Commodity Futures and Options
Commodity Futures and Options
This domain tests contract design and the mechanics of futures and options on commodity futures. You must be able to read a contract specification, compute contract value and margin, and explain option payoffs.
Futures anatomy
A contract specifies trading unit, quotation unit, tick size, quality grade, delivery centres, delivery period, last trading day and settlement method. Gold may quote in ₹ per 10 g while the trading unit is 1 kg; crude oil quotes in ₹ per barrel with a 100-barrel lot. Daily mark-to-market (MTM) credits or debits the margin account. Margins include initial margin, often SPAN-like, exposure margin and additional margin.
Options
Indian commodity options are on futures, not spot goods. They are European-style and cash-settled at expiry. A call gives the buyer the right to buy the underlying futures at the strike; a put gives the right to sell. The buyer pays premium and posts no margin; the seller receives premium and posts margin. Intrinsic value for a call = max(0, futures − strike); for a put = max(0, strike − futures).
Worked example
A gold futures lot is 1 kg and the price is ₹60,000 per 10 g, so contract value = 100 × ₹60,000 = ₹60,00,000. Initial margin at 6% = ₹3,60,000; exposure margin at 1% = ₹60,000; total ≈ ₹4,20,000. If the price rises to ₹61,000 per 10 g, the long's MTM gain is 100 × ₹1,000 = ₹1,00,000. On a call with strike ₹60,500, expiry futures at ₹61,000 gives intrinsic value ₹500 per 10 g, or ₹50,000 per lot.
Traps
Do not charge margin to an option buyer. Do not assume exercise creates physical delivery. Do not multiply by 1 kg when the quote is per 10 g; the multiplier is 100. Do not treat a European option as exercisable any day before expiry.