A Study on Commodity Future of India (Draft - Bachelor Thesis on Price & Commodity Submitted to University of Kerala, Department of Commerce, Finance Wing)

Topics: Futures contract, Chicago Board of Trade, Commodity market Pages: 47 (9002 words) Published: November 21, 2010


Commodity includes all kinds of goods. FCRA defines “goods” as “every kind of moveable property other than actionable claims, money and securities”. Futures trading are organized in such goods or commodities as are permitted by the central government. The national commodity exchanges have been recognized by the central government for organizing trading in all permissible commodities which include precious (gold & silver) and non-ferrous metals; cereals and pulses; oil seeds, raw jute and jute goods; sugar; potatoes and onions; coffee and tea; rubber and spices, etc.

The Indian experience in commodity futures market dates back to thousands of years. References to such markets in India appear in Kautialya’s ‘Arthasastra ‘. The words “teji”, “Mandi”,”Gali”, and “Phatak” have been commonly heard in Indian markets for centuries

The first organized future market was however established in 1875 under the aegis of the Bombay cotton trade association to trade in cotton contracts. Derivatives trading were then spread to oilseed jute and food grains. The derivative trading in India however did not have uninterrupted legal approval by the Second World War, i.e., between the 1920 & 1940’s. Futures trading in the organized form had commenced in a number of commodities such as – cotton, castor seeds, wheat, silver, gold etc. During Second World War futures trading is prohibited under defense rules.

After independence, the subject of future trading was placed in the union list, and forward contracts (regulation) act, 1952 was enacted. Futures trading in commodities particularly, cotton, oilseeds and bullion, was at its peak during this period. However, following the scarcity in various commodities futures trading in most commodities was prohibited in mid –sixties. There was a time when trading was permitted only two minor commodities, viz,, pepper and turmeric.

Commodities are more than what you think they are. Almost everything you see around is made of what market considers commodity. A commodity could be an article, a product or material that is bought and sold. It could be any kind of movable property, except actionable claims, money and securities commodity trade forms the backbone of the world economy. The Indian commodity market is estimated to be around Rs.11 million, and forms almost 50 percent of the Indian GDP.

Future contract:-

Future contract is an agreement made by and traded on the exchange between two parties to buy or sell a commodity at a particular time in the future for a pre defend price. Since both the parties are unaware of each other, the exchange provides a mechanism to give the party assurance of honored contract. The exchange specifies standardized features of the contract. The risk to the holder is unlimited, and because the pay off pattern is symmetrical, the risk to the seller is unlimited as well.

Money lost and gained by each party on futures contracts is equal and opposite. In other words futures trading are a zero sum game. These are basically forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract.

These are regulated by overseeing agencies, and are guaranteed by clearing houses hedgers often trade futures for the purpose of keeping price risk in check. Futures contracts are often used by commercial enterprises as “hedging tools” to reduce the risk of expected future purchases or sales of the underlying assets. If used to speculate, risk increases so risk depends on the underlying instrument and the use of futures

Futures market id=s expected to help the market participants through two vital economic functions, viz., price discovery and price risk, management. At the macro level, the liquid and vibrant futures make having nationwide participation also assists in sobering down inter...
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