MCX is India’s leading Commodity Exchange with a market share of 99.99 per cent in the precious metals segment. MCX Gold and Silver Prices are the domestic price benchmark for the bullion and jewellery value-chain, and end-consumers alike – It is understood that most Pricing is done MCX (+/-).
The MCX Gold and Silver prices reflect all four elements: Dollar/Rs exchange rate, Custom Duty tariff, international gold prices along with the domestic premia/discounts, thereby providing a perfect hedge for market participants. MCX has emerged as an efficient platform for price risk management for gold and silver. MCX has seen deliveries of over 120 MT of gold and more than 3,500 tons of silver via its futures contracts since inception, thereby creating efficient spot-futures integration.
Importers, bullion traders, listed jewellers as well as small-medium jewellers from across the country use MCX bullion contracts for the aforesaid purposes of pricing, hedging as well as delivery of quality-assured Exchange-good gold and silver bars and coins.
Recently MCX launched their Gold Mini Options Contract with Gold Mini (100 grams) Futures as underlying. Outlook Money spoke with Shivanshu Mehta, Head - Bullion, Multi Commodity Exchange of India Limited in an exclusive interaction.
Shivanshu Mehta, Head – Bullion, MCX said, “As a market leader it is incumbent upon us to constantly innovate and bring products that cater to the needs of the bullion and jewellery industry. Being of shorter tenor and smaller denomination, the Gold Mini Options on futures would bring more retail participation and also make it affordable for small-medium jewellers to protect their fabrication margins by paying a smaller premium. Further, options would allow for participation in favourable price movements while strictly insuring against downside movements, thereby letting jewellers hedge their inventories with higher capital efficiency and lower cost.”
Q1) What Was The Underlying Need To launch Gold Mini Options With Gold Mini (100 grams) Futures As Underlying Contract And What Are Its Advantages?
Ans) MCX successfully launched Gold 1kg Options on futures contract in 2017. Gold options with Gold (1 Kg) Futures as underlying turnover of Rs.4,284 crore registered a three-and-half year high on March 24, 2022, highest volume of 9.49 MT in March 16, 2020, and highest open interest of 8.75 MT in March 20, 2020.
After receiving overwhelming response for Gold 1kg options contract, we received requests from jewellers to introduce smaller denomination options that would enable them to hedge via options, as the advantages of options are multifold, and as listed below:
- Options offer the buyer an Insurance against adverse movement, but allow for participation on the favourable side.
- Maximum loss to the extent of premium paid for buyer.
- Exchange-traded options are free from counterparty risk.
- Futures & Options combination (both risk management tools) gives leverage of futures with safety of Options. Hence, profit is possible from change in future prices, but losses are limited via Options.
- Participants can devise numerous effective hedging strategies.
- Better cash-flow management because of one-time payment of premium.
- Low transaction cost, low capital intensive.
- Flexible pricing via Put options: Jewellers may offer the lower of current price / or of a future date, for example - Akshay Tritiya as Festive Scheme.
Hence, MCX designed the Gold Mini Options contract and launched the same on April 25, 2022.
Q2) What Was The Launch Day Trading Volume i.e., on April 25, 2022?
Ans) The contract received a great response on the launch day itself and clocked a volume of 1,253 lots, turnover of Rs. 66.10 crore and open interest of 356 lots. Further, on day 2 (April 26), the contract clocked a volume of 1,813 lots, turnover of Rs 95.41crore and open interest of 628 lots.
Q3) What Are The Advantages of the Newly-Launched Gold Mini Options With Gold Mini (100 grams) Futures As Underlying Contract?
Ans) Gold Mini Options is a relatively smaller denomination contract and also has a monthly expiry. Further, the Gold options on futures would devolve into Gold Mini futures contract, its underlying, which itself is highly liquid, having a turnover of Rs. 2,57,103 crore and volume of 533 MT in FY 2121-22.
This contract provides efficient use of capital, margin protection and inventory hedging for jewellers. This contract is also covered under portfolio margin benefit across the portfolio of bullion futures and options.
Spread benefit in initial margin is permitted in the following cases for both futures and options:
a) Different expiry date contracts of the same underlying
b) Two contracts variants having the same underlying commodity. (e.g. Gold, Gold Mini, Gold Guinea, Gold Petal)
Q4) Whom does the Gold Mini Options with Gold Mini Options With Gold Mini (100 grams) Futures As Underlying Contract Cater To?
Gold Mini options contract caters to small and medium jewellers who can easily mitigate their price risk by hedging in Gold Mini Options contract and take the above listed advantages. Further, Gold Mini options contract has less premium, making it affordable and feasible to the small retailers and investors who can now trade in Gold Mini options contracts.