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FAQ

 
What is Commodity?
 
A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities.
 
What is Derivative?
 
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, options and swaps/spreads.
 
What is Futures Contract?
 
A derivative instrument, Futures is a type of forward contract. Futures are contracts to sell / buy standardized financial instruments or commodities on a specified future date at an agreed price. Futures contracts are used generally for protecting against adverse price fluctuation.
 
What is the difference between equity futures and commodity futures?
 
In equity futures the underlying asset is the equity share of any company whereas in commodity futures the underlying asset is the commodity itself.
 
What are the benefits of trading in commodity futures?
 
Futures trading in commodities results in transparent and fair price discovery on account of large scale participation and reflects views and expectations of wider section of people related to that commodities. Producers, traders and processors, exporters/importers get an online platform through different exchanges for price risk management. It providers a platform for producers to hedge their positions according to their view of the prices.
 
How is Future Prices Determined?
 
Futures prices evolve from the interaction of bids and offers emanating from all over the country which converge in the trading floor or the trading engine. The bid and offer prices are based on the expectations of prices on the maturity date.
 
What is an Exchange?
 
A place where things are exchanged, especially a centre where securities or commodities are bought and sold.
 
What is Commodity Exchange?
 
Commodity Exchange is a common platform, where market participants from varied spheres trade in wide spectrum of commodity derivatives. In Simpler terms one can determine the price of contracts on a current date, for goods to be transacted in future.
 
How many exchanges are there in the country for commodities futures trading?
 
There are some 23 commodity exchanges in India. However most of them are regional, offline (non screen-based) and commodity specific, hence these are almost inoperative. Significantly the government has recently allowed four national level multi-commodity exchanges to trade in all permitted commodities.
 
Will there be separate trading terminals/systems for commodity futures?
 
Yes. Since the exchanges are separate, the VSATs, trading terminals, risk management systems will be separate.
 
Which is the regulatory body for commodities trading?
 
The Forward Markets Commission (FMC) is the regulatory body for commodity futures/forward trade in India. The commission was set up under the Forward Contracts (Regulation) Act of 1952. It is responsible for regulating and promoting futures/forward trade in commodities. The FMC is headquartered in Mumbai while its regional office is located in Kolkata.
 
What are Long & Short Positions?
 
In simple terms, long position is a net bought position, while short position is a net sold positions.
 
Why would one trade in commodity exchange?
 
Trading in Commodity Exchange is mainly done for three reasons: Hedging, Speculating & Arbitrage.
 
What is Hedging?
 
Hedging is a mechanism by which the participants in the physical/cash markets can cover their price risk. Theoretically, the relationship between the futures and cash prices is determined by cost of carry. The two prices therefore move in tandem. This enables the participants in the physical/cash markets to cover their price risk by taking opposite position in the futures market.
 
What is Speculating?
 
Speculators are participants who are willing to take risks in the expectation of making profit. Any person, who feels that the market will move in one direction, can thus take a position in the market. Speculators provide liquidity to the market; therefore, it is difficult to imagine a futures market functioning without speculators.
 
What is Arbitrage?
 
Arbitraging is primarily done in two different ways to make profit from the futures.

Market Simultaneously purchase and sale goods in two different markets so that the selling price is higher than the buying price by more than the transaction cost, thus enabling a person to make risk-less profits.

Simultaneously purchase / sale in the Spot market and sale / purchase in the futures markets so that the selling price is higher than the buying price by more than the transaction cost & the interest cost, again resulting in risk-less profits.
 
What are Margins?
 
The aim of margin money is to minimize the risk of default by either counter party. The amount of initial margin is so fixed as to ensure that the probability of loss on account of worst possible price fluctuation, which cannot be met by the amount of ordinary/initial margin, is very low. The Exchanges fix rates of ordinary/initial margin keeping in view need to balance high security of contract and low cost of entering into contract.
 
How much margin is applicable in the commodities market? How is it arrived at?
 
As in stocks, in commodities also the margin is calculated by VaR system. Normally it is between 5-10% of the contract value. The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market (MTM) margin. The margin keeps changing depending on the change in price and volatility.
 
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