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Commodity futures market

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  1. Introduction.
  2. What is a 'Commodity'?
  3. How the futures market came about.
  4. The meaning of futures market.
  5. Salient features of a 'Commofity futures contract'.
  6. The main difference between the physical and futures market.
  7. Basics of futures trading.
    1. Who uses futures market.
  8. Need for the study.
  9. Trading methodology.
  10. Scope of the study.
  11. Data collection methods.
    1. Primary method.
    2. Secondary method.
  12. Geojit financial services.
    1. Overview.
    2. Overseas joint ventures.
    3. Milestones.
  13. Basic trading strategies.
    1. Buying (going long) if price is expected to increase.
    2. Selling (going short) if price is expected to decrease.
    3. Spreads.
  14. About MCX & NCDEX.
    1. Multi Commodity Exchange (MCX).
    2. Vision and mission.
    3. Benefits to participants.
    4. MCX commodities.
    5. National Commodity and Derivatives Exchange (NCDEX).
    6. NCDEX commodities.
  15. Commodity futures trading.
    1. Evolution of the commodity market in India.
    2. The Kabra committee report.
    3. Latest developments.
    4. Intruments available for trading.
  16. Forward contracts.
    1. Limitations of forward markets.
  17. Introduction to futures.
    1. Futures terminology.
  18. Introduction to Options.
    1. Option terminology.
  19. Basic payoffs.
    1. Payoff for futures.
    2. Payoff for buyer of futures: Long futures.
  20. Using commodity futures.
  21. Hedging.
  22. Speculators.
  23. Arbitration.
    1. Overpriced commodity futures: Buy spot, sell futures.
    2. Under priced commodity futures: Buy futures, sell spot
  24. Trading.
    1. Futures trading system.
    2. Entities in the trading system.
    3. Commodity futures trading cycle.
    4. Gold futures contract specifications.
    5. Margins for trading in futures.
  25. Clearing and settlement.
    1. Clearing banks.
    2. Depository participants.
    3. Settlement.
    4. Settlement mechanism.
    5. Final settlement.
    6. Settlement methods.
    7. Closing out by offsetting positions.
  26. Risk management.
  27. Commodity futures trading in Geojit.
  28. Conclusion.

India has a long history of commodity futures trading, extending over 125 years. Still, such trading was interrupted suddenly since the mid seventies in the fond hope of ushering in an elusive socialistic pattern of society. As the country embarked on economic liberalization policies and signed the GATT agreement in the early nineties, the government realized the need for futures trading to strengthen the competitiveness of Indian agriculture and the commodity trade and industry. Futures trading began to be permitted in several commodities, and the ushering in of the 21-century saw the emergence of new National Commodity Exchanges with countrywide reach for trading in almost all primary commodities and their products.

A commodity futures contract is essentially a financial instrument. Following the absence of futures trading in commodities for nearly four decades, the new generation of commodity producers, processors, market functionaries, financial organizations, broking agencies and investors at large are, unfortunately, unaware at present of the economic utility, the operational techniques and the financial advantages of such trading.

[...] Profit Cotton futures price Loss Figure 5.4 Payoff for a seller of cotton futures USING COMMODITY FUTURES For a market to succeed, it must have all three kinds of participants - hedgers, speculators and arbitragers. The confluence of these participants ensures liquidity and efficient price discovery on the market. Commodity markets give opportunity for all three kinds of participants. In this chapter we look at the use of commodity derivatives for hedging, speculation and arbitrage. HEDGING: The primary purpose of futures markets is to provide an efficient and effective mechanism to manage price risk. [...]


[...] VISION AND MISSION: The vision of MCX is to revolutionize the Indian commodity markets by empowering the market participants through innovative product offerings and business rules so that the benefits of futures markets can be fully realized. Offering 'unparalleled efficiencies', 'unlimited growth' and 'infinite opportunities' to all the market participants. EXCHANGE OF CHOICE: At MCX we believe that performance excellence and affordability would be the key drivers in promoting and popularizing Commodities Futures trading in the country. Exchanges in the new economy will be driven by strong service availability backed by superior technology and MCX is well poised to emerge as the "Exchange of Choice" for the commodity futures trading community. [...]


[...] COMMODITY FUTURES TRADING CYCLE: NCDEX trades commodity futures contracts having one-month, two-month and three-month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading day. New contracts will be introduced on the trading day following the expiry of the near month contract. [...]

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