Commodity Exchanges and types of players

Classroom

oi-Monika Nihalani

By Monika Nihalani

Published: Friday, May 27, 2011, 16:43 [IST]

There are three major national commodity exchanges in India. All three have electronic trading and settlement systems and a national presence. Apart form these, there are 18 domestic commodity exchanges.

Below are the three major national commodity exchanges:

• National Commodity and Derivatives Exchange Limited (NCDEX), Mumbai
• Multi Commodity Exchange of India Ltd (MCX), Mumbai
• National Multi Commodity Exchange of India Ltd (NMCE), Ahmedabad

Different types of Players in Commodity Market:

Players of commodities market have been classified into three broad categories. They are Hedgers, Speculators and Arbitrageurs.

Hedgers: Hedging is an investment strategy used for minimising a risk and hedgers are the practitioners of this strategy. Generally, hedgers are producers or consumers who want to transfer the price-risk on to the market. Commodities derivatives market provide them an effective hedging mechanism against adverse price movements. They protect themselves from risk associated with the price of commodity by using derivatives.

For example, an airline company faces the risk is price rise of fuel. So they will go for a long position (buy an oil futures contract) to hedge, just to cover the amount of fuel they expect to buy.

Similarly, gold is the best hedge against inflation.

Speculators: Speculators are sophisticated leading players in commodities futures market. They are basically risk takers and are never associated with any commodity. They generally bet against the price movement in the hope of making gains.

They undertake speculative position with respect to anticipating future price movements with a small margin and square-off anytime during trading hours. They do either by going long or going short positions.

Buying a futures contract in anticipation of price increase is known as 'going long". Selling a futures contract in anticipation of a price decrease is known as 'going short".

Arbitrageurs: Arbitrageurs are investors who earn from discrepancy in prices between the two exchanges or between different maturities of the same commodity.

A simple example of arbitraging is simultaneously buying a gold at lower price from one exchange and selling it on another exchange for higher price. So they make profit from price difference.

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