COMMODITY DERIVATIVES TRADING IS NOW SIMPLE AND FAST ! A RECAP
National Commodity Exchanges came into existence in late 2002-2003 after the then NDA Government lifted the 40 year ban on Forwards trading. These Exchanges were under the control of Forward markets Commission (FMC) which was subsequently merged with SEBI in the year 2015.
Let us understand the concept of “Commodity Futures Contract”.(CFC)
It is a legal agreement or contract enforceable in law, between the client and the Exchange through an authorized Broker-intermediary to Buy or Sell a Commodity at a pre-set price for delivery on a specific future date. Unlike Equity Futures, however almost all commodity contacts barring, a hew like crude oil and natural gas, result in compulsory delivery mode.
The CFC have been launched in bullion, base metals like Gold, Silver, Copper, Zinc Aluminium, Lead, and Energy, diamond, agri. Futures like edible Oilseed and Oils, guar, spices, and plantation products such as rubber, Jute. These Trades are done various Exchanges and they are MCX, NCDEX, ICEX, NSE and BSE. Options trading for Hedging purposes are also made available from 2017.
What are the parameters in Futures Trading? The activeness or Volume of trade would indicate the open interest (OI) which if read with price would offer important clues to the Investors. To give an example, a rise in price along with OI is a bullish sign- that is long position is getting built up. The reverse of course is the Bearish Trend (Short Build up). However a rise in Price along with a fall in OI signals short-covering. Similarly a fall in OI and price decline indicate long liquidation or Bulls cutting their long position.
One has to be extremely careful as the risk-return of Futures Trading would be more vulnerable as the trading involves taking leverage by putting up a margin to trade. This margin is a fraction of the Contract cost enabling even small traders can enter the market with small investments.
Let us study an example for our better understanding:
Let us presume that a Traders takes a Gold Futures (1 KG) contract expiring on Dec 5th. Based on the basic price or value of 10 Gms of Rs 37900/- the 1 KG contract value is Rs37.9 Lakhs. But the Buyer pays only 5 % margin for trading, the leverage offered is normally is 20 times- i.e Rs 1,89,000/- (5 % 0f 37.9L). Now if the Price rises the next day by Rs 200 per 10 Gms, the gain to the Trader at contract value is Rs 20,000/- But if the price falls by the same amount the loss is more.
The Futures Trading is quite useful to those who have one position-long or short for which Futures Trading position is taken as an opposite tool to minimize the loss. Normally Hedgers, Speculators, arbitrageurs and jobbers are active in the CFC.
So let us understand the nuances of CFC market and derive the inherent benefits of short term profits of course through smart trading techniques and hedging.
For all your queries, feel free to contact Goodwill- your Investment Facilitator any time! Good Luck !