HEDG­ING BY VAR­I­OUS PLAY­ERS IN THE COT­TON VALUE CHAIN

Dalal Street Investment Journal - - COMMUNICATION FEATURE -

Farmer (ka­pas grower). He is ex­posed to the risk of a fall in ka­pas prices, whose prices are closely cor­re­lated to ginned cot­ton prices. To counter this risk, he can lock-in his price by sell­ing cot­ton fu­tures on a com­mod­ity ex­change. Now, at the time of har­vest, the farmer can close down the fu­tures mar­ket po­si­tion by buy­ing cot­ton fu­tures con­tract with a si­mul­ta­ne­ous sell­ing of ka­pas in the phys­i­cal mar­ket.

Gin­ner. A cot­ton gin­ner who holds raw cot­ton runs the risk of a price fall till the time of his in­tended de­liv­ery of ginned cot­ton. He can hedge against this risk by sell­ing MCX cot­ton fu­tures at the time of procur­ing cot­ton stocks for gin­ning. Later, he can close his fu­tures mar­ket po­si­tion by buy­ing MCX cot­ton fu­tures at the time of sell­ing his ginned cot­ton in the phys­i­cal mar­ket.

Spin­ning Mill. A spin­ning mill or a tex­tile mill runs the risk of a price rise from the time of ex­e­cut­ing an or­der till it ac­tu­ally buys raw cot­ton/yarn. Here again, the miller can hedge against this risk by buy­ing MCX cot­ton fu­tures. Later, when he ac­tu­ally buys cot­ton/yarn from the mar­ket for pro­cess­ing, he can close his fu­tures mar­ket po­si­tion, that is, by sell­ing MCX cot­ton fu­tures con­tract. By tak­ing po­si­tion in the fu­tures mar­ket, he can also avoid the car­ry­ing cost of keep­ing the raw ma­te­rial in­ven­tory.

Ex­porter. A yarn or bale ex­porter, who re­ceives an ex­port or­der of a cer­tain quan­tity of cot­ton to be de­liv­ered three months later, runs the risk of a price rise be­tween the time of re­ceiv­ing the ex­port or­der and buy­ing the re­quired cot­ton stocks from the phys­i­cal mar­ket. To counter this, the yarn or bale ex­porter could buy MCX cot­ton fu­tures con­tract at the time of re­ceiv­ing the ex­port or­der; later, he could close the fu­tures mar­ket po­si­tion by sell­ing MCX cot­ton fu­tures con­tract at the time of pur­chas­ing phys­i­cal cot­ton stocks for ex­port de­liv­ery.

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