Frequently Asked Questions
A commodity is a product having commercial value that can be produced, bought, sold, and consumed. It is interchangeable with other commodities of the same type.
A derivative contract is an enforceable agreement whose value is derived from an underlying asset such as a commodity, precious metal, currency, bond, stock, or indices. Four common examples are forwards, futures, options and swaps/spreads. A commodity future is a contract to buy or sell a specific commodity, of a specific quality, at a specific price, for a specific future date on the exchange.
A forward contract is a legally enforceable agreement for delivery of goods or the underlying asset on a specific date in future at a price agreed on the date of contract. Under the Forward Contracts (Regulation) Act, 1952, contracts for delivery of goods settled by money difference, or where delivery and payment is made after a period of 11 days, are forward contracts.
Futures Contract is a type of forward contract. Futures are exchange traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price. Futures contracts are generally used for protecting against risk of adverse price fluctuation.
In a spot market, commodities are physically bought or sold usually on a negotiable basis resulting in delivery. In the futures markets, commodities can be bought or sold irrespective of physical possession of the underlying commodity. The futures market trades in standardized contractual agreements with specific quality, quantity, and mode of delivery whose settlement is guaranteed by regulated commodity exchanges.
Commodity Market in India has been regulated under the guidance of the Ministry of Consumer Affairs, Food & Public Distribution, with oversight evolving through FMC and subsequently SEBI for commodity derivatives.
The biggest advantages are price risk management and price discovery. Farmers can protect themselves against undesirable price movements. Merchandisers avoid price risk. Processors keep control on raw material cost. International traders can lock in their prices.
Hedging means taking a position in the futures or options market that is opposite to a position in the physical market. It reduces or limits risks associated with unpredictable changes in price. The objective is to offset a loss in one market with a gain in another.
It is the minimum percentage of the contract value required to be deposited by the members/clients to the exchange before initiating any new buy or sell position. This must be maintained throughout the time their position is open and is returnable at delivery, exercise, expiry or closing out.
Arbitrage is making purchases and sales simultaneously in two different markets to profit from the price differences prevailing in those markets.
