Securities and Exchange Board of India (SEBI) recently laid out rules for the introduction of commodity options.
What are futures and options?
Derivatives are financial instruments with a price that is dependent upon or derived from one or more underlying assets.
Futures and options represent two of the most common form of "Derivatives".
An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract.
In futures contract buyer has the obligation to purchase a specific asset, and the seller has to sell and deliver that asset at a specific future date.
What are the changes made?
SEBI has also permitted options trading in commodity futures.
It allowed commodity exchanges to launch options in agri and non-agri commodity futures if they pass the minimum average daily volume requirement.
What are benefits?
Options are better hedging-and-trading tools than futures.
Losses are limited for the buyer and costs are lower. Buyer is less affected by volatility in market price.
The launch of options will boost overall market participation and also complement the existing futures.
Thus it makes the commodities market more efficient.
The combination of futures and options can give market participants the benefit of price discovery of futures
