Commodity Futures

31-May-14 Financial Derivatives - Kevin

Commodity futures exchanges
Three national multi-commodity futures
exchanges
NMCE, Ahmedabad
MCX, Mumbai
NCDEX, Mumbai
Single commodity futures exchanges
International Pepper futures exchange, Kochi
Coffee futures exchange of India, Bangalore
The Forward Markets Commission (FMC)
regulatory body for commodity futures trading
31-May-14 Financial Derivatives - Kevin
Gold futures specifications
Exchange: NCDEX, Mumbai
Product: Gold 100 grams
Unit of trading: 100 grams
Quotation: Rs. per 10 grams
Tick size: Re.1
Price limit: +/(-) 4 percent
31-May-14 Financial Derivatives - Kevin
Other details
Three months contracts are available for
trading
Expiry date: 20
th
day of delivery month or
the preceding working day, if 20
th
day is non
working day
Trading hours:
Mondays through Fridays: 10.00 AM to 11.30
PM
Saturdays: 10.00 AM to 2.00 PM
31-May-14 Financial Derivatives - Kevin
Illustration Commodity futures
for hedging
A farmer has cultivated wheat and it is
growing
Harvest is due in 2 months time
Current price of wheat: Rs.10/ kg
At harvest time, price may decline to Rs.8/ kg
The farmer enters into a futures contract to
sell wheat after 2 months at Rs.9.50/ kg
After 2 months, the farmer will be able to get
Rs.9.50/ kg for his wheat, whatever be the
price in the market at the time.
Commodity futures for
speculation
Gold price is expected to rise in the short term
You may buy gold coins to gain from the rise
in gold price
Alternatively, you may buy gold futures (by
depositing only the margin)
The futures transaction may be reversed when
the gold price rises
Larger profit from smaller investment without
touching the underling commodity
31-May-14 Financial Derivatives - Kevin
Commodity prices: basics
Spot price: price of a commodity for
immediate delivery
Futures price: price agreed upon for delivery
in future at a particular location
Spot price determined by demand and supply
Two models try to explain the determination of
futures price
Cost-of-carry model
Expectations model
31-May-14
Financial Derivatives - Kevin
Cost-of-carry model
Futures price must equal the spot price
plus the cost of carrying the commodity
forward to the delivery date
Cost of carry includes cost of financing,
storage and insurance (expressed as a
fraction of the spot price)
F = S (1 + C)
31-May-14 Financial Derivatives - Kevin
Expectations model
Futures price equals the cash price that
traders expect to prevail on the delivery
date (i.e. the future spot price)
F ~ E (S1)
31-May-14 Financial Derivatives - Kevin
Role of commodity futures
market
Futures trading performs three important
economic functions
Price discovery
Transferring risk (through hedging)
Providing liquidity to the market
(through speculation)
31-May-14 Financial Derivatives - Kevin
31-May-14 Financial Derivatives - Kevin
Website familiarisation
Websites:
www.ncdex.com
www.mcxindia.com
www.nmce.com
Exercises
List the commodities traded in each market
Select any one commodity and write down
the spot price and the futures prices for two
contracts expiring in different months on any
working day from any one exchange