A reasonably interchangeable good or material bought and sold freely as an article of commerce. Commodities include energy products
like oil and natural gas, metals like gold, copper and nickel, and agricultural products like sugar, coffee,
and soybean. are traded in bulk on a commodity exchange or spot market.
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
Why Commodity Futures?
Commodity futures trading performs two important functions, namely, price discovery and price risk management with reference
to the given commodity.
It enables the ‘Consumer' in getting an idea of the price at which the commodity would be available at a future point of time.
He can do proper costing and also cover his purchases by making forward contracts.
It is very useful to the ‘exporter' as it provides an advance indication of the price likely to prevail and
thereby helps him in quoting a realistic price and secure export contract in a competitive market
It ensures balance in supply and demand position throughout the year and leads to integrated price structure
throughout the country.
It also helps in removing risk of price uncertainty, encourages competition and acts as a price barometer
to farmers and other functionaries in the economy.
Helps to lock in the price of the production as by taking positions in commodity futures you can
effectively lock in the price at which you wish to sell your produce
Increase in holding power as you can store the underlying commodity in exchange approved warehouse
and sell in the futures to realize the future value of the commodity.
By buying commodity futures, you can fix the price of your raw material and control your cost
Commodity Derivative Advantages:
Transparency and Fair Price Discovery:
Trading in commodity futures is transparent and a process of fair price discovery is ensured through large-scale
participation. The large participation also reflects views and expectations of a wider section of people concerned
with that commodity.
It provides a platform for producers to hedge their positions according to their exposure in physical commodity.
Trade on Low Margin:
Commodity Futures traders are required to deposit low margins, roughly 5 to 10% of the total value of the contract,
much lower compared to other asset classes. The low margin, which again varies across exchanges and commodities,
facilitates the taking of large positions at lower capital.
No Counter party Risk:
Much like the exchanges in the equity market, Commodity Futures market have Clearing Houses, which guarantee
that the terms of the contracts are fulfilled, thereby eliminating the counter party risk.
The emergence of online trading would enable growth in the commodity market, much akin to the one seen in the equity market.
It would also ensure bringing the market closer to both, the user and the trader.
The rise in participation would decrease the risk of cartelization, ensuring a holistic view on the commodity.
Hence, pricing would be more practical and less irrational leading to Fair Price Discovery Mechanism.
Who invests in commodities ?
Producers / Farmers
Importers / Exporters
Agricultural credit providing agencies
Hedgers, speculators, arbitrageurs
Large scale consumers. For e.g. refiners, jewelers, textile mills
Corporate having risk exposure in commodities.
Different types of commodities that are traded markets?
At present , following commodities are available for trading in Indian commodity exchanges
Castor seeds, Castor Oil , Cotton seed oil cake , Mentha Oil
Pepper , Red Chilli, Jeera , Turmeric , Cardamom , Corriander
Copper , Nickel , Zinc , Aluminium
Rubber , Guar Seed , Guar Gum, Sugar