Commodities are backbone of an economy and participants like individuals and industrial units trade in commodity market. Different commodities could be traded at an exchange (for e.g. at MCX). Derivative contracts in commodities provide opportunity to take position on price movement and hedge a position in the spot market.
Broadly there are four different categories of commodities;
At MCX, there are different variants available for each commodity; for e.g. Gold Futures are available in 1 Kg as well as in 1 gm. Similarly, SILVER FUTURES are available in 30 Kgs and in 1 Kg.
Futures are available on individual commodities and indices
Market is open from 9:00 AM to 11:30/11:55 PM
Different lot sizes; for e.g. Gold Mini (100 gms), Gold Petal (1 gm) provides opportunity to a broad range of participants
Commodity prices are derived on the basis of global factors. Thus, a very high level of transparency is seen in commodity derivatives market.
Margin requirement is low; usually in a range of 10-25% for different commodities.
Commodities in Bullion are available in variants (lot size) like; GOLD, GOLD MINI, GOLD GUINEA, and GOLD PETAL SILVER, SILVER MINI, and SILVER MICRO
Tick size differs for different variants and commodities
Contracts are compulsorily settled by delivery except in energy category.
I Sec currently doesn’t offer delivery settlement and an open position is squared off prior to start of delivery margining period.
In all cash settled contracts (i.e. Crude Oil and Natural Gas); a pre expiry margin would be levied during five days’ period to the expiry date (w.e.f April 1, 2021)
The primary objective of trading in the commodity futures market is to hedge against any potential losses due to unfavourable price movements. Businesses which use commodities as raw materials or even trade in commodities, use futures market to lock in the commodity prices.
The commodity futures market provides a mechanism for price discovery and risk management. It is also a platform used for speculation and arbitrage opportunities. Along with this, an important objective of commodity futures market is that it promotes investment in the commodity sector.
Commodity futures also help in predicting the future price of the commodity. It also reflects the market sentiments.
Commodity futures are derivatives contracts to buy or sell a certain quantity of a commodity at a predetermined price on a specific date in the future. Futures are traded on exchanges, and their prices are determined by the forces of demand and supply.
Traders can buy and sell futures contracts to hedge against the risk of rising or falling prices of the underlying commodity. By taking a long position in a futures contract, a trader can bet that the price of the underlying commodity will go up in the future, while a short position means betting on the price dropping.
The essential concept that determines how commodity futures work is the expiration date. Usually, commodity contracts are netted at the expiration date. If there is a difference in price between the original trade and the final trade, it is settled in cash. Commodity futures are instrumental in helping investors take a position when it comes to an underlying asset. The assets include commodities like gold, silver, wheat, crude oil, cotton, lead, zinc, natural gas, etc.
To help identify a commodity futures contract, they are named after the month in which they expire. Thus, if a commodity futures contract expires in February, it will be known as a February futures contract. Do note that the risks associated with commodity futures can be high, especially since certain commodities do experience substantial volatility in the market. However, along with the risks of bearing large losses, one also stands to earn large gains.
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