Hedging price risk in futures exchange offers the safest way to protect margins, says G.Chandrashekhar

“Hedging will not give you windfall profit but will definitely protect your existing profit,” G.Chandrashekhar, Commodities Editor, The Hindu Business line, said here on Friday.

Speaking at a stakeholder awareness and education seminar on “Agribusiness and Commodities price risk management,” organised by The Hindu Business Line in co-ordination with Forward Markets Commission and National Commodity and Derivatives Exchange (NCDEX), he outlined the enormous growth potential of India. “India’s economic growth is on a strong footing,” he asserted and added that it was likely to record excellent growth in food, textiles and clothing, housing and infrastructure, energy, healthcare, education, and leisure and entertainment sectors. Of them the first four are ‘commodity intensive’ sectors whereas the rest are service sectors.

According to him, India is well poised to be a major producer, processor, consumer, importer, and exporter of commodities. He forecasted that the economic growth of India would be “commodity driven”.

He was happy to note that the government had created a free trade environment and Indian market was gradually integrating with global market. “Hence, global view of the market is a must for stakeholders.”

At the same time, he warned that the “risk perception is also getting heightened.” Hence, he suggested that it was imperative to focus on “risk mitigation” and all risks converge in one element – price. “Price risk management nearly equals management of all other risks.”

“Hedging price risk in futures exchange offers the safest way to protect margins and price risk management is extremely important in commodities market,” he added.

Explaining how commodities have become the new asset class by outperforming many traditional asset classes, Mr.Chandrashekhar advised “trading decisions must be based on sound research and commercial intelligence.”

Deepak Sayna from the NCDEX, explaining the functioning of the exchange, its birth , membership, and the number of commodities traded, pointed out that this exchange was born because of the “uncertainty of the future and as people wanted safety.”

He also outlined the phenomenal growth of the value of the commodities traded in the exchange – a whopping 53 per cent from 2009-10 to 2010-11. Of course, the growth of agricultural commodities was only 19.58 per cent he admitted.

World over commodity markets are larger than stock markets, he added.

The NCDEX, he said, was a common platform where the price was transparent and the transaction costs were low.

There was near total absence of counterparty risk. Market prices were available to wider world and the contract size was standardised. At the same time, he pointed out that if it were to be bilateral trading the customers would have restricted access, trade prices would be unknown to other players, it would entail high cost and time-consuming negotiations involve counterparty credit risk, there was difficulty in price dissemination, and there would be only customised contracts.

Mr.Sayna explained how futures exchanges provided help in price discovery in an efficient fashion. Besides, it provided facility to protect oneself, whether it is companies or farmers, against the adverse movements in the price of new materials and products. “Thus price risk management” is the major benefit of these exchanges, he added.

T.Subramanian, Regional General Manager (Advertisement), The Hindu, welcomed the gathering.