Commodity is another asset class for savvy investors to ensure their investments are well diversified. Commodities investment can be either for hedging their underlying commodity exposure or for trading purely for profits and take advantage of arbitrage that exist.
GEPL has a well-qualified team to advice it’s customers in commodities. We are member of both MCX and NCDEX
Diversification is an important rule to prudent investment. So it is only logical to look at other asset classes to spread your nest eggs.
Commodities offer short-term investment opportunities. When price volatility and cyclical movement are favorable, commodities can offer significant returns. However there is a carry cost to holding commodity exposure.
Apart from offering comfort of diversification, price predictability is another edge that favors commodities investment.
Since they are exchange traded and cash settled, only a margin is required to trade in commodities. This luxury of leverage is another advantage to investing in futures.
Commonly traded commodities like precious metals and crude are highly liquid, making it easy to get in out of the market.
Our step by step guide will help you through understanding the basics
Before you invest for the first time it is important to understand the basics. We’ve put together a step-by-step guide to investments that we hope will clarify some of the broader benefits and risks.
Yes, like equity markets, commodity market has circuit breakers. Exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its set price limit will fall in circuit breaker category.
Rolling over of hedge position means the closing out of existing position in the futures contract and simultaneously taking a new position in a futures contract with a later date of expiry.
It is the rate at which the contract is settled on the expiry date. Usually it is the average of the spot prices of the last few trading days (as specified by the exchange) before the contract maturity.
The contract enters into the tender period a few days before the expiry. This enables the members to express their intention whether to give or take delivery.
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.
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.
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.
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.
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.
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 rich of adverse price fluctuation i.e. hedging.
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.
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.
A commodity is a product having commercial value that can be produced, bought, sold, and consumed.
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