Efficiency of Gold Option Contracts in India

Abstract

India has emerged as the number 1 consumer for gold, globally. India is heavily dependent on gold imports to meet its demand. The New Economic Policy 1991 and globalization have increased the risks of buying gold due to increased volatility in prices. The government of India introduced gold option futures with the aim that option futures on gold will be fundamentally used for hedging the risks associated with gold price changes. But there is a question whether that gold option contracts are effective in hedging price. The paper tries to answer this question. The paper aims to find the hedging efficiency of gold option contracts in Multi Commodity Exchange (MCX). The paper uses Simple linear regressions (OLS model) for testing hedging efficiency. The paper found that there is significant relationship between the spot prices and gold option prices and the R2 shows that there is a hedging efficiency of 88%. The result of this paper shows the attractiveness of the gold derivative markets as a platform for hedging price risks. The paper also see that there should be adequate awareness needed for the major stakeholders in realising the major benefits of option contracts, there by using the exchange traded platforms and derivative instruments to its full potential.

Keywords: Gold Options, Gold Futures, Hedging Efficiency, MCX, Derivatives

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