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).