Commodity hedging
Using futures to lock in a price for a commodity you produce, hold or must buy
Regulatory position as on 16 October 2026
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room who in a supply chain is hurt by a falling price and who is hurt by a rising one. The producer fears a fall; the buyer fears a rise. A hedge answers both. Keep the deck to the idea of hedging; we do not distribute or recommend commodity trading.
A hedge is not a bet on prices. It is a way to fix a price now and remove the risk of a later move.
The hedger takes an opposite position in futures: a loss on the physical commodity is offset by a gain on the futures, and vice versa. The price is fixed either way, apart from basis risk.
Trainer notes
The cost of this certainty is the upside: if the price moves in the hedger's favour, the hedge cancels that benefit. That is the trade-off to land early.
Four words to know first
Hedger
A business exposed to a commodity price: it produces, holds, or must buy that commodity.
Futures contract
A standard exchange contract to buy or sell a set quantity at a set price on a future date.
Short hedge
Selling futures now to protect goods you will sell later from a fall in price.
Long hedge
Buying futures now to protect against a rise in the price of goods you must buy later.
Take-away: Futures trade on an exchange. Most hedgers close out their position in cash before delivery.
Trainer notes
A speculator takes a futures position without any physical exposure, hoping to profit from the price move. A hedger does the opposite: the futures position cancels a risk the business already carries.
A short hedge, with real arithmetic
THE SET-UP
A producer will have 100 units of a commodity to sell in three months.
The price today is ₹5,000 per unit. To remove price risk, the producer sells 100 units of futures at ₹5,000.
- Price falls to ₹4,600. The physical sale brings 100 × ₹4,600 = ₹4,60,000.
- Futures: sold at ₹5,000, bought back at ₹4,600 = ₹400 per unit gain × 100 = ₹40,000.
- Total received: ₹4,60,000 + ₹40,000 = ₹5,00,000, which is ₹5,000 per unit — the price locked in.
- Had the price risen to ₹5,400, the ₹40,000 extra on the sale would be cancelled by a ₹40,000 loss on futures. Still ₹5,00,000.
Result: A hedge fixes the price. It removes the loss from a fall and gives up the gain from a rise.
Illustration with assumed round figures. Futures are assumed to track the spot price exactly.
Trainer notes
In practice the futures price and the spot price need not move by the same amount. The small gap between them is the basis, and the risk that it changes is basis risk. The lock-in is then close to, but not exactly, the target price.
Two sides of a hedge
Whether you sell futures or buy them depends on which price move would hurt you.
Short hedge — sell futures
- Used by someone who owns or will produce the commodity and will sell it later.
- Protects against a price fall between now and the sale.
- For example a farmer, a miner, or a maker with finished stock to sell.
Long hedge — buy futures
- Used by someone who must buy the commodity later as a raw material.
- Protects against a price rise between now and the purchase.
- For example a food processor, a refiner, or a jeweller buying metal.
Take-away: A hedge trades the chance of a more favourable price for certainty about the price.
Trainer notes
Both sides use the same market in opposite directions. For every hedger selling futures there can be another buying them, or a speculator taking the other side.
India's commodity derivatives market now
| Aspect | What applies today |
|---|---|
| Regulator | SEBI has regulated this market since 28 September 2015, when the Forward Markets Commission (FMC) merged into it. |
| Instruments | Futures have traded for years. Options came later: the first, on gold, launched in 2017, and 'options on goods' were allowed from 2020. |
| Settlement | Contracts are settled in cash or, for many, by delivery of the goods on expiry. Most hedgers close out before expiry. |
| Farm contracts | Derivatives of seven farm commodities (including wheat, chana, mustard, the soya bean complex and crude palm oil) are suspended until 31 March 2027. |
| Mutual funds | Since 2019 mutual funds may use exchange-traded commodity derivatives, within limits, in hybrid schemes and gold ETFs (silver ETFs from 2021). |
Sources: SEBI PR 237/2015 (FMC merger); SEBI PR 21/2026; SEBI circulars 21 May 2019 and 16 Jan 2020; MCX gold options launch, 17 Oct 2017.
Trainer notes
The mutual-fund row is the direct link for our work: a retail investor often meets commodities through a gold or silver ETF, not by trading futures. The single-commodity cap for a scheme is 10% of its net asset value (gold ETFs holding gold derivatives are exempt), and 'sensitive' commodities, mainly essential farm goods, are excluded.
Weather derivatives
What they are
Contracts whose payout is tied to measured weather — rainfall, temperature or wind — rather than the price of any good.
India's first one
NCDEX launched RAINMUMBAI in 2026: a cash-settled rainfall contract for the Mumbai monsoon, built with IMD data.
Not crop insurance
It pays on a measured index, not on your proven loss, and is meant for people who are exposed to that weather.
Take-away: Weather derivatives are new in India: RAINMUMBAI came first, then a Chennai rainfall contract.
Source: NCDEX–IMD MoU of 26 Jun 2025; NCDEX RAINMUMBAI launch, 2026 (exchange and press reports).
Trainer notes
RAINMUMBAI was built with IIT Bombay and tracks a Cumulative Deviation Rainfall index: how actual June-to-September rainfall deviates from the Long Period Average over 1991 to 2020, read from IMD stations in Mumbai. It is cash-settled and brand new. The 2019 mutual fund rules we cover deal with commodity derivatives, not weather contracts.
Where things stand
Four dates and numbers that describe commodity derivatives in India today.
- REGULATOR SINCE
- 2015SEBI took over from the Forward Markets Commission on 28 September 2015.
- FIRST COMMODITY OPTION
- 2017Gold options began in 2017; 'options on goods' followed in 2020.
- FARM CONTRACTS SUSPENDED
- 7Seven farm commodities' derivatives suspended until 31 March 2027.
- FIRST WEATHER CONTRACT
- 2026RAINMUMBAI, a rainfall derivative, launched in 2026.
Sources: SEBI press releases (FMC merger 2015; PR No. 21/2026 on farm suspension); press and exchange reports on commodity options (2017) and RAINMUMBAI (2026).
Trainer notes
These are regulatory and calendar facts, not market prices, so no 30-day lag applies. State them and stop; we do not comment on where any commodity price will go.
If you learnt this from older material
What older decks say
- A separate body, the Forward Markets Commission, regulates commodity futures.
- You can only hedge with futures.
- Weather derivatives are theoretical in India.
- All the main farm futures trade freely.
What holds now
- SEBI has regulated the market since 2015; the FMC no longer exists.
- Options on commodities also trade, since 2017.
- An exchange-traded rainfall derivative went live in 2026.
- Several farm derivatives are suspended until 31 March 2027.
Take-away: The idea of hedging is unchanged. The Indian market around it has changed a lot since 2015.
Sources: SEBI (FMC merger 2015; commodity options 2017); SEBI PR No. 21/2026; NCDEX (weather derivative 2026).
Trainer notes
Older training material predates the SEBI merger (2015), commodity options (2017 onward), the farm-contract suspensions (from 2021) and the first weather derivative (2026).
Four things people get wrong
Misconception'Hedging removes all risk.'
What is trueIt removes price risk on the hedged quantity. Basis risk remains: futures and spot prices may not move exactly together.
Misconception'A hedger wants to profit on futures.'
What is trueThe futures gain or loss is there to offset the physical position, not to make money on its own.
Misconception'Hedging always leaves you ahead.'
What is trueIf the price moves your way, the hedge gives up that gain. The aim is certainty, not the most favourable outcome.
Misconception'Weather derivatives are insurance.'
What is trueInsurance pays a proven loss. A weather derivative pays on a measured index, whether or not you lost money.
Check yourself
Question 1: A producer sells futures at ₹5,000 to hedge 100 units. At sale the spot is ₹4,600 and the futures are bought back at ₹4,600. What price is locked in?
Answer: ₹5,000 per unit. The physical sale brings ₹4,60,000, and the ₹400 per unit gain on futures (₹40,000) makes up the difference: ₹4,60,000 + ₹40,000 = ₹5,00,000.Question 2: Who regulates commodity derivatives in India, and since when?
Answer: SEBI, since 28 September 2015, when the Forward Markets Commission merged into it; the Forward Contracts (Regulation) Act was repealed on 29 September.Question 3: How does a rainfall weather derivative differ from crop insurance?
Answer: It pays on a measured rainfall index, not on your proven loss, and is meant for those exposed to that weather. Insurance pays your actual loss on a specific policy.
Sources and disclaimer
Sources for the figures in this explainer
- Forward Markets Commission merged into SEBI w.e.f. 28 Sep 2015; the Forward Contracts (Regulation) Act was repealed w.e.f. 29 Sep 2015: SEBI press release PR 237/2015.
- Seven farm commodities' derivatives suspended until 31 March 2027: SEBI Press Release PR No. 21/2026, dated 27 March 2026.
- First commodity option (gold) launched 2017; 'options on goods' permitted from January 2020: contemporary press and exchange notices.
- Mutual funds permitted to use exchange-traded commodity derivatives, within limits, in hybrid schemes and gold ETFs: SEBI circular, 21 May 2019. Silver ETFs followed in 2021.
- India's first exchange-traded weather (rainfall) derivative, RAINMUMBAI: NCDEX–IMD MoU of 26 June 2025 and NCDEX launch in 2026 (exchange and press reports).
- All prices and quantities in the worked example and quiz are invented for illustration and are not quotes for any commodity.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).