Derivatives Trading

Why in news?

• On December 20, 2021, the capital markets regulator suspended futures trading in seven commodities, viz., wheat, paddy (non-basmati), moong, chana, soybean and its derivatives, mustard seed and its derivatives, and palm oil and its derivatives on the exchanges.
• The trading was initially suspended for a year, but in December 2022, the ban was extended for another year, i.e., until December 20, 2023. 

What is derivative trading in commodities? 

• The derivatives are short-term financial contracts that are bought and sold in the market.
•  Profits are made in the derivatives trade by predicting the price movements of the asset that underlies the contract. 
• The derivatives trade can be in futures and options.
• In a futures contract, a supplier pledges to sell a certain quantity at a fixed price at a future date. 
• An option is a derivative contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying asset.
• Farmers can put fixed amounts of their products, which fit the quality standards of the exchange, to be sold at a fixed price — almost like price insurance. 
• These contracts can be exited by either the producer or the trader by paying a margin price to the exchange.
• Agricultural commodities like cotton, paddy, soya bean, soya oil, mustard seed, etc., are traded on the National Commodities and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX).

Q1) What is National Stock Exchange of India Limited?

The National Stock Exchange of India Limited (NSE) is India’s largest financial market. Incorporated in 1992, the NSE has developed into a sophisticated, electronic market, which ranked fourth in the world by equity trading volume.

Source: SEBI ban on Agri commodities trade: Why farmers are protesting against the regulator in Mumbai