InvestorQ : What is the major role that exchanges like MCX and the NCDEX bring to the trading and risk management in commodities?
Rishita Das made post

What is the major role that exchanges like MCX and the NCDEX bring to the trading and risk management in commodities?

Answer
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Mahima Roy answered.
2 years ago


This is one of the main advantages of trading in commodity futures. You have a full-fledged exchange mechanism. That means; you have standard contract sizes, standard expiry time-tables, comprehensive surveillance systems and foolproof risk management systems. All this reduces the risk of trading in commodities. Contrast this with the market for OTC commodity futures. You do not have a centralized clearing mechanism and no guarantee that trades will be executed and honoured. Secondly, contracts are tailor-made for individual needs and hence it can become illiquid in the absence of the counterparty having a balancing requirement. The commodity exchange mechanism overcomes these basic challenges of the OTC commodity markets.