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Petrol, diesel futures trading to start soon on exchanges
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SME Times News Bureau | 11 Jul, 2020
Market regulator Securities and Exchange Board of India (SEBI) may soon
allow futures trading in auto fuels petrol and fiscal giving an
opportunity to bulk consumers of these petroleum products to hedge their
risks from a volatile market where there is a sudden spurt in prices.
Sources
said that petroleum ministry has approved the plan to allow trading of
petroleum products in the derivative market and the commodity exchanges
would be able to launch petrol and diesel futures soon after SEBI
releases its final regulations in this regard.
Futures are
financial contracts which help the buyer to purchase a commodity, or the
seller to sell the commodity, at a predetermined future date and at a
predetermined price. In the case of petrol and diesel, the derivative
product would involve buying a specified quantity of the at a specified
price with delivery set at a specified time in the future. In a rising
market where prices of fuel is going up, the futures product would
protect the participant from losing out as the financial product would
hedge the risk and ensure uniform pricing of the commodity.
"It
is a good development as it will allow industrial and bulk consumers of
the two petroleum products to hedge their risks. But in current market
conditions, in the absence of a big pick up in demand oil prices are
either stable or falling, hedging would work against the interest of
participant as it would add up to the cost of hedging," said an oil
sector analyst asking not to be named.
Currently futures trading
is allowed in crude oil giving opportunity to refiners to hedge their
risks against frequent price fluctuations. The addition of petrol and
diesel with give them another instrument to hedge their refining
margins.
Sources said that as current market conditions may not
be conductive for a futures market in petroleum products, it may wait
before intruding the new product in the market.
Petrol and
diesel futures in any case will not benefit retail customers as the
quantum of fuel used by them would be low. SEBI may allow derivative
products with a floor of say 100 litre of petrol and diesel. This will
be too high a level for retail customers to participate in the futures
market.
Futures contract in petrol and diesel are expected to be
ideal for refiners, transport companies, petrol pump owners, etc. who
are exposed to daily price fluctuations in the petroleum products.
Railways, aviation, fleet owners and industrial consumers could also
take benefit from the product.
In India a part from volatility
in international markets, petrol and fiscal prices are also impacted by
frequent changes in government duties, both at central and state levels,
on the two products. The futures contract can help against these
unforeseen price increased too.
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