Commodity Market Guide to Beginners
A derivative contract is an enforceable agreement whose value is derived from the value of an
underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or,
indices of commodities, stocks etc. Four most common examples of derivative instruments are
forwards, futures, and options.
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 Forward Contracts (Regulation)
Act, 1952, all the contracts for delivery of goods, which are settled by payment of money difference or
where delivery and payment is made after period of 11 days, are forward contracts.
Futures contracts are standardized. In other words, the parties to the contracts do not decide the terms
of futures contracts; but they merely accept terms of contracts standardized by the Exchange.
Forward contracts (other than futures) are customized. In other words, the terms of forward contracts
are individually agreed between two counter-parties.
Commodity Futures are contracts to buy/sell specific quantity of a particular commodity at a future
date. It is similar to the Index futures and Stock futures but the underlying happens to be commodities
instead of Stocks and indices.
The simultaneous purchase and sale of similar commodities in different markets to take advantage of a
The difference between the spot or cash price of a commodity and the price of the nearest futures
contract for the same or a related commodity. Basis is usually computed in relation to the futures
contract next to expire and may reflect different time periods, product forms, qualities, or locations.
CASH –FUTURES = BASIS.
Commodity futures market has been in existence in India for centuries. The Government of India
banned futures trading in certain commodities in 70s. However, trading in commodity futures has been
permitted again by the government in order to help the Commodity producers, traders and investors.
World-wide, commodity exchanges originated before other financial exchanges. Infact most of the
derivatives instruments had their birth in commodity exchanges.
The Government of India permitted establishment of National-level Multi-Commodity exchanges in
the year 2002 -03 and accordingly following exchanges have come into picture. They are
Multi-Commodity Exchange of India (MCX)
National Commodity and Derivatives Exchange of India, Mumbai(NCDEX).
National Multi Commodity Exchange, Ahmedabad(NMCE).
Indian Commodity Exchange (ICEX)
ACE Derivatives & Commodity Exchange Ltd.
However, there are regional commodity exchanges functioning all over the country.
At international level there are major commodity exchanges in USA, Japan and UK.
Some of the most popular exchanges around the world are given below along with the major
|Name Of Exchange||Major Commodities traded in exchange|
|New York Mercantile Exchange (NYMEX)||Crude Oil, Heating Oil|
|Chicago Board of Trade (CBOT)||Soy Oil, Soy Beans, Corn|
|London Metals Exchange (LME)||Aluminum, Copper, Tin, Lead, Zinc, Nickel|
|Chicago Board Option Exchange (CBOE)||Options on Energy, Interest rate|
|Tokyo Commodity Exchange (TCE)||Silver, Gold, Crude oil, Rubber|
|Malaysian Derivatives Exchange (MDEX)||Rubber, Soy Oil, Crude Palm Oil|
|Commodities Exchange (COMEX)||Gold, Silver, Platinum, Copper|
|Multi Commodity Exchange (MCX)||Gold, Silver, Crude Oil, Mentha, Soy Oil, CPO, Copper, Zinc, Lead|
|National Commodity & Derivative Exchange(NCDEX)||Guar Seed, Chana, Soybean, Soy Oil, RM Seed, Pepper, Jeera, Turmeric, Chilli , Sugar|
This is the biggest myth about the commodities market. Commodities (spot) Markets in India are
11 trillion worth per annum. Internationally the futures market in commodities is 5- 20 times that of the spot market. Look at the table given below. Even if we assume a 5 times multiple the commodity futures markets can grow up to become55 trillion per annum.
|Market||Annual Physical trade(Rs Cr.)||3 time multiple(In Cr.)||5 time Multiple(In Cr.)|
|Per Day *||4,400||13,200||22,000|
Commodity Exchanges function from 10.00 AM to 11.30 PM/11.55 PM everyday. However, only
metals, bullions and energy products are available for trading after 5.00 PM. On Saturdays, the
exchanges are open from 10.00 AM to 2.00 PM
All the commodities are not suitable for futures trading and for conducting futures trading. For being
suitable for futures trading the market for commodity should be competitive, i.e., there should be large
demand for and supply of the commodity – no individual or group of persons acting in concert should
be in a position to influence the demand or supply, and consequently the price substantially. There
should be fluctuations in price. The market for the commodity should be free from substantial
government control. The commodity should have long shelf-life and be capable of standardisation and
At present, futures are available on the following commodities
|Bullion||Gold and Silver|
|Oil & Oilseeds||Castor seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soymeal, Crude Palm Oil ,Cottonseed, Oilcake, Cottonseed, Mentha oIl|
|Spices||Pepper, Red Chilli, Jeera, Turmeric, Cardamom, Coriander|
|Metals||Copper, Nickel,Tin, Steel, Zinc, Aluminium|
|Fibre||Kapas, Long Staple Cotton, Medium Staple Cotton|
|Energy||Crude oil, Furnace Oil, Natural Gas, Heating Oil|
|Others||Rubber, Guar Seed, Guar Gum, Sugar, Gur|