Recently Multi Commodity Exchange has introduced gold option contracts for the first time in India.
What is a 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.
What are advantages of this?
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.
What are the 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.
