In a bid to attract bullion hedgers, the National Commodity Derivatives Exchange has launched gold-hedge contract which will mimic the international prices without considering other charges such as customs duty, local taxes and premiums. The contract will be available for trading from Thursday.
Excluding other charges will make the contract value lesser, compared with the conventional gold contracts, thus leading to lower margin requirement and in effect help to increase market participation.
The one-kg gold hedge contract provides a transparent platform for investors with exposure to the international markets. The final settlement prices is arrived at after taking into account the gold price in dollar terms, rupee value against dollar and the conversion ratio.
While the contract is cash settled, a participant can still take the benefit of intention matching where both buyer and seller agree on physical delivery of gold bars. With no compulsion to give or take delivery of gold bars, an investor can ignore the landed cost of the precious metal, local taxes and the premium being charged by sellers due to short supply in the domestic market.
Samir Shah, MD and CEO, NCDEX, said the new gold contract is the perfect solution to the price distortion and takes forward RBI’s intention to work out a financial product to reduce gold imports.
The expiry of gold hedge contract is aligned with currency futures. While the currency futures contract is available for all 12 months in a year, the NCDEX gold-hedge contract will be available for March, May and July.
Domestic gold prices have a high correlation with international prices. However, the price correlation was impacted by the 10 per cent customs duty and the premium charged due to shortage of the yellow metal following RBI’s gold import restriction.
The new NCDEX contract is a derivatives instrument that will address the anomalies created by the physical markets in futures prices to provide a correct benchmark and allow wider participation in the gold market. India is the world’s second largest market for gold.