Domestic Commodity Markets

Commodities today have become an attractive investment vehicle. In the current investment scenario, it is increasingly getting difficult for individuals and institutions to create a well-balanced investment portfolio. Commodity Futures is solution for the same.A commodity futures contract is a commitment to make or accept delivery of a specified quantity and quality of a commodity during a specific month in the future date at a price agreed upon when the commitment is made. Commodities traded in the commodity exchanges are required to be delivered at the contracted price, ignoring all the changes in the market prices. Both the participants (Buyers & Sellers) are allowed to liquidate their respective positions by way of cash settlement of price between the contracted and liquidated price, no later than the last trading session of the specified expiry date.

An effective and efficient market for trading in commodities futures requires:

  • Volatility in the prices of the underlying commodities
  • Large numbers of buyers and sellers with diverse risk profiles (hedgers, speculators and arbitrageurs).
  • The underlying physical commodities to be fungible, i.e. they should be exchangeable.

Features of commodity futures

Organized

Commodity Futures contracts always trade on an organized regulated exchanges, e.g. NCDEX, MCX.

Standardized

Commodity Futures contracts are highly standardized with the quality, quantity, and delivery date, being predetermined

Counterparty Risk Eliminated

Commodity Futures exchanges use clearing houses to guarantee that the terms of the futures contract are fulfilled. The Clearing House guarantees that the contract will be fulfilled, eliminating the risk of any default by the other party.

Physical Delivery

Actual delivery of the commodity can be made or taken on expiry of the contract. Physical delivery requires the member to provide the exchange with prior delivery information and completion of all the delivery related formalities as specified by the exchange.

Margin Trading

Commodity Futures traders do not have to put up the entire value of a contract. Rather, they are required to post a margin that is roughly 4 to 8% of the total value of the contract (this margin varies across exchanges and commodities). This facilitates taking of leveraged positions

Regulated Markets Environment

Commodity Futures contracts are highly standardized with the quality, quantity, and delivery date, being predetermined. SEBI regulates the markets

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