1. What are commodities?

Commodities are raw materials of a wide variety of areas:
Grains - Corn, Soybeans, Wheat
Livestock - Cattle, Hogs
Precious Metals - Gold, Platinum, Silver
Industrials - Cotton, Copper
Softs - Cocoa, Coffee, Sugar, Orange Juice
Energy - Crude Oil, Heating Oil, Natural Gas

2. What is a 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.

3. What is Futures Contract?

Futures are exchange - traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price. Futures contracts are used generally for protecting against rich of adverse price fluctuation (hedging).

4. What is a Commodity Exchange?

Commodity exchanges are centers where futures trade is organized in a wider sense. It is taken to include any organized market place where trade is routed through one mechanism, allowing effective competition amongst buyers and among sellers.

5. What is the Commodities Market?

The commodities market consists of the trading of forward contracts or futures contracts; forward contracts are contractual agreements to buy/sell any commodity between two entities; futures contracts are market agreements to buy/sell very specific commodities between two entities over a recognized commodities exchange.

6. Why trade in the Commodities Market?

Commodities present an exciting alternative investment and trading tool, but it is important to be well prepared to enter the markets. Futures prices are not price predictions, but are the collective current opinion of the marketplace of where prices appear to be heading. That opinion, and the direction of prices, can change in an instant, which makes trading these markets so challenging and potentially rewarding.

7. 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.

8. What is Speculation?

Speculation involves selecting investments with higher risk in order to profit from an anticipated price movement. It is expectation driven and uses market opportunities to increase ones profitably.

9. What are Margins?

Margin money is the minimum balance that needs to be maintained in the exchange to buy or sell a contract. Investors generally use margin to increase their purchasing power so that they can own more stock without fully paying for it.

10. Who are the Market Participants?

Hedgers, speculators and arbitrageurs are the three classes of investors having divergent goals, which is why their presence in the markets complements each other so well.

Hedgers - Hedgers wish to eliminate price risk from their already existing exposures and are essentially safety driven.

Speculators - Speculators willingly take price risks to profit from price changes and are expectation driven.

Arbitrageurs - Arbitrageurs profit from price differential existing in two markets by simultaneously operating in two different markets.

11. Procedure for delivery of goods?

A warehouse receipt is issued in favor of the buyer, which is transferable. On producing this receipt the buyer can take the commodity from the warehouse.

12. What are the different Commodity Exchanges in India?

The three major Commodity Exchanges operating in India are: -
NCDEX (National Commodity and Derivatives Exchange),
NMCEIL (National Multi Commodity Exchange Of India Limited) and
MCX (Multi Commodity Exchange).

13. List of Commodities traded in NCDEX

1) Soy Bean
2) Refined Soy Oil
3) Mustard Seed
4) Expeller Mustard Oil
5) RBD Palmolein
6) Crude Palm Oil
7) Medium Staple Cotton
8) Gold
9) Kilo Gold
10) Long Staple Cotton
11) Pepper
12) Rubber
13) Jute
14) Chana
15) Guar Seeds
16) Silver
17) Mega Silver

14. List of Commodities traded in MCX

1) Gold
2) Gold-M
3) Silver
4) Silver-M
5) Castor Seed
6) Soy Seed
7) Castor Oil
8) Refined Soy Oil
9) RBD Palmolein
10) Crude Palm Oil
11) Ground nut Oil
12) Guar Seed
13) Rubber
14) Pepper
15) Steel-Long
16) Steel-Flat

15. MCX Commodity Indices

REFCOCIX

Refco listed its commodity index "REFCO-CIX" on the MCX platform. Commodities included in REFCO-CIX are based on three parameters: trading volume in Rupee value, open interest in terms of number of contracts and fundamental factor measured by sum of production and imports. Refco CIX, which has been developed with the technical support of MCX, will now be a live index on the MCX platform.

MCXCOMDEX

MCX COMDEX is designed & developed by the Research Developed by the Department of Multi Commodity Exchange of India Ltd. (MCX) in association of the Indian Statistical Institute (ISI), Kolkata. This is the median Composite Commodity Index in India based on commodity futures prices of an exchange.

This index would be an ideal investment tool in commodities market and also be a barometer for the performance of commodities market over a period of time. The index allows per se as a “tradable” index (once approved by the regulatory body), which is readily accessible to market participants. The MCX COMDEX futures will give users the ability to efficiently hedge commodity and inflation exposure and lay off residual risk. Protection can be established regardless of overall market direction.

MCX COMDEX relies on a unique combination of liquidity on MCX and physical market size to determine its component weightings. In additional, several design features such as annual price-percentage rebalancing help ensure that the index will remain diversified and representative of the asset class over time while still enabling investors to capitalize on major a normal year.


16. NCDEX Commodity Indices

FUTEXAGRI

The NCDEX Agri futures index would have the same basket of commodities that is present in the spot index and similar to NCDEX Agri spot index, each individual commodity would have equal weight age in the index. Prices of the near month futures contract of the respective commodities shall be used for the construction of the index. If no futures are available in a particular month, the next nearest expiration month prices shall be used. Also the base period for the construction is the same for both i.e. the average of the prices prevailed during the year 2001. Thus the spot index and the futures index are comparable and the difference between them conveys the returns the participants can obtain by buying the futures index. Participants of the market can observe the real time movements of the futures Agri Index under the symbol FUTEXAGRI.

NCDEXAGRI

NCDEX Agri futures index is constructed on the prices of the nearest month expiry contracts for the same basket of commodities that forms part of the NCDEX Agri spot index. The advantages of the futures index would be two fold. The futures index if looked in tandem with the spot index would convey to the market participants the returns the commodity markets are offering for one month period by buying the futures index. Second, since the futures index are constructed based on the futures contracts traded in the Exchange it would be get updated on real time basis as against the spot index that is updated twice a day. However, it should be noted that the futures index is provided to the market participants only for information and it cannot be traded.

NCDEXRAIN

A higher index would mean that, compared to the cumulative long period average rainfall up to the date of index, there has been more rainfall. A lower index would mean the converse. NCDEX Rainfall Index at any point of time will tell us what percentage of cumulative normal expected rainfall (till the date of the index) it has actually rained. The value is scaled by 1000 to represent a number. All historical and current rainfall data has been sourced from India Meteorological Department (IMD). The NCDEX Rainfall Index is not intended to be a weather forecast or prediction regarding rainfall by NCDEX or any of its employees. The NCDEX Rainfall Index is only for information purpose and not for any other purpose including any kind of financial transaction.