India’s commodity derivatives market has undergone a remarkable transformation, evolving from ancient barter systems to a sophisticated, forward contracting between producers and merchants, and subsequently to structured Futures markets with clearing houses that ensure the creditworthiness of transactions. The definition of contracts has progressed from basic forwards to complex options and structured products, enabling originators and intermediaries to mitigate risks beyond their primary expertise.

Derivatives deal with multi-economic functions and are complex and controversial; however, they are an integral part of the financial system. Frequently, the variables driving derivatives are the prices of market-traded assets. For instance, a bond option is a derivative whose value hinges on the price of a bond. However, derivatives are not limited to financial assets; they can derive their value from virtually any variable, such as the price of crude oil or the wind speed at a particular location. The underlying assets for derivatives can include foreign exchange, interest rates, equities, commodities, and credit.

With an impressive 20 per cent annual growth rate, the Indian commodity market has shifted from being agriculture-dominated to seeing greater participation in bullion, energy, and metals trading, mirroring India’s industrial development and reflecting India’s dual identity as both an agrarian economy and a rapidly industrialising one. Behind the numbers and growth rates lies a fascinating tale of farmers, traders, and businesses adapting age-old practices to technology-driven finance.

China expanding rapidly

The annual turnover of commodity forwards is roughly ₹5-10 lakh crore in India, whereas the commodity futures and options segment is about ₹550-600 lakh crore. The turnover is driven by the actions of diverse value chain participants (VCPs), who fulfill roles as hedgers, arbitrageurs, or traders. These VCPs may serve as producers, manufacturers, processors, and consumers, and each player in the value chain leverages commodity futures and options to their benefit; for instance, farmers use futures and options to secure pricing, while firms hedge against raw material costs.

Globally, leading exchanges, such as the Chicago Mercantile Exchange (CME Group), London Metal Exchange (LME), and Shanghai Futures Exchange, have jointly witnessed annual trading volumes exceeding $100 trillion, with China’s markets expanding rapidly due to commodity-driven industrialisation.

As the commodity market accelerates domestically and globally, businesses throughout the value chain – from miners to manufacturers face increasing pressure to manage their exposure to volatile prices. This reality has made risk management tools not just useful, but essential for survival in today’s markets. Thus, Commodity options serve as a versatile and cost-effective risk management tool, enabling hedgers and small stakeholders to navigate price volatility without excessive capital requirements. Unlike futures contracts that demand high margins and carry unlimited risk, options limit potential losses to their holders to the premium paid, making them particularly suitable for farmers, small traders, and manufacturers seeking affordable hedging solutions.

Offering lifeline

For small traders, options offer a lifeline, allowing hedging with minimal capital. Strategies like bull call spreads (buying a call option at a specific strike while also selling the same number of calls of the same asset at a higher strike price) and iron condors (two calls and two puts with different strike prices) help navigate volatility without taking excessive risk. Those expecting a moderate increase in price can deploy the bull call spread, a low-capital strategy that profits from upward moves while defining maximum risk.

For neutral market conditions where prices are expected to remain range-bound, the iron condor strategy allows traders to benefit from low volatility by selling both out-of-the-money calls and puts while limiting risk with defined wings. Suppose you’re a farmer watching grain prices move sideways for weeks, or a small jeweler seeing gold trade in a tight range. Instead of taking big risks, these strategies let you earn reasonable gains from market stability while keeping your potential losses known. Similarly, the butterfly spread (four options contracts with three different strike prices) enables precise bets on price stability, offering high reward potential with very low risk if the commodity stays near a target price at expiration.

By implementing these solutions and understanding the full spectrum of available strategies, commodity market participants can significantly enhance their risk management capabilities and market participation. The key lies in matching the appropriate strategy to specific market expectations and risk tolerance, creating a more inclusive and efficient marketplace for all participants.

Despite these advantages, challenges such as limited liquidity, lack of awareness, and margin requirements hinder broader adoption among farmers and other stakeholders. To address these barriers, exchanges and regulators should promote financial literacy programmes, introduce micro-sized contracts, and incentivize market makers to improve liquidity. By simplifying these strategies and enhancing market accessibility, commodity options can become an indispensable tool for hedgers and small traders, fostering greater participation and stability in the commodity markets.

Dr Arora is Associate Professor & Area Chair (Finance) & Dr Bhatia is Professor (Finance) and Dean-Executive Education, Birla Institute of Management Technology (BIMTECH) Greater Noida

Published on August 2, 2025

Niva Bupa Health Insurance witnessed an 11.44 per cent year-on-year growth in its gross written premiums (GWP) for the first quarter of this fiscal, reaching ₹1631.90 crore. Was this growth volume led?

The reported 11.44 per cent growth in GWP for Q1 must be viewed in light of a change in our accounting methodology. Last financial year’s base was calculated differently, and the treatment of premium recognition this year has changed—especially for long-term policies. On a like-to-like basis, after adjusting for the accounting change, the actual growth stands at 28 per cent for the quarter. It’s important to note that this shift is purely accounting-related and does not reflect any change in the underlying business fundamentals. The premium recognition approach for certain long-term policies has been revised, which explains the reported variance.

The growth is broad-based across all our distribution channels—agency, bancassurance and brokers—all of which have delivered strong performance. Within this, the retail segment has outpaced overall growth, posting over 30 per cent year-on-year growth in Q1. Yes, this is clearly volume-led growth. The number of lives covered under our policies rose sharply—from 1.5 crore in Q1FY25 (including both retail and group) to 2.25 crore in Q1FY26, marking a significant 50 per cent year-on-year increase.

What was the contribution of retail insurance compared to group insurance? Do you expect this mix to change over the next two to three years?

In Q1FY26, the individual (retail) business contributed around 67–68 per cent of our total GWP, with the remaining share coming from group insurance. This is broadly in line with last fiscal’s mix, and we are comfortable with this composition.

Both retail and group segments are delivering healthy growth, and we see no immediate reason for this mix to shift materially in the near term. We expect it to remain in a similar range over the next two to three years.

In Q1FY26, the company reported an operating loss of ₹145.22 crore, compared to an operating profit of ₹23.23 crore in Q1FY25. What led to this operating loss?

The operating loss in Q1FY26 is primarily attributable to the change in accounting treatment for gross written premiums (GWP). This change was implemented midway through the previous financial year, resulting in a lower GWP base for Q1FY26. Under Indian GAAP, this adjustment impacted net premiums written (NWP) and overall earnings, leading to a decline when compared to the previous year. Therefore, a year-on-year comparison on a GAAP basis doesn’t offer a consistent or accurate picture.

That’s why it’s important to also consider our performance under International Financial Reporting Standards (IFRS), which we follow for consolidated reporting with our majority shareholder, Bupa. Under IFRS, our performance is much clearer—with net profit increasing from ₹36 crore in Q1FY25 to ₹70 crore in Q1FY26, effectively doubling year-on-year. There is no such distortion in the IFRS numbers.

How is the company progressing in terms of compliance with the new Expenses of Management (EoM) norms?

We are well on track towards meeting the regulatory requirements under the revised EoM norms. Our EoM ratio improved significantly—from 40.7 per cent in Q1FY25 to 35.9 per cent in Q1FY26, reflecting a reduction of 4.8 percentage points. For the current quarter, the allowable EoM limit—factoring in permitted spends on insurtech and insurance awareness—stands at approximately 35.8 per cent. We’re very close to this threshold and remain fully committed to achieving full compliance within the stipulated timelines. We’re confident of meeting the regulatory benchmark by the end of the financial year.

On the distribution front, what are the contributions of the agency and bancassurance channels?

Currently, approximately 30 per cent of our business comes from the agency channel, while around 20 per cent is contributed by bancassurance. We are quite comfortable with this distribution mix and believe it is sustainable over the long term. Our agency network is growing steadily—we now have over 1.90 lakh agents across the country and are consistently adding 2,000–2,500 new agents every month.

On the bancassurance side, we have partnerships with over 20 banks, including both public sector and private institutions. These banks collectively operate thousands of branches, offering us an effective channel to deepen our presence in tier II and tier III cities.

At the same time, our agency strategy is also focused on geographic expansion. Wherever we identify potential in underserved markets, we open new branches or recruit agents locally to strengthen our footprint. Both channels are integral to our strategy of expanding access and penetration in smaller towns and emerging markets.