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Unit 13: Commodity Market
Self Assessment Notes
Fill in the blanks:
1. Commodity markets have a huge potential in the Indian context particularly because of
the ………………………… economy.
2. With the government’s initiative for agricultural …………………………, commodities’
trading in India has gained increased momentum in activities.
3. Any goods that are unbranded and are commonly traded in the market come
under…………………………
4. In case of a ………………………… market, the commodities are bought and sold for
immediate delivery.
5. ………………………… investors should understand the risks and advantages of trading in
commodities futures before taking a leap.
13.2 Commodity and Currency Derivatives – Introduction
The Indian economy is witnessing a mini revolution in commodity derivatives and risk
management. Commodity options trading and cash settlement of commodity futures had been
banned since 1952 and until 2002; commodity derivatives market was virtually non-existent,
except for some negligible activity on an OTC basis. As on September 2005, the country had
3 national level electronic exchanges and 21 regional exchanges for trading commodity
derivatives. As many as eighty (80) commodities have been allowed for derivatives trading. The
value of trading has been booming and was slated to cross the $ 1 trillion mark in 2006 and, if all
goes well, seems set to touch $5 trillion in a few years. This unit analyses questions such as: how
did India pull it off in such a short time since 2002? Is this progress sustainable? What are the
obstacles that need urgent attention, if the market is to realize its full potential?
13.2.1 Commodities Future
Commodity future is a derivative instrument for the future delivery of a commodity on a fixed
date at a particular price. The underlying in this case is a particular commodity.
If an investor purchases an oil future, he is entering into a contract to buy a fixed quantity of oil
at a future date. The future date is called the contract expiry date. The fixed quantity is called the
contract size. These futures can be bought and sold on the commodity exchanges.
The commodities include agricultural commodities like wheat, rice, tea, jute, spices, soya,
groundnut, coffee, rubber, cotton, etc, precious metals – gold and silver, base metals – iron ore,
lead, aluminium, nickel, zinc etc, and energy commodities – crude oil and coal.
Did u know? The number of retail investors participating in the market is increasing
gradually after the introduction of commodities futures. The expected growth rate of
commodity market is 40% annually over the next five years.
13.2.2 Benefits of Commodities Futures
The following are the benefits of commodities futures:
To producer: A producer of a commodity can sell the futures of the commodity, thereby
ensuring that he can sell a particular quantity of his commodity at a particular price at a
particular date.
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