Why in news?
Securities and Exchange Board of India (SEBI) recently laid out rules for the introduction of commodity options.
What are 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.
What are the changes made?
- SEBI has also permitted options trading in commodity futures.
- It allowed commodity exchanges to launch options in agri and non-agri commodity futures if they pass the minimum average daily volume requirement.
What are benefits?
- Options are better hedging-and-trading tools than futures.
- Losses are limited for the buyer and costs are lower. Buyer is less affected by volatility in market price.
- The launch of options will boost overall market participation and also complement the existing futures.
- Thus it makes the commodities market more efficient.
- The combination of futures and options can give market participants the benefit of price discovery of futures
Source: Businessline
