MCX Options - Hedging Instruments for

Bullion & Jewellery industry

MCX GOLD FUTURES: FEATURES OF THE UNDERLYING

• MCX Price is the benchmark for value-chain and end-consumers alike: Most Pricing is done MCX(+/-)

• MCX Bullion prices in-build: Hedge for: Gold price, USD-INR, Import duty changes, prevailing
premium/discount; which enables all major value-chain participants:

Bullion Branded Retail

Importer Exporter
Trader Jeweler Jeweler

• Strong correlation with international benchmarks as well as Domestic Spot:

• CME(INR Eq.- Import Parity)-MCX 98.93%; MCX-Domestic Spot 98.02%

• Trading hours on MCX gold futures market are stretched till almost midnight to match trading time in the
global markets. So, Indian participants are able to manage price risks as efficiently as global counterparts.

• Quality benchmark: London Bullion Markets Association(LBMA) approved Refiners’ Bars & coins with
tamper proof packing

• Transparency, Convenience & Assurance of Delivery

WHY OPTIONS?

An option contract offers the best of both worlds. It will offer the buyer of
the contract protection if the price of the underlying moves against him but
allows him to walk away from the deal if the underlying price moves in his
favour.

Options:

• Give buyer the “right”, but not the “obligation”

• To buy or to sell an agreed amount of underlying asset (Notional
Value)
• On or before an agreed future date (expiry date)
• At an agreed exchange rate (Strike Price)
• In exchange for fee (Option Premium)
WHAT ARE OPTIONS?

• An option is the right, but not the obligation, to buy or sell a futures contract & buyer of an
option acquires this right.
• Commodity Call Option : Buy asset (futures contract) in the future at a pre-determined
decided rate today.
• Commodity Put Option : Sell asset (futures contract) in the future at a pre-determined
decided rate today.
OPTIONS-USAGE BY PHYSICAL INDUSTRY
 Producer/Bullion Dealer Hedging:
Gold Producers sell above the money Calls at Premiums (Ceiling) & buy protective Puts below the money; (to
create Floor price): achieving low/zero cost Collar - hedge against fall in expected price of future
production/inventory. This is a Costless Collar Strategy.

 Flexible Pricing Schemes by Jewellers:

Offer Lower of current price /Akshaya Tritiya price:
• Buy Put at Current Prices.
• If prices rise, won’t exercise and loss will be the premium paid
• If prices fall then will Sell the same Put and take profit.

 Inventory Hedging- Monetising idle stock by way of Premium

 Write Calls above the Money when Implied Volatility (IV)
is higher (and so is Premium)

 Protection from rising prices against Fixed quotes

ⱴ
IMPLIED VOLATILITY & PREMIUM

Volatility is a function of price movement…

 Standard deviation of daily returns…expressed in annualised terms.

 Measure of uncertainty of asset returns / degree of price fluctuation

 High IV causes options premiums to increase – sometimes very dramatically.

 Lower volatility- premiums decline
EXAMPLE – HEDGING STRATEGIES

• Options represent a form of Price Insurance, cost of which is

the Option Premium determined during its trading by markets
• Improves market Liquidity, Transparency
• Maximum Loss to the extent of Premium paid for Buyer
• Possible apportioning of Hedging cover as may be needed

Basic hedging strategies:

Call or Put Protection Buying Puts ( for metal
Buying Calls ( for metal consumers having bought Fixed
consumers having bought Gold from Banks, Importers,
Unfixed Gold from Banks , Wholesalers etc)
Importers , Wholesalers etc)
OPTION STRATEGY FOR BULLION DEALER: PROTECTING
INVENTORY – FIXED GOLD

Bullion Dealer: Risk of

depreciation in Gold
(CMP 30000)

Buy Put option:

Strike price 30000
Prices Premium Rs.300 Prices go
go up down

Profit: Actual loss is

Loss: Maximum up Compensated by
to Rs.300 appreciation in the
premium price
The loss is limited to the extent of the premium paid i.e. Rs. 300/= & no MTM
EXAMPLE: PROTECTING INVENTORY – FIXED GOLD

Buy Put option : Strike price 30000 Premium Rs.300

P&L Payoff at Expiration Matrix (Premium: 300) 300

Underlying Price Payoff from Physical Net

At Expiry options Stock Profit/Loss 200

29500 200 -500 -300

100
29600 100 -400 -300
29700 0 -300 -300 0
29500 29600 29700 29800 29900 30000 30100 30200 30300 30400 30500
29800 -100 -200 -300
-100
29900 -200 -100 -300
30000 -300 0 -300 -200
30100 -300 100 -200
30200 -300 200 -100 -300

30300 -300 300 0

-400
30400 -300 400 100
Payoff from options Net Profit/Loss
30500 -300 500 200
Having hedge through options Bullion dealer protect himself against downside risk and also avails opportunity
profit if prices go beyond 30300/- in physical markets
OPTIONS STRATEGY FOR JEWELERS:
BUYING UNFIXED GOLD

Exporter : Risk of
appreciation in Gold
post receiving order
(CMP 30000)

Buy Call option

Strike price 30000
Prices
Prices go Premium Rs.300
go up
down

Profit: Actual loss is

Loss: Maximum up Compensated by
to Rs.300 appreciation in the
premium price
The loss is limited to the extend of the premium paid i.e. Rs. 300/- & no MTM
EXAMPLE : BUYING UNFIXED GOLD

Buy Call option Strike price 30000 Premium Rs.300

300 300
P&L Payoff at Expiration Matrix (Premium: 300)
200 200
Underlying Payoff from Net
Physical Stock
Price At Expiry options Profit/Loss
100 100
29500 -300 500 200
29600 -300 400 100 0 0

29700 -300 300 0

-100 -100
29800 -300 200 -100
29900 -300 100 -200
-200 -200
30000 -300 0 -300
30100 -200 -100 -300 -300 -300

30200 -100 -200 -300

-400 -400
30300 0 -300 -300
Payoff from options Net Profit/Loss
30400 100 -400 -300
30500 200 -500 -300
Having hedge through options Jeweller protect himself against upside risk and also avails opportunity profit if
prices break below 29700 in physical markets
THEORETICAL EXAMPLES OF OTHER HEDGING STRATEGIES
EXAMPLE : SHORT STRANGLE

Gold CMP 29800. Strategy: Sell 29400 PE @200 and Sell 30200 CE @300

P&L Payoff at Expiration Matrix (Premium: 500)

600
Underlying Payoff from Payoff from Net Net Profit/Loss
Price At Expiry 29800 PE Sell 30200 CE Sell Profit/Loss
500
28800 -400 300 -100
400
29000 -200 300 100
29200 0 300 300 300
29400 200 300 500
200
29600 200 300 500
29800 200 300 500 100
30000 200 300 500
0
30200 200 300 500
30400 200 100 300 -100
30600 200 -100 100
-200
30800 200 -300 -100
EXAMPLE : LONG STRANGLE

Gold CMP 29800. Strategy: Buy 29400 PE @200 and Buy 30200 CE @300

P&L Payoff at Expiration Matrix (Premium: -500)

200
Net Profit/Loss
Underlying Payoff from Payoff from Net
Price At Expiry 29800 PE Buy 30200 CE Buy Profit/Loss 100

28800 400 -300 100

0
29000 200 -300 -100

28800

29000

29200

29400

30200

30400

30600

30800
29600

29800

30000
29200 0 -300 -300 -100

29400 -200 -300 -500

-200
29600 -200 -300 -500
29800 -200 -300 -500 -300
30000 -200 -300 -500
-400
30200 -200 -300 -500
30400 -200 -100 -300 -500
30600 -200 100 -100
-600
30800 -200 300 100
EXAMPLE : CALL WRITTING

Gold CMP 29800. Strategy : Sell 30200 CE @300

P&L Payoff at Expiration Matrix (Premium: 300)

400
Underlying Payoff from Net Net Profit/Loss

Price At Expiry 30200 CE Sell Profit/Loss 300

28800 300 300
200
29000 300 300
29200 300 300 100
29400 300 300
0
29600 300 300
29800 300 300 -100
30000 300 300
-200
30200 300 300
30400 100 100 -300
30600 -100 -100
-400
30800 -300 -300
EXAMPLE : COLLAR

Gold CMP 29800. Strategy : Buy 29400 PE @200 and Sell 30200 CE @300

P&L Payoff at Expiration Matrix (Premium: 100)

800
Net Profit/Loss
Underlying Payoff from Payoff from Net
Price At Expiry 29400 PE Buy 30200 CE Sell Profit/Loss 600
28800 400 300 700
29000 200 300 500 400

29200 0 300 300

200
29400 -200 300 100
29600 -200 300 100
0
29800 -200 300 100
30000 -200 300 100 -200
30200 -200 300 100
30400 -200 100 -100 -400

30600 -200 -100 -300

-600
30800 -200 -300 -500
TAXATION UPON EXERCISE OF GOLD OPTIONS

Transaction Taxes on Gold 1 kg Options contract with a notional value of Rs 30 lakh and option premium of Rs
30,000 (@ 1% of notional value)

Particulars Call Option Put Option

Buyer Seller Buyer Seller

CTT on premium (@ 0.05% of premium – Seller)

15 15

CTT on exercise (@ 0.0001% of FSP – Buyer)

3 3

Transaction Fees on Options #

- - - -

On conversion of option position to futures position on exercise (@ 0.01% on futures position –

Seller)
- 300 300 -

If chooses not to take physical delivery, but squares position in futures

300 - - 300

Total Transaction Taxes 303 315 303 315

TAXATION UPON EXERCISE OF SILVER OPTIONS

TRANSACTION TAXES ON SILVER 30 KG OPTIONS CONTRACT WITH A NOTIONAL VALUE OF RS 12 LAKHS AND
OPTION PREMIUM OF RS 12,000 (@ 1% OF NOTIONAL VALUE)

PARTICULARS CALL OPTION PUT OPTION

BUYER SELLER BUYER SELLER

CTT on premium (@ 0.05% of premium – Seller) 6 6

CTT on exercise (@ 0.0001% of FSP – Purchaser) 1.2 1.2
On conversion of option position to futures position on exercise (@ 0.01% on
futures position – Seller) - 120 120 -

Transaction Fees on Options #

- - - -

If chooses not to take physical delivery, but squares position in futures

120 - - 120

Total Transaction Taxes (Rs./lot) 121.2 126 121.2 126

 Final Settlement Price

#Transaction fees on Options Contracts are waived till September 30, 2018.
Note : For detailed contract specifications, kindly refer exchange Circular No. MCX/TRD/185/2018, dated
18th May, 2018
BENEFITS - AMENDMENTS TO SECTION 43(5)

• The Finance Act, 2013 has removed this anomaly and provided for coverage
of commodity derivatives transactions undertaken in recognized commodity
exchanges too under the ambit of Section 43(5) of the Income Tax Act, 1961,
on the lines of the benefit available to transactions undertaken in recognized
stock exchanges.

• Hedgers are no longer forced to undertake physical delivery of commodities

in order to prove that their transactions are in the nature of hedging and not
‘speculation’. This is clearly a great impetus for the growth of the commodity
derivatives market in India.
THANK YOU
Performance – Bullion contracts
GOLD FUTURES Avg. Daily Turnover in Volumes Open Interest
( Rs. Crs.) (Kgs) (Kgs)
FY 2017-18 2,876 9.82 9.36
FY 2018-19 (YTD) 2,826 9.17 8.72
SILVER FUTURES Avg. Daily Turnover in Volumes Open Interest
( Rs. Crs.) (MT) (MT)
FY 2017-18
2,493 637.67 680.92
FY 2018-19 (YTD)
2,403 633.25 675.54
Options Avg. Daily Turnover in Volumes Open Interest
( Rs. Crs.) (MT) (MT)
Gold 249.02 0.815 1.433

Silver 40.44 9.97 23.61

Highest Turnover in ( Rs. Crs.) 17 Oct 2017 29 May 2018 24 July 2018

Gold Options 1560.07 2020.99 2930.64

Highest Turnover in ( Rs. Crs.) 15 June 2018 14 June 2018 18 June 2018

Silver Options 202.02 130.73 107.30

Hedger awareness meet details

Year No. of Events Associations Location Attendees

FY 17-18 101 64 72 16,718

FY 18-19 (YTD) 38 17 35 6,768

OPTION TERMINOLOGY

• Option price: Option price is the price which the option buyer pays to
the option seller. It is also referred to as the option premium.

• Expiration date: The date specified in the options contract is known as

the expiration date, the exercise date, the strike date or the maturity.

• Strike price: The price specified in the options contract is known as

the strike price or the exercise price.

• European options: European options are options that can be

exercised only on the expiration date itself.
SOME TERMS UNIQUE TO OPTIONS TRADING

• In the Money for Call Option: Futures contract value is above

strike price
• In the Money for Put Option: Futures contract value is below strike
price
• At the Money: Futures contract value equals strike price
• Out of Money for Call Option: Futures contract value is below
strike price
• Out of Money for Put Option: Futures contract value is above
strike price
• Open interest: The total number of options contracts outstanding or
open in the market at any given point of time.
 GOLD OPTIONS AND SILVER OPTIONS CONTRACT SPECIFICATION

TRADING UNIT One MCX Gold futures contract One MCX Silver futures contract
(1 KG) (30 KG)
OPTION TYPE European Call & Put Options European Call & Put Options

STRIKES 15 In-the-money, 15 Out-of-the-money and 1 10 In-the-money, 10 Out-of-the-money and 1

Near-the-money. (31 CE and 31 PE). Near-the-money. (21 CE and 21 PE).

STRIKE PRICE INTERVALS Rs. 100 Rs. 250

TICK SIZE Rs. 0.50 Rs. 0.50

PROFIT OR LOSS PER TICK Rs. 50 Rs. 15

MARGINS The Initial Margin shall be computed using The Initial Margin shall be computed using
SPAN (Standard Portfolio Analysis of Risk) SPAN (Standard Portfolio Analysis of Risk)
software, which is a portfolio based margining software, which is a portfolio based margining
system. system.
SETTLEMENT On expiry of options contract, the open On expiry of options contract, the open
position shall position shall
 In-the-Money (ITM) – Devolve into  In-the-Money(ITM) – Devolve into
underlying Futures unless ‘explicit underlying Futures
instruction’ given for not devolving into  Close to the Money(CTM) – Devolve into
futures. underlying futures only on explicit
 Close to the Money(CTM) – Devolve into instruction
underlying futures only on explicit  Out of the Money (OTM) – Expire
instruction Worthless (No devolvement)
 Out of the Money (OTM) – Expire
Worthless (No devolvement)
EXPIRY DAY Three business days prior to the first business Three business days prior to the first business
day of Tender Period of the underlying futures day of Tender Period of the underlying futures
contract. contract.
 EXERCISE MECHANISM AT EXPIRY

 Option series having strike price closest to the Daily Settlement Price (DSP) of
Futures shall be termed as At the Money (ATM) option series. This ATM option
series along with two option series each having strike prices immediately above
and below ATM shall be referred as ‘Close to the money’ (CTM) option series.

 In case the DSP is exactly midway between two strike prices, then immediate two
option series having strike prices just above DSP and immediate two option series
having strike prices just below DSP shall be referred as ‘Close to the money’ (CTM)
option series

 All option contracts belonging to ‘Close to the money’ (CTM) option series shall be
exercised only on ‘explicit instruction’ for exercise by the long position holders of
such contracts.

 All In the money (ITM) option contracts, except those belonging to ‘CTM’ option
series, shall be exercised automatically, unless ‘contrary instruction’ has been given
by long position holders of such contracts for not doing so.

 All Out of the money (OTM) option contracts, except those belonging to ‘CTM’
option series, shall expire worthless.
 OPTION SETTLEMENT PROCESS
Expiry Day (Last trading day): Three business days prior to the first business day of Tender Period
of the underlying futures contract.

Pre Tender Margin : Exchange shall levy pre tender margin on the long buy positions entering the
option tender period.

On expiry of options contract, the open position shall devolve into underlying futures position as
follows:-

 long call position shall devolve into long position in the underlying futures contract
 long put position shall devolve into short position in the underlying futures
contract
 short call position shall devolve into short position in the underlying futures
contract
 short put position shall devolve into long position in the underlying futures
contract
 All such devolved futures positions shall be opened at the strike price of the
exercised options
Organised hedge books in Wake Of GST:
Opening Up Of Additional Delivery Locations

Objectives & Expectations:

 Nationalization of benchmark contract Price

 Penetration into regional consumption centres

 Infusion of new small/medium jewellers/buyers into MCX eco-system

 Smoothening of Disparity across centres & creating price stability

 Logistical convenience
Commodity Exchange Penetration
MCX may plan its vaulting facilities.
Presence spread across locations in India which will
enable participants to give and take delivery of the precious metal
across the country

Cities and towns 1,200+

Members 669
Authorised persons 51,575
Unique client code 29 lacs +
Trading terminals 11,06,743
(including CTCL)

^ Total Applications submitted to SEBI (Includes 33 Members who have applied for Surrender of
Membership)