A lsquo diamond futures contracts rsquo has been recently designed to provide Indian exporters with ...........

Economic Affairs Others

A ‘diamond futures contracts’ has been recently designed to provide Indian exporters with a hedging tool. What do you understand by hedging in this context?

To ensure optimum demand conditions of diamonds abroad
To protect them from diamond price fluctuations

Which of the above is/are correct?

1 only

2 only

Both 1 and 2

None

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Explanation:

A hedge is an investment to reduce the risk of adverse price movements in an asset. This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes.

Statement 1: India is a global diamond polishing hub where most rough diamonds in the world are polished. The futures contracts will enable companies involving in cut and polished gems business to better hedge price risks. The exact mechanism through which this happens is not important, and need not be covered here.