Frequently Asked Questions

  • What is a commodity ?

    A commodity is a product having commercial value that can be produced, bought, sold, and consumed.

  • What is a Derivative contract & what is Commodity future ?

    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. Commodity future is a contract to buy or sell specific commodity, of a specific quality, at a specific price, for a specific future date on the exchange.

  • What is a forward contract ?

    A forward contract is a legally enforceable agreement for delivery of goods or the underlying asset on a specific date in future at a price agreed on the date of contract. Under Forward Contracts (Regulation) Act, 1952, all the contracts for delivery of goods, which are settled by payment of money difference or where delivery and payment is made after a period of 11 days, are forward contracts.

  • What is a futures contract ?

    Futures Contract is a type of forward 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 risk of adverse price fluctuation.

  • What is the difference between spot market and futures market ?

    In a spot market, commodities are physically bought or sold usually on a negotiable basis resulting in delivery. While in the futures markets, commodities can be bought or sold irrespective of the physical possession of the underlying commodity. The futures market trades in standardized contractual agreements of the underlying asset with specific quality, quantity, and mode of delivery whose settlement is guaranteed by regulated commodity exchanges.

  • Who regulates the commodity exchanges in India ?

    Commodity Market in India is regulated by Forward Market Commission (FMC) under the guidance of the Ministry of Consumer Affairs, Food, & Public Distribution.

  • What are the benefits of futures trading in commodities ?

    The biggest advantage of trading in commodity futures is price risk management and price discovery. Farmers can protect themselves against undesirable price movements and decide upon cropping pattern. The merchandisers avoid price risk. Processors keep control on raw material cost and decreasing inventory values. International traders also can lock in their prices.

  • What is hedging ?

    Hedging means taking a position in the futures or options market that is opposite to a position in the physical market. It reduces or limits risks associated with unpredictable changes in price. The objective behind this mechanism is to offset a loss in one market with a gain in another.

  • What is initial margin ?

    It is the minimum percentage of the contract value required to be deposited by the members/clients to the exchange before initiating any new buy or sell position. This must be maintained throughout the time their position is open and is returnable at delivery, exercise, expiry or closing out.

  • What is arbitrage in commodity markets ?

    Arbitrage is making purchases and sales simultaneously in two different markets to profit from the price differences prevailing in those markets. The factors driving arbitrage are the real or perceived differences in the equilibrium price as determined by supply and demand at various locations.

  • What is Mark-to-market (MTM) ?

    Mark-to-market margins (MTM or M2M) are payable based on closing prices at the end of each trading day. These margins will be paid by the buyer if the price declines and by the seller if the price rises. This margin is worked out on difference between the closing/clearing rate and the rate of the contract (if it is entered into on that day) or the previous day's clearing rate. The Exchange collects these margins from buyers if the prices decline and pays to the sellers and vice versa.

  • What is Cash Settlement ?

    It is a process of settling a futures contract by payment of money difference rather than by delivering the physical commodity or instrument representing such physical commodity (like, warehouse receipt). In India, most of the future trades are cash settled.

  • What is Currency trading ?

    Trade is an international business and for any trade payments are settled in Currencies, which are specific to the countries/regions involved. Whenever any Currency is bought or sold for another, the transaction is known as 'Currency trading'. Currency trading is the largest financial market globally, followed by Commodities and Equities. Investors, speculators and corporates are involved in cross-border Currency trade.

  • What are Exchange Traded Currency Futures ?

    The Exchange Traded Currency Futures contract is an agreement to buy or sell the underlying Currency on a specified date in the future and at a specified rate. The underlying asset for a Currency Futures contract is a Currency. The Exchange’s clearing house acts as a central counter-party for all trades and thus, takes on a performance guarantee.

  • What is a Currency Futures contract ?

    A Currency Futures contract is a standardized version of a Forward contract that is traded on a regulated Exchange. It is an agreement to buy or sell a specified quantity of an underlying Currency on a specified date in the future at a specified rate.

  • What is an OTC Market ?

    OTC is short for ‘over-the-counter’. The OTC market has no central marketplace and is linked to a network of dealers/traders who do not physically meet but, instead, communicate through phone and computer networks. OTC contracts are customized contracts, based on negotiations between the counter-parties. In the case of OTC markets, the counter-party default risk depends on the counter-party creditworthiness, among other factors.

  • What are the factors that affect the exchange rate of Currencies ?

    A country’s exchange rate is typically affected by the supply of and demand for the country’s Currency in the international Forex market. The demand-and-supply dynamics is principally influenced by factors such as interest rates, inflation, trade balance and political and economic scenarios in the country. The level of confidence in the economy of a particular country also influences the Currency of that country.

  • What Currencies can be traded on the Exchanges ?

    In India, currently only USD/INR, EUR/INR, GBP/INR and JPY/INR are available for trading on various Exchanges.

  • Why trade Currency Futures ?

    Currency Futures allow investors to take a view on the movement of the Indian Rupee against other Currencies. This can be used to protect one’s business from Currency risks due to fluctuation of the exchange rates.

  • What is the settlement price ?

    As per established norms, the Reserve Bank Reference Rate, on the date of expiry, will be the settlement price.

  • What types of margins are levied on trades ?

    There are four types of margins mandated by SEBI and they are as follows:

      Initial Margin,
      Extreme Loss Margin,
      Calendar Spread Margin and
      Mark-to-Market Margin.

  • What is a client agreement ?

    It is a legal document entered into between the broker and the client setting out the conditions of their relationship and meeting the requirements of the relevant self-regulatory organization and the Regulator.