About Commodity Derivatives
Commodity Derivatives markets are a good source of critical information and indicator of market sentiments. Since, commodities are frequently used as input in the production of goods or services, uncertainty and volatility in commodity prices and raw materials makes the business environment erratic, unpredictable and subject to unforeseeable risks.
Volatility in raw material costs affects businesses and can be significant given that commodity prices are driven by supply and demand from domestics as well as global markets. Ability to manage or mitigate risks by using suitable hedging in commodity derivative products, can positively affect business performance. Futures & Options are by far the most common Commodity Derivatives products offered on an Exchange, that are well structured and regulated through robust mechanisms and controls.
The National Stock Exchange of India Limited (NSE) commenced trading in Commodity Derivatives with the launch of bullion futures on October 12, 2018. For 25 years, we shaped the equity market. We launched the Derivatives contracts on the popular benchmark Nifty 50 Index in June 2000. NSE has now embarked a journey to shape the commodity market, with the introduction of futures on Commodity Derivatives.
Product
Commodity Derivatives segment of NSE provides trading in Futures. Instruments are available on Bullion and Energy Futures. By establishing prices for futures, the commodity derivatives markets help buyers and sellers determine prices of commodities in physical markets, thus linking the two markets.
Derivatives on the following Products
Brent Crude Oil
Copper
Degummed Soy Oil
Gold
Silver
Brent Crude Oil
Crude Oil Derivatives (Brent and WTI) are the highest traded product in the Commodities market space.
NSE has successfully launched Brent Crude Oil Futures on 1st March 2019 with regular 100 barrels.
Crude Oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. A type of fossil fuel, crude oil can be refined to produce usable products such as gasoline, diesel and various forms of petrochemicals. It is a non-renewable resource, which means that it can't be replaced naturally at the rate we consume it and is, therefore, a limited resource.
Brent Crude is a major trading classification of sweet light crude oil that serves as a benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulphur content. Brent Crude is extracted from the North Sea and comprises Brent, Forties, Oseberg and Ekofisk crudes (BFOE Quotation).
Brent is the leading global price benchmark for Atlantic basin crude oils. It is used to price two-thirds of the world's internationally traded crude oil supplies.
Copper
Of the various segments in metals & mining industry, Base Metals holds a significant space in shaping the foundation of world economy due to its many industrial applications.
Within the base metals, Copper is one of the earliest metals to be extracted in ancient India. Copper is the third largest metal consumed in the world after Steel and Aluminium.
Copper is a soft, malleable and ductile metal and is considered to be the best non-precious metal conductor of electricity.
Top Copper Mining nations are Chile, Peru, China, Congo and US where Chile being highest.
Global refined Copper Production stands at approx. 25 Mio Tonnes where China leads as the largest producer. China is the biggest consumer of refined Copper as well.
You can also watch us on YouTube
The Indian Copper Industry has 3 primary producers of Copper - Sterlite Industries (Vedanta Ltd), Hindalco Industries and hindustan Copper Ltd.
Hindalco operates one of the largest single location custom copper smelters in the world with a refining capacity of 500,000 MT
Vedanta used to produce about 400,000 MT before their Tuticorin plant shutdown in 2018. Their production has now come down by more than 70% since then
Hindustan Copper is India's only vertically integrated copper producing company has a refining capacity of 99,500 MT
Degummed Soy Oil
Degummed Soy Oil is the intermediate product between crude or solvent soy oil and refined soy oil. 80% of soy oil produced globally is used for edible purpose, but in India 100% of soy oil produced is used for edible purpose.
India is the largest importer of Degummed Soy Oil.
India is the largest importer of Degummed Soy Oil. Almost 75% of domestic demand of Soy Oil is met by imports. Degummed Soy Oil import is around 20% of total annual edible oil demand. Import of degummed soy oil in India is majorly from Argentina, Brazil and USA and the major ports of arrival are Kandla, Haldia, and Mundra port. As degummed soy oil is imported, its price is completely dependent on price at originating countries. Soybean price in domestic market and price of other vegetable oils in domestic market are highly related with the import parity of degummed soy oil.
Soybean oil prices in India are largely influenced by the international edible oil price movements (especially palm oil at BMD and soy oil at CBOT). For degummed soy oil, price at Kandla is considered to be the benchmark price.
Gold
Traditionally, Gold has been used as money and also served as a relative standard for currency equivalents specific to economic regions or countries, until recent times. India continues to remain world's second biggest consumer of Gold.
From an overall evaluation it is seen that India has a traditional and stable market for gold consumption. There is increase in demand from Ornamental and Electronic Sectors. Gold is considered a valuable asset, for investments and bank reserves. A huge gap exists between demand and indigenous production which is likely to continue
The market participants engaged in import, exports, domestic trading, and manufacturing of gold and gold jewelleries are exposed to price risk. Commodity derivatives product provide an effective hedging tool much to the advantage of market participants.
Gold Mini Options
Illustration – Mechanism of Exercise
Option series having strike price closest to the Final Settlement Price (FSP) shall be termed as At-the-Money (ATM) option series.
This ATM option series and three option series having strike prices immediately above this ATM strike and three option series having strike prices immediately below this ATM strike shall be referred as ‘Close to the money’ (CTM) option series.
In case the FSP is exactly midway between two strike prices, then immediate three option series having strike prices just above FSP and immediate three option series having strike prices just below FSP shall be referred as ‘Close to the money’ (CTM) option series.
All option contracts belonging to ‘CTM’ option series shall be exercised only on ‘explicit instruction’ for exercise by the long position holders of such contracts.
All In-the-money (ITM) option contracts, except those belonging to ‘CTM’ option series, shall be exercised automatically, unless ‘contrary instruction’ has been given by long position holders of such contracts for not doing so.
All Out of the money (OTM) option contracts, except those belonging to ‘CTM’ option series, shall expire worthless.
Silver
Silver has been used for thousands of years for ornaments and utensils, trade, and as the basis for many monetary systems. Its value as a precious metal was long considered second only to gold. Silver is a brilliant grey-white metal that is soft and malleable. Its unique properties include its strength, malleability, ductility, electrical and thermal conductivity, sensitivity, high reflectance of light, and reactivity.
India is not a major silver exporter in pure form, although it exports silver jewellery. In terms of mine production, India is ranked 14th and is ranked third in terms of demand and imports. India imports Silver (unwrought or semi-manufactured) from countries such as China, United Kingdom, Russian Federation, Germany and Rep of Korea, while it exports silver jewellery to countries such as US, Hong Kong, UAE.
The major countries producing Silver are Mexico, Peru, China, Chile and Russia. Major consuming countries are United States, China, India, Japan and Russia. Major Silver exporting countries are Mexico, Rep of Korea, Canada, China and Hong Kong.
The market participants engaged in import, exports, domestic trading, and manufacturing of silver and silver jewelries are exposed to price risk. Commodity derivatives product provide an effective hedging tool much to the advantage of market participants.
Join Telegram Channel for More Updates-https://t.me/GMTIacademy
Subscribe YouTube Channel for Videos- (4) Fund Accounting with GMT Institution - YouTube
Corporate actions.
https://www.youtube.com/watch?v=V8wKtp4aeQQ&t=2195s
Private Equity-03 https://youtu.be/Wip9pwV7fZU
Derivatives https://youtu.be/iV2p9a-TUFU
Cash Recon https://youtu.be/F6H-wgwuDa8
Cash Dividend https://youtu.be/F6H-wgwuDa8
Visit at - www.getmeupskills.in for material and Live sessions.
Join a Personal training course from the Industry experts and enhance your knowledge. call us at - 7387609230
Comments