The cotton futures trading scheduled for commencement on July 17, 1998 does not seem to be taking off on the auspicious date fixed by pundits for East India Cotton Association (EICA).EICA has been rushing against time to get back to this forward system after three decades but with suitable modifications based on systems prevailing abroad and at home. After going through this exercise meticulously, it submitted the amendment to the association's byelaws to the Forward Market Commission (FMC) last month.
According to EICA president Suresh Kotak, the FMC complimented EICA for its efforts to revamp old system. However, the FMC gave some valid suggestions and asked to incorporate some small changes in the amended bye-laws.
The EICA needs to work on these changes and present them before the second extra-ordinary general body meeting to be held on July 11 or 13, 1998.
After passing the resolution to incorporate these changes, the ball again goes into the court of FMC. It, therefore, is most unlikely thatthe muhurat of July 17 can be adhered to. At the most, the EICA may resume mock trading.
The proposed futures contract is in essence a hedge contract meant for efficient price-risk management wherein only the price changes and nothing else changes since all parameters are set. It is a pre-set contract.
In the ready transaction, the goods are ready which can be seen and the business is done on the cash basis and ready delivery. In future it is a preset hedge contract and the constant change is in prices. The delivery can be there as per the tendering range of the quality which will be at the premium and discount of to the basic quality of the preset hedge contract.
In the absence futures facility, the mill would have simply bought the required cotton at Rs 30 higher rendering its operations incompetitive.Similarly, a farmer F expects a particular quantity of harvest of a particular variety. Fearing the prices to go down after supplies from the new crop glut the market, F enters into a contract at say Rs60 per kg and the spot prices crash to Rs 40 by the time of the delivery. F will simply buy back the future sell position at Rs 40 thus making Rs 20 and sell the produce at Rs 40 in the spot.
The third category is speculators who are called " professional risk takers" and would participate in this game to earn income out of risk bearing.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
