants, and
provision of adequate information services
• Kunnal and Shankarmurthy (1996) studied that the critically analyses the
performance of the Karnataka State Seed Corporation (KSSC) with respect to
its seed marketing activity. KSSC has adopted a mixed distribution network to
sell seeds in the state. The quantity of seeds of different crops marketed by the
KSSC increased during the study period. Though sales of seeds showed
fluctuating trends, sales turnover showed an increasing trend. The share of
cooperatives in the distribution of seeds of KSSC was not appreciable
Problem statement :
Commodity derivatives have gained widespread popularity as a risk
management tool in developed countries. However, their use in emerging
markets has been limited, despite the fact that many of these countries are
significant producers and consumers of commodities. This raises the
question of why emerging markets have been slow to adopt commodity
derivatives and whether their use would be beneficial for these
economies.
Objective of the study:
• To get an idea about the different commodities traded in the market.
• To present a wholesome picture of Commodity Markets in India with
particular reference to Commodity Exchanges.
• To analyse benefits and risks associated with the use of commodity
derivatives in emerging markets.