Cost Management through Commodity Derivative Trading: Opportunity for the MSMEs in India to be Future-Ready

Abstract

MSMEs are pioneers in ensuring optimum distribution of resources and generation of employment opportunity and therefore a steady support is required to be provided by the Government to the sector. High volatility in the prices of the commodities puts the MSMEs into uncertainty relating to their input cost management. Due to globalization, price discovery takes place internationally and thus the firms become price takers only. In this respect, exposure to the derivative trading facilitates the MSMEs to get necessary protection from adverse movement of prices of the commodities. For the last two decades or so, futures trading of commodities have been started in the Indian economy and during recent years new instruments such as option contracts and option-futures contracts have also been introduced. In this study, an attempt has been made to provide an understanding of derivative trading mechanisms to facilitate the risk management by the MSMEs.