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NISM Series XVI study materials
NISM Series XVI study resources

NISM Series XVI: Introduction to Commodity Markets

NISM Series XVI · Work through your exam, one topic at a time.

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Introduction to Commodity Markets

Introduction to Commodity Markets

This section covers the Introduction to Commodity Markets domain of the Series XVI exam. It tests the foundations: what a commodity derivative represents, who uses it, how spot and futures prices relate, and how India's market is structured. Expect questions that distinguish physical trading from exchange-traded derivatives and that test terminology such as basis, contango and backwardation.

Core ideas

  • A commodity is a fungible good traded in standardized grades: bullion, base metals, energy and agricultural produce.
  • Spot markets trade immediate delivery; derivatives trade price risk for future delivery. Exchange-traded commodity futures are standardized and cleared; forwards are bilateral.
  • Participants: hedgers transfer risk, speculators provide liquidity and take risk, arbitrageurs link markets, and warehouses and assayers support delivery.
  • India's national commodity exchanges began in 2003 (MCX, NCDEX). The Forward Markets Commission regulated until it merged with SEBI in 2015.
  • Basis = spot price minus futures price. Contango means futures are above spot, usually reflecting storage, insurance and financing. Backwardation means futures are below spot, often from convenience yield or tight nearby supply.

Worked example

Gold spot is ₹60,000 per 10 g. A three-month futures contract trades at ₹61,200. The ₹1,200 difference is the futures premium. If financing and storage for three months cost about 2%, the fair futures price is ₹60,000 × 1.02 = ₹61,200, so the market is in contango and the basis is −₹1,200. A jeweller expecting to buy later can buy futures to lock in ₹61,200; if spot rises to ₹63,000, the futures gain offsets part of the higher physical cost.

Traps

Do not assume every commodity future is physically settled: crude oil and natural gas contracts are typically cash-settled. Do not say SEBI has always regulated commodities. Do not confuse the basis sign, and do not treat a futures premium as automatic arbitrage once carry costs are included.