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Economic
Benefits of the Futures Trading and its Prospects:
Futures
contracts perform two important functions of price discovery and price
risk management with reference to the given commodity. It is useful to
all segments of economy. It is useful to producer because he can get an
idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities, the best
that suits him.It enables the consumer get an idea of the price at
which the commodity would be available at a future point of time. He can
do proper costing and also cover his purchases by making forward
contracts. The futures trading is very useful to the exporters as it
provides an advance indication of the price likely to prevail and
thereby help the exporter in quoting a realistic price and thereby
secure export contract in a competitive market. Having entered into an
export contract, it enables him to hedge his risk by operating in
futures market. Other benefits of futures trading are:
(i) Price
stabilization-in times of violent price fluctuations - this mechanism
dampens the peaks and lifts up the valleys i.e. the amplititude of price
variation is reduced.
(ii)
Leads to integrated price structure throughout the country.
(iii)
Facilitates lengthy and complex, production and manufacturing
activities.
(iv) Helps
balance in supply and demand position throughout the year.
(v)
Encourages competition and acts as a price barometer to farmers and
other trade functionaries.
Futures trading is also
capable of being misused by unscrupulous speculators. In order to
safeguard against uncontrolled speculation certain regulatory measures
are introduced from time to time. They are:
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Limit on open
position of an individual operator to prevent over trading;
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Limit on price
fluctuation (daily/weekly) to prevent abrupt upswing or downswing in
prices;
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Special margin
deposits to be collected on outstanding purchases or sales to curb
excessive speculative activity through financial restraints;
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Minimum/maximum
prices to be prescribed to prevent future prices from falling below
the levels that are un remunerative and from rising above the levels
not warranted by genuine supply and demand factors.
During shortages, extreme
steps like skipping trading in certain deliveries of the contract,
closing the markets for a specified period and even closing out the
contract to overcome emergency situations are taken.
Prospects
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