Organising futures markets in Bangladesh
Wednesday, 16 June 2010
M S Siddiqui
Futures market is a purchase of one product for delivery at any certain time in future. Usually, it is an auction purchase in which participants buy and sell commodity for delivery on a specified future date. This is a business to business and mostly between producers and wholesalers.
These future contracts deal with commodity trading including interest rates, spot prices, forwards, options and swaps. In a future contract on a particular commodity, generally a future date is fixed for delivery of the commodity and a price is also fixed which will be applied on the future date of delivery. This protects the seller from future price drops and protects the buyers from future price rises.
There is a common allegation that the prices of agricultural product are very high at retail level in city markets. There is a very common allegation against middlemen and businessmen involved in process of making these products available to the consumers in the cities. The marketing chain for farm products in Bangladesh is highly fragmented. Market players include local collectors, local traders, local market Aratdars (wholesalers) and their agents, urban wholesalers and their commission agents, rural and urban retailers. Many of these operate on a very small scale.
Crops such as paddy, red chili, and vegetables are either collected by Farias or commission agents from the producers and take the products to sell directly in nearby markets. Wholesalers purchase from rural markets through agents and send the produce to the commission agents in big urban wholesale markets, or sell to processors. The Farias or commission agents earned a bad name in the society.
Farias are traders who buy directly from the growers and sell to other traders or to the local markets. They are mostly small-scale seasonal floating traders, and some combine farming with trading. Paikars are small scale wholesalers who collect products from small markets and send them to big markets, or sell to near-by Aratdars (big wholesalers). Beparies are rural assemblers who collect from growers or local markets and export to wholesale-cum retail markets or distant urban wholesale markets.
Aratdars or wholesalers are permanent shopkeepers and commission agents having their own premises in the city markets. Aratdars are the middle functionary between Bepari and retailers. Commissions are taken by them from both the parties. Their shops are called 'Arats'. Based on the volume of transactions, the bigger Arats are called 'Mokams'.
There is another group of traders mostly offer 'Dadon' - cash as loans to producers in return for the produce at a pre-fixed price, This is called the futures market. Retailers are traders catering to need of the customers. They buy products from the Arats or Mokams and sell directly to the consumers.
Urban wholesale markets: these are specialized markets operating for a particular line of products. (e.g. rice, vegetable and fruits). These markets bridge the gap between distant wholesalers and large number of retailers. Commission agents called Arathdars provide services in these markets. There are some wholesale markets in Dhaka like shampur, Kawran Bazar etc.
The supply and demand for the trading of futures contracts: Bangladesh has futures market namely name as Dadon or auction for trading of fruits, vegetable and other agricultural products. One of the organized futures trading products are Tobacco and Sugarcane. The buyers of tobacco are Cigarette industries and sugarcane by local sugar refiners. They fix the prices in advance and also provide technical support to the growers as well. There is no auction but an agreed price between buyers and sellers.
The markets in other countries have a similar nature: There are some global markets for such products. There are various organized futures exchanges specialised in certain types of contracts. For example, corn, oats, soybeans, and wheat are traded on the Chicago Board of Trade, while the Commodity Exchange in New York handles trades in copper, gold, and silver. Other futures markets include the Chicago Mercantile Exchange, the Coffee, Sugar and Cocoa Exchange, the International Monetary Market, the Kansas City Board of Trade, the Minneapolis Grain Exchange, the New York Cotton Exchange, the New York Futures Exchange, and the New York Mercantile Exchange. These are very organized markets and the daily prices of these markets have good impact on all markets of the worlds.
The main participants of futures market can be classified into two broad groups -- hedgers and speculators. Hedgers are those who have interest in the underlying commodity of the future contract and aim at eliminating or reducing the financial risk of price changes.
Hedgers are generally the producers and consumers of a commodity. The farmers often make future contracts on their crops to ensure a certain price for their produce. And the buyers of these contracts purchase these to ensure a fixed cost for the products, as they don't want to suffer from price hike in future. Speculators are those who buy future contracts with the aim of earning profit by speculating market movements. Speculators on futures price fluctuations also play a role and they take some benefits through selling market information and influencing the auction prices.
There is a long history of futures market. According to Wikipedia, One of the earliest written records of futures trading is in Aristotle's book Politics. He tells the story of Thales, a poor philosopher from Miletus who developed a "financial device, which involves a principle of universal application." Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or pathetic and because the olive-press owners were willing to hedge against the possibility of a poor yield. When the harvest-time came, and a sharp increase in demand for the use of the olive presses outstripped supply, he sold his future use contracts of the olive presses at a rate of his choosing, and made a large quantity of money.[1]
The first modern organised futures exchange began in 1710 at the Dojima Rice Exchange in Osaka, Japan. The United States followed in the early 1800 in Chicago. Gluts and shortages of these products caused chaotic fluctuations in price, and this led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash forward" contracts to insulate them from the risk of adverse price change and enable them to hedge.
Forward contracts were standard at the time. However, most forward contracts weren't honored by both the buyers and the sellers. For instance, if a buyer of a corn forward contract made an agreement to buy corn, and at the time of delivery the price of corn differed dramatically from the original contract price, either the buyer or the seller would back out. Additionally, the forward contracts market was very illiquid and an exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller.
In 1848, the Chicago Board of Trade (CBOT -) was formed. Trading was originally in forward contracts; the first contract (on corn) was written on March 13, 1851. In 1865, standardized futures contracts were introduced.
The Chicago Produce Exchange was established in 1874, renamed the Chicago Butter and Egg Board in 1898 and then reorganised into the Chicago Mercantile Exchange (CME) in 1919. In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer futures contracts in foreign currencies: British pound, Canadian dollar, German mark, Japanese yen, Mexican peso, and Swiss franc.
In 1881, a regional market was founded in Minneapolis, Minnesota and in 1883 introduced futures for the first time. Trading continuously since then, today the Minneapolis Grain Exchange (MGEX) is the only exchange for hard red spring wheat futures and options.
The 1970s saw the development of the financial futures contracts, which allowed trading in the future value of interest rates. These, particularly the 90-day Eurodollar contract introduced in 1981, had an enormous impact on the development of the interest rate swap market.
Today, the futures markets have far outgrown their origins. With the addition of the New York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the traditional commodity markets, and plays a major role in the global financial system, trading over 1.5 trillion U.S. dollars per day in 2005.
In terms of trading volume, the National Stock Exchange of India in Mumbai is the largest stock futures trading exchange in the world, followed by JSE Limited in Sandton, Gauteng, South Africa.
There is no organized futures market in Bangladesh. Farias go to places of growers and conduct an auction at certain date or the bidding process goes through out the period decided by growers. Futures market on commodities can benefit both the buyer and seller if regulated by law and rule as practiced in other countries of the world.
The writer is a part-time teacher, Leading University. He can be reached at e-mail: shah@banglachemical.com
Futures market is a purchase of one product for delivery at any certain time in future. Usually, it is an auction purchase in which participants buy and sell commodity for delivery on a specified future date. This is a business to business and mostly between producers and wholesalers.
These future contracts deal with commodity trading including interest rates, spot prices, forwards, options and swaps. In a future contract on a particular commodity, generally a future date is fixed for delivery of the commodity and a price is also fixed which will be applied on the future date of delivery. This protects the seller from future price drops and protects the buyers from future price rises.
There is a common allegation that the prices of agricultural product are very high at retail level in city markets. There is a very common allegation against middlemen and businessmen involved in process of making these products available to the consumers in the cities. The marketing chain for farm products in Bangladesh is highly fragmented. Market players include local collectors, local traders, local market Aratdars (wholesalers) and their agents, urban wholesalers and their commission agents, rural and urban retailers. Many of these operate on a very small scale.
Crops such as paddy, red chili, and vegetables are either collected by Farias or commission agents from the producers and take the products to sell directly in nearby markets. Wholesalers purchase from rural markets through agents and send the produce to the commission agents in big urban wholesale markets, or sell to processors. The Farias or commission agents earned a bad name in the society.
Farias are traders who buy directly from the growers and sell to other traders or to the local markets. They are mostly small-scale seasonal floating traders, and some combine farming with trading. Paikars are small scale wholesalers who collect products from small markets and send them to big markets, or sell to near-by Aratdars (big wholesalers). Beparies are rural assemblers who collect from growers or local markets and export to wholesale-cum retail markets or distant urban wholesale markets.
Aratdars or wholesalers are permanent shopkeepers and commission agents having their own premises in the city markets. Aratdars are the middle functionary between Bepari and retailers. Commissions are taken by them from both the parties. Their shops are called 'Arats'. Based on the volume of transactions, the bigger Arats are called 'Mokams'.
There is another group of traders mostly offer 'Dadon' - cash as loans to producers in return for the produce at a pre-fixed price, This is called the futures market. Retailers are traders catering to need of the customers. They buy products from the Arats or Mokams and sell directly to the consumers.
Urban wholesale markets: these are specialized markets operating for a particular line of products. (e.g. rice, vegetable and fruits). These markets bridge the gap between distant wholesalers and large number of retailers. Commission agents called Arathdars provide services in these markets. There are some wholesale markets in Dhaka like shampur, Kawran Bazar etc.
The supply and demand for the trading of futures contracts: Bangladesh has futures market namely name as Dadon or auction for trading of fruits, vegetable and other agricultural products. One of the organized futures trading products are Tobacco and Sugarcane. The buyers of tobacco are Cigarette industries and sugarcane by local sugar refiners. They fix the prices in advance and also provide technical support to the growers as well. There is no auction but an agreed price between buyers and sellers.
The markets in other countries have a similar nature: There are some global markets for such products. There are various organized futures exchanges specialised in certain types of contracts. For example, corn, oats, soybeans, and wheat are traded on the Chicago Board of Trade, while the Commodity Exchange in New York handles trades in copper, gold, and silver. Other futures markets include the Chicago Mercantile Exchange, the Coffee, Sugar and Cocoa Exchange, the International Monetary Market, the Kansas City Board of Trade, the Minneapolis Grain Exchange, the New York Cotton Exchange, the New York Futures Exchange, and the New York Mercantile Exchange. These are very organized markets and the daily prices of these markets have good impact on all markets of the worlds.
The main participants of futures market can be classified into two broad groups -- hedgers and speculators. Hedgers are those who have interest in the underlying commodity of the future contract and aim at eliminating or reducing the financial risk of price changes.
Hedgers are generally the producers and consumers of a commodity. The farmers often make future contracts on their crops to ensure a certain price for their produce. And the buyers of these contracts purchase these to ensure a fixed cost for the products, as they don't want to suffer from price hike in future. Speculators are those who buy future contracts with the aim of earning profit by speculating market movements. Speculators on futures price fluctuations also play a role and they take some benefits through selling market information and influencing the auction prices.
There is a long history of futures market. According to Wikipedia, One of the earliest written records of futures trading is in Aristotle's book Politics. He tells the story of Thales, a poor philosopher from Miletus who developed a "financial device, which involves a principle of universal application." Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or pathetic and because the olive-press owners were willing to hedge against the possibility of a poor yield. When the harvest-time came, and a sharp increase in demand for the use of the olive presses outstripped supply, he sold his future use contracts of the olive presses at a rate of his choosing, and made a large quantity of money.[1]
The first modern organised futures exchange began in 1710 at the Dojima Rice Exchange in Osaka, Japan. The United States followed in the early 1800 in Chicago. Gluts and shortages of these products caused chaotic fluctuations in price, and this led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash forward" contracts to insulate them from the risk of adverse price change and enable them to hedge.
Forward contracts were standard at the time. However, most forward contracts weren't honored by both the buyers and the sellers. For instance, if a buyer of a corn forward contract made an agreement to buy corn, and at the time of delivery the price of corn differed dramatically from the original contract price, either the buyer or the seller would back out. Additionally, the forward contracts market was very illiquid and an exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller.
In 1848, the Chicago Board of Trade (CBOT -) was formed. Trading was originally in forward contracts; the first contract (on corn) was written on March 13, 1851. In 1865, standardized futures contracts were introduced.
The Chicago Produce Exchange was established in 1874, renamed the Chicago Butter and Egg Board in 1898 and then reorganised into the Chicago Mercantile Exchange (CME) in 1919. In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer futures contracts in foreign currencies: British pound, Canadian dollar, German mark, Japanese yen, Mexican peso, and Swiss franc.
In 1881, a regional market was founded in Minneapolis, Minnesota and in 1883 introduced futures for the first time. Trading continuously since then, today the Minneapolis Grain Exchange (MGEX) is the only exchange for hard red spring wheat futures and options.
The 1970s saw the development of the financial futures contracts, which allowed trading in the future value of interest rates. These, particularly the 90-day Eurodollar contract introduced in 1981, had an enormous impact on the development of the interest rate swap market.
Today, the futures markets have far outgrown their origins. With the addition of the New York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the traditional commodity markets, and plays a major role in the global financial system, trading over 1.5 trillion U.S. dollars per day in 2005.
In terms of trading volume, the National Stock Exchange of India in Mumbai is the largest stock futures trading exchange in the world, followed by JSE Limited in Sandton, Gauteng, South Africa.
There is no organized futures market in Bangladesh. Farias go to places of growers and conduct an auction at certain date or the bidding process goes through out the period decided by growers. Futures market on commodities can benefit both the buyer and seller if regulated by law and rule as practiced in other countries of the world.
The writer is a part-time teacher, Leading University. He can be reached at e-mail: shah@banglachemical.com