Commodity Derivatives
Commodity Derivatives cover futures and options on bullion, metals, energy and agricultural products. The exam tests contract specifications, margins, delivery and the role of SEBI.
Core rules
- SEBI regulates commodity derivatives; the Forward Markets Commission was merged into SEBI in 2015.
- Major exchanges include MCX and NCDEX.
- Contracts specify quality, quantity, delivery month and delivery centre.
- Margins include initial margin, maintenance margin and MTM; price limits apply.
- Many contracts are delivery-based; warehouse receipts and quality standards matter.
- Commodity options exist and are used for hedging as well as speculation.
Worked example
A jeweller buys one MCX gold futures contract at ₹60,000 per 10 grams. The contract size is 1 kg, so the notional value is ₹60,000 × 100 = ₹60,00,000. If the price rises to ₹61,000 per 10 grams, gain = ₹1,000 × 100 = ₹1,00,000. The reasoning: the quote is per 10 grams but the contract is 1 kg, so multiply by 100. A trader who forgets this understates both exposure and P&L by a factor of 100.
Traps that cost marks
- Mixing per-gram and per-10-gram quotations.
- Ignoring delivery quality and warehouse charges.
- Assuming all commodity contracts are cash-settled.
- Forgetting that MTM losses can trigger margin calls before expiry.