Commodity Derivatives Market in Nepal: Initial Phase and Future Prospects

The commodity derivatives market refers to the financial instruments used in the agriculture, industry, and service sectors that help manage various risks and achieve economic stability. In this blog, we will discuss the current state, challenges, and future prospects of the commodity derivatives market in Nepal.

1. Introduction

Commodity derivatives are financial instruments whose value is based on the value of physical commodities. Repeated economic crises in the global economy have highlighted the importance of the derivatives market. The economic crises of the 1970s (Stagflation), the 1997 East Asian financial crisis, the 2008 global financial crisis, and the 2010 European debt crisis have played significant roles in improving financial management and developing new technologies.

Global Economic Crises

1. Stagflation (1970s): During the 1970s, the global economy faced an economic crisis known as Stagflation, characterized by high inflation and unemployment, which led to global economic instability. This crisis spurred the development of derivatives markets to strengthen financial markets and manage risks.

2. East Asian Financial Crisis (1997): In 1997, an economic crisis emerged in East Asian countries, affecting nations like Thailand, Malaysia, South Korea, and Indonesia. This crisis had a severe impact on financial markets, increasing the importance of derivatives markets as a countermeasure.

3. Global Financial Crisis (2008): The 2008 global financial crisis affected the entire world, exposing the weaknesses in the banking system and highlighting the importance of risk management. During this crisis, the derivatives market played a crucial role in managing financial instruments and risks.

4. European Debt Crisis (2010): In 2010, European countries faced a debt crisis that disrupted their economic stability and led to the search for various financial measures. The derivatives market also played a significant role during this crisis.

2. Development of Commodity Derivatives in a Global Perspective

International organizations have played crucial roles in developing the commodity derivatives market. This section discusses those organizations and their contributions.

World Trade Organization (WTO)

The World Trade Organization (WTO) manages global trade rules and resolves trade disputes, contributing to the development of the derivatives market in several ways:

1. Management of Trade Rules: The WTO simplifies and makes global trade accessible by managing various trade rules.

2. Resolution of Trade Disputes: The WTO maintains trade stability by resolving trade disputes.

3. Development of New Trade Policies: The WTO assists in developing new trade policies that benefit the derivatives market.

Organisation for Economic Co-operation and Development (OECD)

The Organisation for Economic Co-operation and Development (OECD) contributes to the economic development and cooperation of member countries, aiding the derivatives market's development through:

1. Economic Policy Suggestions: The OECD provides economic policy suggestions to member countries, aiding their economic development.

2. Economic Research: The OECD conducts economic research, contributing to solving economic problems.

3. Economic Reform Programs: The OECD runs economic reform programs, aiding the economic stability and development of member countries.

International Organization of Securities Commissions (IOSCO)

The International Organization of Securities Commissions (IOSCO) regulates and supervises global securities markets, contributing to the development of the derivatives market through:

1. Financial Regulation: IOSCO regulates global financial markets, ensuring their stability.

2. Financial Supervision: IOSCO supervises financial markets, ensuring their transparency and stability.

3. Development of New Financial Policies: IOSCO assists in developing new financial policies, contributing to the development of financial markets.

3. Development of Commodity Derivatives Market in Nepal

The development of the commodity derivatives market in Nepal can bring significant improvements in economic stability, risk management, and price determination processes. The following aspects highlight the development of the commodity derivatives market in Nepal:

Use of Derivatives in the Agriculture Sector

The agriculture sector plays a significant role in Nepal's economy. Farmers can achieve price stability for agricultural products by using derivatives. For instance, futures contracts can be used to determine the future price of agricultural products, helping farmers achieve price stability.

Use of Derivatives in Industry and Service Sectors

Businesses in Nepal's industry and service sectors can manage risks using derivatives. For example, swap contracts can be used to determine the future cost of production, helping businesses manage risks.

Financial Literacy and Awareness

For the development of the commodity derivatives market in Nepal, increasing financial literacy and awareness is essential. The lack of financial literacy and awareness has resulted in fewer market participants. Therefore, various programs should be conducted to increase financial literacy and awareness.

Regulatory Structure and Legal Standards

For the development of the commodity derivatives market in Nepal, developing regulatory structures and legal standards is necessary. The lack of regulatory structures and legal standards has hindered market development. Therefore, necessary regulatory structures and legal standards should be developed.

Necessary Technology and Infrastructure

For the development of the commodity derivatives market in Nepal, improving necessary technology and infrastructure is essential. The lack of necessary technology and infrastructure has reduced the effectiveness of the derivatives market. Therefore, necessary technology and infrastructure should be improved.

4. Challenges of the Commodity Derivatives Market in Nepal

The development of the commodity derivatives market in Nepal faces various challenges. These challenges must be addressed by adopting various measures. The main challenges in developing the commodity derivatives market in Nepal are as follows:

Lack of Financial Literacy and Awareness

The lack of financial literacy and awareness has hindered the development of the commodity derivatives market in Nepal. The lack of financial literacy and awareness has resulted in fewer market participants, reducing the market's effectiveness and stability. To address this issue, the following measures should be adopted:

1. Financial Literacy Programs: Various programs should be conducted to increase financial literacy. Financial literacy programs provide individuals with information about using financial instruments and make them aware.

2. Awareness Campaigns: Various awareness campaigns should be conducted to inform the public about the importance and use of financial instruments. Awareness campaigns encourage the public to use financial instruments.

3. Educational Programs: Educational programs related to financial literacy and awareness should be conducted at school and university levels. Educational programs provide students with information about using financial instruments and make them aware.

Lack of Regulatory Structure and Legal Standards

The lack of regulatory structure and legal standards has also hindered the development of the commodity derivatives market in Nepal. The lack of regulatory structure and legal standards reduces market confidence, reducing the market's effectiveness and stability. To address this issue, the following measures should be adopted:

1. Development of Regulatory Structure: Necessary regulatory structures should be developed for the development of the commodity derivatives market in Nepal. The development of regulatory structures maintains market confidence and ensures their stability.

2. Development of Legal Standards: Necessary legal standards should be developed for the development of the commodity derivatives market. The development of legal standards maintains transparency in the market and ensures their effectiveness.

3. Regulatory Reforms: Necessary reforms should be made in the current regulatory structure and legal standards. Regulatory reforms solve the problems in the market and aid their development.

Lack of Necessary Technology and Infrastructure

The lack of necessary technology and infrastructure has also hindered the development of the commodity derivatives market in Nepal. The lack of necessary technology and infrastructure reduces the market's effectiveness and stability. To address this issue, the following measures should be adopted:

1. Improvement of Technology: Necessary technology should be improved for the development of the commodity derivatives market in Nepal. The improvement of technology ensures the market's effectiveness and stability.

2. Development of Infrastructure: Necessary infrastructure should be developed. The development of infrastructure ensures the market's effectiveness and stability.

3. Use of New Technology: New technology should be used in the commodity derivatives market. The use of new technology ensures the market's effectiveness and stability.

5. Future Prospects

The future of the commodity derivatives market in Nepal is bright. Increasing financial literacy and awareness, developing regulatory structures and legal standards, and improving necessary technology and infrastructure can take the derivatives market to new heights. The development of the commodity derivatives market in Nepal can play a significant role in stabilizing and strengthening the economy.

Increasing Financial Literacy and Awareness

For the future of the commodity derivatives market in Nepal, increasing financial literacy and awareness is essential. Increasing financial literacy and awareness increases the number of market participants and ensures their effectiveness and stability. Therefore, the following measures should be adopted:

1. Financial Literacy Programs: Financial literacy programs should be conducted to provide individuals with information about using financial instruments.

2. Awareness Campaigns: Awareness campaigns should be conducted to encourage the public to use financial instruments.

3. Educational Programs: Educational programs related to financial literacy and awareness should be conducted at school and university levels.

Development of Regulatory Structure and Legal Standards

For the future of the commodity derivatives market in Nepal, developing regulatory structures and legal standards is essential. The development of regulatory structures and legal standards maintains market confidence and ensures their effectiveness and stability. Therefore, the following measures should be adopted:

1. Development of Regulatory Structure: Necessary regulatory structures should be developed for the development of the commodity derivatives market in Nepal.

2. Development of Legal Standards: Necessary legal standards should be developed for the development of the commodity derivatives market.

3. Regulatory Reforms: Necessary reforms should be made in the current regulatory structure and legal standards.

Improvement of Necessary Technology and Infrastructure

For the future of the commodity derivatives market in Nepal, improving necessary technology and infrastructure is essential. The improvement of necessary technology and infrastructure ensures the market's effectiveness and stability. Therefore, the following measures should be adopted:

1. Improvement of Technology: Necessary technology should be improved for the development of the commodity derivatives market in Nepal.

2. Development of Infrastructure: Necessary infrastructure should be developed.

3. Use of New Technology: New technology

should be used in the commodity derivatives market.

Conclusion

The development of the commodity derivatives market in Nepal can bring significant improvements in economic stability, risk management, and price determination processes. However, its development requires improvements in financial literacy, awareness, regulatory structures, legal standards, technology, and infrastructure. By addressing these areas in the future, the development of the commodity derivatives market in Nepal can support the country's economic growth and development. By adopting the necessary measures for the development of the commodity derivatives market in Nepal, we can achieve economic stability and prosperity.