Welcoming Options In India's Commodity Derivatives Market

When the US airline companies, struck by crude oil prices that touched 147 dollars a barrel in 2008, began looking for hedging solutions to protect their bottom lines, one airline company stood out.

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This company had consistently been using Options contracts to hedge almost 95 per cent of its fuel costs for several years. As a result, while many of its competitors started going bust, unable to cope with the raging volatility in crude oil prices, this company could focus on expanding its business, overlooking the direction and quantum of crude price movements. This was Southwest Airlines.

The Dallas-based carrier has been admired for the success of its hedging programme by many in the industry. By appropriately using Options, the airline could sustain its business plans and signal to the market the sustainability of its business practice, which has hedging of fuel price as a key cornerstone.

Examples such as Southwest’s bring to the fore the significance of hedging commodity price risks, which is more cost-effective, and often more efficient, when conducted by the use of flexible derivative products such as commodity Options. However, such products are not permissible in India. That was till now.

On June 13, the much-awaited guidelines on Options trading in commodity derivatives market was announced by the Securities and Exchange Board of India (SEBI). This follows the announcement made by the Finance Minister while presenting the Union Budget for 2016-17, wherein he had declared that new derivative products will be developed by SEBI in the commodity derivatives market. Subsequently, the Commodity Derivatives Advisory Committee (CDAC) of SEBI had recommended the launch of options products in commodity markets, which culminated in the guidelines issued on June 13.