What is a Commodity?

A commodity is anything for which there is demand,

but which is supplied without qualitative
differentiation across a markets.

They are things of value, of uniform quality, that are
produced in large quantities by many different
producers; the items from each different producer
are considered equivalent.


Global classification of commodities
Precious Metals: Gold, Silver, Platinum, etc.
Other Metals: Nickel, Aluminum, Copper, Zinc, etc.
Agro-Based Commodities: Wheat, Rice, Corn, Cotton,
Oils, Oilseeds, etc.
Soft Commodities: Coffee, Cocoa, Sugar, etc.
Petrochemicals: High Density Polyethylene,
Polypropylene.
Energy: Crude Oil, Natural Gas, Gasoline, etc.

Commodity market
Commodity market is a place where trading in
commodities takes place. These are the markets
where raw and primary products are exchanged.

These raw commodities are traded on regulated
commodity exchanges, in which they are bought and
sold in standardized contracts. It is similar to an
equity market, but instead of buying or selling shares
one buys or sells commodities.

Commodity exchange
An entity, usually an incorporated non-profit association,
that determines and enforces rules and procedures for the
trading of commodities and related investments, such as
commodity futures.
Commodities exchange also refers to the physical center
where trading takes place
18 existing commodity exchanges in India offering domestic
contracts in 8 commodities and 2 exchanges that have
permission to conduct trading in international (USD
denominated) contracts.
http://www.icexindia.com/
The two most important commodity exchanges in India
are;
1)Multi-Commodity Exchange of India Limited (MCX),
2) National Multi-Commodity & Derivatives Exchange of
India Limited (NCDEX)

Multi Commodity Exchange of India Ltd,
Mumbai (MCX)

www.mcxindia.com
The Exchange, which started operations in November 2003, operates within the
regulatory framework of the Forward Contracts (Regulation) Act, 1952.

MCX is an independent and de-mutualised multi commodity exchange.
MCX features amongst the world's top three bullion exchanges and top four
energy exchanges.
The Exchange has an extensive national reach, with over 2100 members,
operations through more than 400,000 trading terminals (including CTCL),
spanning over 1900 cities and towns across India. MCX is Indias leading
commodity futures exchange with a market share of about 86 per cent in terms
of the value of commodity futures contracts traded in 9M FY2013-14.
Its key shareholders are Financial Technologies (I) Ltd., State Bank of India and
it's associates, National Bank for Agriculture and Rural Development (NABARD),
National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an affiliate
of Fidelity International, Corporation Bank, Union Bank of India, Canara Bank,
Bank of India, Bank of Baroda, HDFC Bank and SBI Life Insurance Co. Ltd.
National Commodity and Derivative Exchange, Mumbai (NCDEX)
NCDEX AND NMCE
(national commodities and derivative exchange)
(National Multi- Commodity Exchange)
(www.ncdex.com
India's largest and most recognized commodities exchange, which was
established in 2003.
The exchange was founded by some of India's leading financial
institutions such as ICICI Bank Limited, the National Stock Exchange of
India and the National Bank for Agricultural and Rural Development,
among others.
Trading is done on 45 commodities that are integral to India's economy
www.nmce.com
NMCE started its operations on November 26, 2002, as the country's
first, online, demutualised, multi-commodity exchange with nationwide
reach
It is the first de-mutualised electronic multi-commodity Exchange of
India. Some of its key promoters are Central Warehousing Corporation
(CWC), National Agricultural Co Operative Marketing Federation of India
Limited (NAFED), Gujarat Agro Industries Corporation Limited (GAIC) and
Punjab National Bank (PNB).
MCS VS NCDEX
MCX deals in the trading of 40 commodities which
include bullions, precious metals, plantations and
more; and NCDEX offers 34 commodities of which 23
are agri-based and the rest include precious metals,
energy, polymer, etc.
To increase the convenience of trading for its members
and promote fair-trade, both MCX and NCDEX have
several nationalised as well as private sector banks that
take care of the clearings and transactions for its
members.
NCDEX has fifteen and MCX sixteen banks empanelled
as its clearing banks.
MCX and NCDEX Technology
Both MCX and NCDEX use state-of-the-art technological
infrastructure to facilitate fast and error free trading for its
members.
Both MCX and NCDEX operate on weekdays (Monday to
Friday) during which new member registrations can
happen. Both Exchanges ensure that all member requests
are resolved at the earliest and with minimum possible
glitch.
The online trading platforms of MCX and NCDEX can be
accessed by all members throughout the country with
computer-to-computer link (CTCL) as well as through
trader workstations with the use of multiple connectivity
media like VPN, VSATs, leased lines and internet.

Major players in commodity market
Speculator
A trader who enters the futures market in pursuit of
profit, accepting risk in the endeavor.
Hedger
A Trader who enters the futures market to reduce
some pre-existing risk exposure.
Broker
An Individual or firm acting as an intermediary by
conveying customers trade instructions. Account
executives or floor brokers are examples of brokers.

Trading Instruments
There are a variety of basic types of
instruments traded in commodity market
places
Spot contracts
Cash market contracts
Forward contracts
Futures contracts
Options
Spot Trades
The term spot refers to a transaction for
immediate delivery
That is, delivery on the spot
This involves the prompt exchange of good for
money
Note that spot trades almost always involve
actual delivery of the good specified in the
contract
All spot trades are generally cash trades
Forward Markets
A forward contract is one that specifies the transfer of
ownership of a commodity at a future date in time
Today the buyer and the seller agree on all contract
terms, including price, quantity, quality, location, and the
expiration/performance/delivery date
No cash changes hands today (except, perhaps, for a
performance bond)
Contract is performed on the expiration date by the
exchange of the good for cash
Forward contracts not necessarily standardized
consenting adults can choose whatever terms they want
Futures Contracts
Futures contracts are a specific type of
forward contract
Futures contracts are traded on organized
exchanges
The exchange standardizes all contract terms
Standardization facilitates centralized trading
and market liquidity

Options
Forward, futures, and spot contracts create binding
obligations on the parties
In contrast, as the name suggest, an option extends a
choice to one of the contract participants
Calloption to buy
Putoption to sell
If I buy an option, I buy the right
If I sell an option, I give somebody else the right to make
me do something
Options are beneficial to the buyer, costly to the seller
hence they sell at a positive price
Cash Settlement vs. Delivery
Settlement
Futures and forward contracts can be settled at delivery at
expiration
Alternatively, buyer and seller can agree to settle in cash at
expiration
Speculative and hedging uses of contracts only requires
that settlement price at expiration reflects underlying value
of the commodity.
Main reason for settlement mechanism is to ensure that
this convergence occurs
Even futures contracts that contemplate physical delivery
are usually closed prior to expiration
Trading Mechanisms
Organized Exchangescentralized trading of
standardized instruments
Centralized trading can occur via face-to-face
open outcry or computerized markets
Computerized markets now dominate
Over-the-Counter (or cash) markets
decentralized, principal-to-principal markets