Commodity exchanges in India are steadily gaining popularity among the investment fraternity. This article provides an understanding on how commodity exchanges can mitigate trading risk.

The Indian commodities sector has been witnessing increased investor's attention towards having a more sophisticated structure in terms of price risk management. The emergence of national level multi-commodity exchanges and liberalization in the commodities sector further indicates the enormous opportunities not only for trading but also for financial intermediation and brokerages function. Advanced clearing and settlement system, modern risk management practices and regulatory-framework, provide ample scope for the growth of commodities derivatives markets in India.

In commodity market, the prices undergo considerable degree of fluctuations. The reasons for price fluctuations may be crop failure, bad weather and demand-supply imbalances. These fluctuations in turn, lead to price risk. This price risk is largely borne by the farmers and the industries where agricultural commodities are used as raw materials. If the participants hedge against this price risk, they will be able to insulate against the inherent fluctuations associated with agricultural commodities. Keeping this in mind, one of the simplest methods to hedge is to use the commodity exchanges as a trading platform.

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