The Singapore Mercantile Exchange gold futures contract, which starts trading Tuesday, is likely to become a popular hedging tool for Asian physical-market participants, a senior exchange official said.

The size of the SMX contract — one kilogram or 32.15 troy ounces — will enable Asian participants to hedge their positions much more accurately than the New York Mercantile Exchange’s Comex contracts, which are 100 ounces or slightly more than 3 kilograms, SMX Vice Chairman Jignesh Shah told Dow Jones Newswires.

“The market will move from an imperfect hedge to a perfect one,” Shah said, noting that many physical-market transactions in Asia use one-kilogram bullion bars.

Shah said the experience of the Multi Commodity Exchange of India, or MCX, which like the SMX is owned by Financial Technologies (India) (526881.BY), is instructive.

“Gold traders will automatically choose to hedge if there is a simple and cheap way to cover their exposure,” he said.

“The demand in Asia is there, just as it was in India. SMX gold could be very big.”

The MCX gold contract is second only to Comex gold in trading volumes, even though it is restricted to India-based participants.

One market participant said that arbitrage trades conducted by India-based participants with the MCX contract, which is also one kilogram in size, could offer the SMX an important source of liquidity in its initial stages.

Shah said that the strategic location of the SMX delivery point in Singapore is convenient for large Asian physical markets including Malaysia, Thailand and Vietnam, as well as China and India.

SMX contracts will be deliverable to vaults operated by J.P. Morgan and Brink’s Inc. located within a free-trade zone at the city-state’s Changi international airport.

Shah, who is also Chairman and Group Chief Executive of Financial Technologies, which also operates exchanges in Dubai, Bahrain, Botswana and Mauritius, said it will be three to four months before physical delivery of SMX gold contracts takes place in any significant volume.

“It is always a gradual process when you launch a new exchange.”