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Home    Our Business    Brokerage    Commodities  FAQs
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. Regularized Commodity Exchanges are the most prudent market place with fixed times of trading and standardized specifications for the contracts.
World over Commodity Exchanges and their performance becomes the barometer of how the economy is performing, with the Transaction Volumes higher than that of the Stock Markets. London Metal Exchange (LME), Chicago Mercantile Exchange (CME), Chicago Board of trade (CBOT), New York Mercantile Exchange (NYME), are amongst the worlds’ largest and best.
Why to trade in commodities?
The primary objectives for commodity futures are effective price discovery and efficient price risk management
Any investor who wants to take advantage of price movements and wishes to diversify his portfolio can invest in commodities. Commodities allow a portfolio to improve overall return at the same level of risk. The concept of hedging is also one of the core reasons to trade in commodity market.
Who are the participants in Commodity Exchange?
Trading in Commodity Exchange is mainly done for three reasons: Hedgers, Speculators and Arbitragers.
Hedgers: 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.
Speculators: Speculators are participants who wish to bet on future movements in the price of an asset. Futures and options contracts can give them leverage; that is, by putting in small amounts of money upfront, they can take large positions on the market. As a result of this leveraged speculative position, they increase the potential for large gains as well as large losses.
Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy between prices of the same product across different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they would take offsetting positions in the two markets to lock in the profit.
What is Initial Margin?
This is the amount of money deposited by both buyers and sellers of futures contracts to ensure performance of trades executed. Initial margin is payable on all open positions and is payable upfront by the client in accordance with the margin computation mechanism and/ or system as may be adopted by the exchange from time to time. Initial margin includes SPAN margins and such other additional margins that may be specified by the exchange from time to time.
Who is the regulatory authority in Commodity Futures Market?
The trading of commodity derivatives on the commodity exchanges is regulated by Forward Markets Commission (FMC). Under the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified under section 15 of the Act can be conducted only on the exchanges, which are granted recognition by the central government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution).
Why should one trade in Organized Platform?
Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. There is no counter-party risk in futures market.
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