InvestorQ : Is it possible to trade cotton in the Indian commodity exchanges?
Diya Chitale made post

Is it possible to trade cotton in the Indian commodity exchanges?

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vidhya Laxmi answered.
2 years ago

Most prices of cotton are approximations at a point of time and are subject to constant change. These prices are only broadly indicative of the opportunity to hedge cotton. Cotton is traded on the MCX in terms of bales, where 1 bale is equivalent to 170 KG. Therefore at the current market price of Rs.17,700/bale, the average price of cotton works out to Rs.105/KG. The minimum lot size for trading cotton futures is 25 bales and that makes the minimum lot size at around Rs.4.50 lakh approximately. The total margin including the SPAN and the extreme loss margin works out to 5-6% entailing an initial margin of around Rs.27,000 per lot.

The cotton futures contract commences on the 1st of each month and expires on the last day of the month. The last 5 days of the month will be treated as the tender period. Hence your decision to take delivery or square off the position needs to be communicated to the exchange at least by the 24th of the month. The seller who intends to give delivery needs to submit the original Warehouse Receipts issued by an exchange approved warehouse. The quality of the cotton must be certified by an authorized assayer.

Cotton has unique qualities that make its demand perpetual. What is important is that its vulnerability to the weather, pest attacks and other diseases makes it essential for all participants in the cotton value chain to hedge their risks. Cotton Futures could be a good option for them.