Answers (1)

The biggest advantage of having an exchange-based platform is reach. A wider reach ensures greater participation, which results into a more efficient price discovery mechanism. In fact it comes to a stage where the derivative market guides the spot market in terms of pricing. This can be well understood by looking at the following example: Imagine a soy wholesaler in Madhya Pradesh who, having bought the crop from the farmer, wishes to sell it to the oil refiners. To sell his crop he has to go to the local market at Indore. The price that he will get for his crop would be solely dependent upon the demand supply condition prevailing at that point of time at that market place. Also as the number of players is less there are chances of the prices being biased. In contrast the prices in the futures market are determined not only by the local demand supply conditions but also by the global scenario. Add to that the view taken on a commodity by various sets of people depending upon different parameters such as technical analysis, political news, exchange rates etc. The price that is thus quoted can be safely regarded as the most efficient price. So, now looking at the futures price the trader can price his crop appropriately.