NCDEX plans for commodity derivatives to address NPAs, volatile agri prices – He told banks, market participants and farmer organisations to use commodity options similar to an insurance policy and hedge their positions by locking minimum profits.
NCDEX will propose to the regulator to allow options in more agri commodities like chana, soyabean and castor seed, among others, as underlying futures in these commodities are fairly liquid.
It also proposes to make soya refined oil a deliverable contract and launch deliverable metals futures.
The cost of buying option is minimal but if the price direction goes against what has been anticipated, then the option will help in capping the profit and protect farmers from falling prices.
Banks can ask their borrowers to hedge the price volatility risk of raw materials or commodities against which they have taken loans in futures market, and in options, if available. Even farmers can sell a part of their crop, estimated at the time of sowing, to ensure they get the price they intend to get even when it falls at the time of crop arrival. Farmers can buy put options of the crop they have sown.
Even bank borrowers can buy put for the commodity which they have pledged to get a loan. The Reserve Bank of India (RBI) has already told banks to ask their borrowers to hedge their commodity price risk on commodity exchanges. Now, bank’s commodity broking subsidiaries are taking membership of the comexes. Kumar said, “We have proposed broking subsidiaries of banks suggesting them to make wider use of commodity futures & option platform.”
For example, if a loan is taken against guar seeds by a borrower of a bank, he can buy put option of guar seed from a bank broking subsidiary. If prices fall, he has to increase collateral for borrowing in general practice. But now, they have more efficient tool ‘Options’. So, when the price falls, put option premium goes up which can be adjusted for marking borrowing to market rate and he saves paying additional collateral. Bank can charge less collateral or reduce interest rate for such hedged stock when pledged as mark to marker risk is lower. This also help banks reduce asset turning non-performing. Options here works as an insurance policy.
