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19/07/2019

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19/06/2019

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18/06/2019

09/11/2016

A commodity futures contract is a commitment to make or accept delivery of a specified quantity and quality of a commodity during a specific month in the future date at a price agreed upon when the commitment is made.

Commodities traded in the commodity exchanges are required to be delivered at the contracted price, ignoring all the changes in the market prices. Both the participants (Buyers & Sellers) are allowed to liquidate their respective positions by way of cash settlement of price between the contracted and liquidated price, no later than the last trading session of the specified expiry date.

An effective and efficient market for trading in commodities futures requires:

Volatility in the prices of the underlying commodities.

Large numbers of buyers and sellers with diverse risk profiles(hedgers, speculators and arbitrageurs).

The underlying physical commodities to be fungible, i.e. they should be exchangeable.

Features of commodity futures

1. Organized :

Commodity Futures contracts always trade on an organized exchange, e.g. NCDEX, MCX, etc in India and NYMEX, LME, COMEX etc. internationally.

2. Standardized :

Commodity Futures contracts are highly standardized with the quality, quantity, and delivery date, being predetermined.

3. Eliminates Counterparty Risk :

Commodity Futures exchanges use clearing houses to guarantee that the terms of the futures contract are fulfilled. The Clearing House guarantees that the contract will be fulfilled, eliminating the risk of any default by the other party.

4. Facilitates Margin Trading :

Commodity Futures traders do not have to put up the entire value of a contract. Rather, they are required to post a margin that is roughly 4 to 8% of the total value of the contract (this margin varies across exchanges and commodities). This facilitates taking of leveraged positions.

5. Closing a Position :

Futures markets are closely regulated by government agencies, e.g. Forward Markets Commission (FMC) in India, Commodity Futures Trading Commission in (CFTC) USA, etc. This ensures fair practices in these markets.

6. Regulated Markets Environment :

Commodity Futures contracts are highly standardized with the quality, quantity, and delivery date, being predetermined.

7. Physical Delivery :

Actual delivery of the commodity can be made or taken on expiry of the contract. Physical delivery requires the member to provide the exchange with prior delivery information and completion of all the delivery related formalities as specified by the exchange.

In order to understand the commodity market participants like hedgers, speculators and arbitrageurs, it is essential to first understand all the features, terms and conditions of the commodity futures contract.

In the next chapter we will learn about the various commodity market participants like hedgers, speculators and arbitrageurs.

08/11/2016

NOW WE STARTED WITH THE INTRODUCTION TO COMMODITY FUTURE
Firstly we have to know brief history of commodity trading:
Trading in commodities futures has a long history. Though the modern trade in commodity futures could trace its origins back to the 17th century in Osaka, Japan, there is evidence to suggest that a form of futures trading in commodities existed in China 6000 years earlier. Organized trading on an exchange started in 1848 with the establishment of the Chicago Board of Trade (CBOT).

The first milestone in the 125 years rich history of organized trading in commodities in India was the constitution of the Bombay Cotton Trade Association in the year 1875. India had a vibrant futures market in commodities till it was discontinued in the mid 1960's, due to war, natural calamities and the consequent shortages.

Recent Developments in India

The advent of economic liberalization helped the cause of laying emphasis on the importance of commodity trading. By the beginning of 2002, there were about 20 commodity exchanges in India, trading in 42 commodities, with a few commodities being traded internationally.

Commodities futures contracts and the exchanges they trade in are governed by the Forward Contracts (Regulation) Act, 1952. The regulator is the Forward Markets Commission (FMC), a division of the Ministry of Consumer Affairs, Food and Public Distribution.

In 2002, the Government of India allowed the re-introduction of commodity futures in India. Together with this, three screen based,nation-wide multi-commodity exchanges were also permitted to be set up with the approval of the Forward Markets Commission. These are:

1. National Commodity & Derivative Exchange (www.ncdex.com)

This exchange was originally promoted by ICICI Bank, National Stock Exchange (NSE), National Bank for Agriculture and Rural Development (NABARD) and Life Insurance Corporation of India (LIC). Subsequently other institutional shareholders have been added on. NCDEX is popular for trading in agricultural commodities.

2. Multi Commodity Exchange (www.mcxindia.com)

This exchange was originally promoted by Financial Technologies Limited, a software company in the capital markets space. Subsequently other institutional shareholders have been added on. MCX is popular for trading in metals and energy contracts.

3. National Multi Commodity Exchange of India (www.nmce.com)

This exchange was originally promoted by Kailash Gupta, an Ahmedabad based trader, and Central Warehousing Corporation (CWC). Subsequently other institutional shareholders have been added on. NMCE is popular for trading in spices and plantation crops, especially from Kerala, a southern state of India.

In terms of market share, MCX is today the largest commodity futures exchange in India, with a market share of close to 70%. NCDEX follows with a market share of around 25%, leaving the balance 5% for NMCE.

In order to start investing in Commodities Futures, you should have comprehensive knowledge about all the above Commodity Futures, which will help you further in learning about the basics of commodity futures contract and it's various features.

In the next post we will learn about the basics of commodity futures contract and it's various features.

NCDEX launches Gold Hedge future contract. Strike gold with NCDEX Gold Hedge