Derivatives Summary

Course: Derivatives and Alternative Investments

Submitted by: Tehmina Khan

Submitted to:

Sir Faruukh

Dated: December 31, 2020

Programe

Master of Business Administration

Sixth Semester (Morning)

Karachi University
 Commodity Derivatives Market in India
The modern commodity market finds its origin in the trading of agricultural products. This
article traces the evolution and development of the commodity derivatives market in India. The
article then goes on to outline its infrastructure and how it is regulated.

Derivatives markets have not only dynamics of resources and production utilization but also
served as a mechanism in the primary market by which trade plays out and surplus was
extracted.
India has large wholesale markets where large quantities of goods are sold and bought for ready
delivery , including agriculture commodities in India , consists of a large number "market-
places" - known as 'mantis' in parts of north and western India.
Government intervention generally includes regulation of production and sale, market control
and financial intervention to influence pricing through price support, subsidies, etc
This article sum up the issues facing the spot market for agricultural commodities in India today:
aim to regulate the agriculture markets in India was to protect the farmer from exploitation by
intermediaries and traders and also to ensure better prices and timely payment for his produce.
The positive role of commodity futures market was articulated in the national agricultural policy
of the central government in 2000, which was followed by the removal of the ban on futures
trading for all commodities in 2003
As an example gold market (future contract) contract is identical in that the amount of gold
(called the contract size), quality of gold, delivery date, and place of delivery are specified.
Since the clearing house is a party to every trade, buyers and sellers of futures contracts only
have to be concerned about the financial integrity of the exchange on which the contracts trade,
provided their broker-member, also known as futures commission merchant (FCM) does not fail.
Although the profit and losses realized at the time of delievery.Every day cash flow shows the
result of future contract. Important is that the relation between contract price and price of
underlying commodity is more convex in case of forward contract than future contract , in much
the same way a zero coupon bond is generally more convex than a coupon bearing bond of the
same maturity. When the value of the funds on deposit declines to a certain level called the
maintenance margin, the trader is required to replenish the margin, bringing it back to its initial
level.
The initial margin amount in large exchanges are now-a-days based on value-at-risk esti- mates
of the contract in question and are generally of the order of 5 per cent of the value of the
underlying commodity.
For example, if party A is long in a gold contract for delivery in March 2007 to the extent of 10
contracts, the position can be brought to zero by selling an equal number of the same contract at
any time before the delivery is due.
Future contract can be completed by a trader by involving in an EFP,
In which both traders agree to the same exchange on commodity and future contract relay on
cash commodity. Both parties can be literally agree on same price to buy and sale the stock on
the agreed contract amount and agree to demolish or cancel their complementary future situation.

Expected Rate of Return on Commodity Futures:

The framework of this theoretical number of work have been utilized the sources of future
commodity price return,CAPM model, the insurance perspective, the hedging pressure
hypothesis and the theory of storage.
The dominant opinion in the market is that the physical delivery rule acts as an anchor and fear
of delivery prevents excessive speculation.
The website of the FMC describes the objectives of regulation as: (i) to create competitive
conditions; (ii) to avoid futures price manipulation that can have adverse implications for spot
prices; (iii) to ensure that the market has an appropriate risk management system; (iv) to ensure
fairness and transparency in trading, clearing, settlement as well as in the management of the
exchanges; (v) to protect and promote the interests of various stakeholders, particularly non-
member users of the market.

Commodity Futures and Inflation: Fire and Brimstone Globally, the era of the futures market in
commodities has coincided with the steady fall of world prices of cereal grains in real terms in
the last century, although the contribution of futures markets alone in this regard is hard to
determine in precise terms.
Globally, prices of commodities, especially agricultural commodities have been rising for some
time now.
One cannot obviously take a view that so long as the far futures prices are a discount to the near
futures price, suggesting, among other things, an improvement in the supply situation in the
future, everything is fine with the futures market but not so if the futures market were to show a
contango well into the coming month