Geojit, Commodity, Commodity Futures

Trading-Online
11-14 minutes

What are commodity markets?

Commodity markets are the place where primary or raw products are brought and transacted
between buyers and sellers. There are two types of markets in India, i.e. Spot market and futures
market.

What is the difference between futures market and spot

market?
A futures market is a place/market where an agreement between two parties to buy or sell the
underlying commodities at a future date at today's future price. The physical delivery of the
commodity is taking place after the expiry of the contract. Physical market or cash market or
Spot market is place where buyers and sellers actively participating and ends with the delivery of
the commodity during the day.

Who is the controlling body of exchanges in India?

Securities Exchange Board of India (SEBI)

Which are the various major commodity exchanges in

India?
Currently, there are three major national level commodity exchanges offering trading in
commodity derivatives. They are Multi Commodity Exchange of India (MCX), National
Commodities and Derivatives Exchange (NCDEX) and National Multi Commodity Exchange of
India (NMCE).

What are the trade timings of commodity exchanges?

MCX – Monday to Friday 10:00AM-11:30/11:55PM*
NCDEX – Monday to Friday 10:00AM-09:00/09.30PM*
NMCE – Monday to Friday 10:00AM-05:00PM
*Closing hour may vary depending up on Day Light Saving Time (DST) changes in the US/UK.
Note: Derivatives trading in Agriculture commodities are available till 05.00PM in all
exchanges. However, certain agricultural commodities like refined soy oil, crude palm oil, cotton
etc. are available for trading till 09:00/9:30 PM.

Who are the participants of commodity market?

Individuals, high net worth individuals (HNIs), Corporate, Hedgers, farmers, processors and
other people related to physical markets can trade in commodities. Internationally, the
classification of clients is on the basis of commercials (who are hedging customer) and non-
commercials who are speculative - trading type of clients.

Who are the players in commodity market?

Hedgers, speculators and arbitrageurs are the major participants in commodity market. Hedgers
are main players in the market with an underlying risk in a commodity. Speculators are traders or
investors who took benefit or profits based on price fluctuations. They essentially create more
liquidity to the contracts. Arbitrageurs are other type of experienced group which make profits
by exploiting the price discrepancies seen in different exchanges or the spot market by equally
entering with the opposite positions of the same contract.

Is commodity trading suitable for a retail investor?

Yes, but retail investors should understand the risks associated with and advantages of
commodity futures trading before taking the leap.

What are the various commodities available for trading?

In India, there are about 50+ major commodities available for trading in different exchanges.
Commodities that are being traded in Indian markets can be broadly categorised as agriculture
and non-agriculture commodities. Agriculture commodities includes Spices like jeera, turmeric,
cardamom, pepper, Oil and oil seeds like soybean, rape mustard seeds, crude palm oil etc,
Pulses, Cereals, Guarseed, Sugar, Cotton etc. Non-agriculture commodities includes precious
metals, base metals, energy complex.

What are the various factors to be keep in mind before

trading in commodity?
There are several factors that should be kept in mind while trading in commodities, which are
shown below in terms of various segments in commodities:
Agri- Commodities: Monsoon, Carryover stocks, Crop acreage, Production, Imports and
Exports, Government policies, Weather etc.
Non-Agri commodities: Bullion & Metals - Currency fluctuations, Global supply and demand
factors, Inflation, Unexpected political, Social and Economic Mayhem.
Energy – Global Demand & Supply, U.S EIA inventory levels, OPEC decisions, Geopolitical
tensions, U.S dollar.

How currency volatility affects the markets?

Currency volatility has a significant bearing on the commodity price moves. For example,
bullion prices tend to rise on a rising Euro (This should not be taken as a reference outcome). On
the other hand, commodities that are priced in dollar terms, like crude oil, tend to weaken when
dollar strengthens.

How much I have to invest initially for trading?

You can have an amount as low as Rs 1,000. All you need is money for margins payable upfront
to exchanges through brokers. The margins range from 3-10 per cent of the value of the
commodity contract.

What are the various charges included in trading?

Broking charges are the main cost while trading in commodities. Apart from that exchange levy,
delivery charges, commodity transaction charges (only for non-agri commodities) and other
applicable taxes are the other charges.

What is margin?
Margin is the amount which is required in advance to accomplish trades on the exchanges. There
are different types of margins like, initial margin, special margin, delivery margin etc. charged
by exchanges on different market condition.

What is MTM?
At the end of every trading day, the margin account of the trader / client is adjusted to reflect the
participant’s gain or loss. The price changes on the close of every trading day may result in some
gain or loss as compared to the previous day’s closing price. These price variations are netted
into the daily margin account. This process is known as marking to the market.

What will happen if I failed to close my position on its expiry

date?
If a trader or an investor fails to close his/her position on its expiry date, depending on the
long/short position, he/she has to take or give delivery of the underlying commodity. If he/she is
not willing to take the delivery, then a penalty has to be paid in case of Sellers Right contract
based on the final settlement price.
What are the commodities available for physical delivery?
Almost all agriculture commodities traded in exchanges are available for physical delivery.
Meanwhile, most of the non agri commodities are cash settled at expiry.

Whether D-mat account is needed for commodities trading?

Demat account is not mandatory for trading, however commodity Demat account is mandatory
for all delivery based transactions.

What is warehouse receipt?

A warehouse receipt is a document that provides proof of ownership of commodities (e.g., bars
of copper) that are stored in a warehouse, vault, or depository for safekeeping.
Warehouse receipts may be negotiable or non-negotiable. Negotiable warehouse receipts allow
transfer of ownership of that commodity without having to deliver the physical commodity.
Warehouse receipts also guarantee existence and availability of a commodity of a particular
quantity, type, and quality in a named storage facility.

What is Hedging?
Hedging is a risk management strategy, basically involving taking equal and opposite position in
futures market as a protection against the risk of loss due to fluctuation in prices in the spot
market.

What is Arbitraging?
Arbitraging is the practice of making profits by the exploitation of the price discrepancies seen in
different exchanges or the spot market by equally entering with the opposite positions of the
same contract.

What is spread? And its types?

Spread is the difference between prices of two futures contracts of the same/similar commodity.
Spread trading in commodities involves simultaneous buying of a commodity and selling of the
same or similar commodity in order to profit from the change in price differential of the two
contracts. Futures market can be a normal market or an inverted market. If the price of the far
month futures contract is higher than the near month one, then it is referred to as “normal
market”. On the other hand, if the price of a far month futures contract is lower than the near
month one, then the situation can be referred to as “inverted market”.

Spread trading may be:

  a. Intra-commodity, involving simultaneous buying and selling of same commodity with
different expiry dates. It is also called calendar spread or intra-delivery spread.
 b. Inter-commodity, involving spread trading between two related commodities. Eg. Lead
and Zinc, Gold and Silver etc.
 c. Inter-Exchange that involves spread trading in same or similar commodities on
different exchanges.
 d. Bull spread or bear spread- based on strategy adopted.

What is contango?
The market condition where, the futures prices of the contract is trading above the spot price. For
example, Cardamom March futures is trading at Rs 1000 a kg while spot prices is at Rs 950 a kg.

What is backwardation?
The market condition where, the futures prices of the contract is trading below the spot price. For
example, Cardamom March futures is trading at Rs 950 a kg and spot prices is at Rs 1000 a kg.

What is parity price?

A price for a commodity that is pegged to another price or composite of prices based on a given
prior period or when the price of an asset is directly linked to another price. For e.g. Price of
crude oil traded in India = Price of NYMEX crude oil x RBI reference rate/USDINR rate.

What are benchmark exchanges for major commodities?

For Gold, silver & Copper, U.S COMEX is the benchmark exchange. U.S NYMEX is
considered as the benchmark for Crude oil & Natural Gas. Base metals trading in Indian
exchanges track LME price as a benchmark.

What are the major international commodity markets and

exchanges?
Major International markets are located in the U.S.A, Canada, U.K., Germany, France, China,
Japan, India etc. Important commodity exchanges are COMEX, NYMEX, CME, CBOT, FTSE,
LME, Shanghai Futures Exchange, TOCOM, BMD Malaysia etc.

Is there any correlation between Indian market and

international markets?
Yes, for certain commodities Indian market takes international Commodity exchanges as a
benchmark for price movements.
Futures, term contracts, stock exchanges,
derivatives, commodities
4-5 minutes

Individual futures contracts vary by the underlying asset subscribed to in the contract. Traditional
futures involving commodities, indexes and currencies have recently been supplemented by
various types of exotic contracts including those involving the weather. The parameters of
individual futures contracts can be found directly in the e-Broker application.

The fee for trading futures in the U.S. starts at $3.95 / contract!

More on the individual types of futures

Index futures

Index futures are the exchange of a fixed amount of cash for an index instrument related to a
specific date in the future. Index futures are the relative price for the future value of the index.
Quotes for index futures are the anticipated value of the index at the maturity of the futures
contract. Financial settlement can be used as the underlying asset (the index) cannot be delivered.

 Futures Dow Jones

 Futures Mini Dow Jones
 Futures Mini NASDAQ100
 Futures Mini SP500
 Futures NASDAQ100
 Futures Nikkei (USD)
 Futures SP500

Stock futures

Stock futures are the exchange of a fixed amount of cash for a stock instrument related to a
specific date in the future. Stock futures are the relative price for the future value of the stock
instrument and can also be the price of the future spot exchange rate and the future risk-free spot
interest rate. Quotes for stock futures are the anticipated value of the stock at the maturity of the
futures contract. The dividend associated with such stock and the interest rate until the maturity
of the futures depend on the current value of the stock.

 Futures ČEZ
 Futures Erste Group Bank
Commodity futures

Commodity futures are the exchange of a fixed amount of cash for a commodity instrument
related to a specific date in the future. Commodity futures are the relative price for the future
value of a commodity instrument and can also be the price of the future spot exchange rate and
the future risk-free spot interest rate. The underlying commodity can be an agricultural
commodity (crops, meat, milk, sugar, etc.), precious metals, raw metals and energy commodities
(oil, natural gas, etc.) The relationship between the spot price and the quotes for the futures
contract depends on the transaction costs, commodity deliveries, production and the consumption
cycle and potential for quick sales.

 Futures Crude Oil

 Futures Corn
 Futures Copper
 Futures Mini Crude Oil
 Futures Mini Corn
 Futures Mini Wheat
 Futures Mini Soy
 Futures Mini Silver
 Futures Mini Gold
 Futures Wheat
 Futures Soy
 Futures Silver
 Futures Gold

Currency futures

Currency futures are the exchange of a fixed amount of cash for a currency instrument related to
a specific date in the future. Currency futures are the relative price for the future spot exchange
rate and also the price for the future risk-free spot interest rate for both currencies. Less than 1%
of currency futures are concluded via delivery.

 Futures UK Pound
 Futures Mini Euro
 Futures Mini Yen

Interest futures

Interest futures are the exchange of a fixed amount of cash in a single currency to receive an
undetermined amount of cash or a debt security in a hard currency. The undetermined amount of
cash depends on the future risk-free spot interest rate and does not depend on the risk interest
rate of any entity. Interest futures are the price of the future risk-free spot interest rate.