Page 34 - Bullion World Issue 7 November 2021
P. 34
Bullion World | Issue 07 | November 2021
A glimpse at Let us take a complete example of
how to proceed with option trading
in for e.g. gold.
analyzing and using E.g.: A jeweler has received
Gold option chain a contract for jewellery which
requires 100 grams of gold. This
contract has been based on the
cost of gold at 47400 rupees per
10 grams. The jeweler needs
The use of options allows the to manufacture and deliver the
precious metals supply chain jewellery by November 20. The
participants to hedge their price jeweler will purchase this gold by
risks. It also allows speculators with Nov 5. The date when the contract
a directional view to take positions was entered was Oct 1. The risk
on the commodities derivatives faced by jeweler is that of gold
exchanges. In a nutshell, an option prices rising above the 47400
on an underlying (for e.g. gold or rupees level. If this happens it is
silver) gives the participant the right likely to add to the cost of raw
to buy or sell at an agreed price for material for jewellery manufacture
a defined period of time. The buyer as well as reduce the profit margin.
of the call (with a bullish view on
underlying) has the right but not the As the jeweler expects the cost
Ms Ashwini Bansod obligation to buy the underlying at of underlying gold to increase in
Head Commodities Research, an agreed price in a defined time. November, he decides to buy gold
Similarly a put option buyer (with a options on domestic exchange for
PhillipCapital (India) Pvt. Ltd.
bearish view on underlying) has the e.g. on MCX, to manage the risk. To
right but not the obligation to sell do this he at the outset looks at the
the underlying asset at an agreed prevailing option chain (Chart 1) for
price for a defined time. gold for November expiry contract.
Chart 1
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