How can investors use futures market to reduce risk? Ajay Kedia answers

economictimes.indiatimes.com:

«Definitely, future market has been a boon for all of the VCPs, like value chain participants, especially when we talk about the industry because their main core importance is to continue their production,» says Ajay Kedia, Director, Kedia Advisory.My first question is going to be in terms of the risks that we have. Now, there is a lot of industry-oriented risk whether you look in terms of procurement risk, inventory risk, credit risk. How can one actually use the Futures market to help them reduce the risk?Definitely, future market has been a boon for all of the VCPs, like value chain participants, especially when we talk about the industry because their main core importance is to continue their production.

But there is a high volatility in the raw material prices in the last couple of years especially in case of spices, oilseed, or pulses. So at this moment, one should be using tactfully these future options which have been available on future exchanges. For example, if suppose somebody wants to take up procurement, so he can plan in advance with the help of future market because in the physical market, generally we see at the time of procurement, either the quantity that has been required is not available with a single supplier.

So we have to look for a multiple supplier, the quality, the quantity, and the timing of delivery. All these things are being slightly scattered. But with the help of exchange, we can rest assure that whatever the quantity I require, at what price I have require, I can put on exchange and take a delivery because delivery mechanism on exchange are very easy or we can say it is very in line.