COMMODITY MARKET

“Advice is the only commodity on the market where the supply

exceeds the demand.”
 COMMODITY MARKET
 Commodity market is a market that trades in primary rather
than manufactured products

 Soft commodities are agricultural products such as wheat,

coffee, cocoa, sugar, etc..

 Hard commodities are mined such as gold, rubber, oil, etc..

 Commodity-based money and commodity markets in a

crude early form are believed to have originated in 4500
BC
 COMMODITY MARKET GROWTH

 Commodity market is a market that trades in primary rather than

manufactured products

 Early civilizations variously used pigs, rare seashells, or other

items as commodity money.

 Since that time traders have sought ways to simplify and

standardize trade contracts

 Gold and silver markets evolved in classical civilizations. At first

the precious metals were valued for their beauty and intrinsic worth
and were associated with royalty
 COMMODITY MARKET GROWTH

 Beginning in the late 10th century, commodity markets grew as a

mechanism for allocating goods, labor, land and capital across
Europe.

 Between the late 11th and the late 13th century, English
urbanization, regional specialization, expanded and improved
infrastructure, the increased use of coinage and the proliferation of
markets and fairs were evidence of commercialization
COMMODITY MARKET GROWTH

 In 1864, in the United States, wheat, corn, cattle, and pigs were
widely traded using standard instruments began trading on
the Chicago Board of Trade (CBOT), the world's oldest futures and
options exchange

 Other food commodities were added to the Commodity Exchange

Act and traded through CBOT in the 1930s and 1940s, expanding
the list from grains to include rice, mill feeds, butter, eggs, Irish
potatoes and soybeans
MAJOR COMMODITY EXCHANGES
Abbrevi
Exchange Location Product Types
-ation

Meats, Currencies,
Chicago Mercantile Chicago, United
CME Eurodollars, Equity
Exchange (CME Group) States
Index
Energy, Precious
New York Mercantile New York, United
NYMEX Metals, Industrial
Exchange (CME Group) States
Metals
Precious Metals, Base
Multi Commodity Exchange MCX India Metals, Energy,
Agricultural
Precious Metals, Base
National Commodity and
NCDEX India Metals, Energy,
Derivatives Exchange
Agricultural

National Multi-Commodity Precious Metals, Base

NMCE India
Exchange of India Ltd Metals, Agricultural
 DERIVATIVES
 Derivatives are financial instruments whose value depend
on the value of some underlying assets

 Tangible assets could be wheat, cotton, real estate or

financial instruments like equity

 Intangibles such as interest rates, weather or index, etc..

 The performance of derivatives depend on how the

underlying asset performs
 DERIVATIVES
 The most important point to remember about derivatives
is that the value of the derivative depends on something
else, which is the underlying asset. This means that when
the value of the underlying asset changes, it causes the
price or value of the derivative to change as well.
COMMODITY & FINANCIAL DERIVATIVES

 Derivatives contracts can be based on real-assets

including different types of commodities such as sugar,
jute, pepper, seeds, etc..

 Futures in pepper- Cochin:

 Futures in potatoes- Hapur

 Coffee Futures Exchange India ltd.- Bangalore 1997

COMMODITY & FINANCIAL DERIVATIVES

 Derivatives in currencies, gilt-edged securities, shares, shares

indices, etc.. are known as Financial Derivatives

 Financial Derivatives can be broadly classified into currency

derivatives, interest rate derivatives, stock & stock index
derivatives

 Derivatives are generally used as an instrument to hedge risk,

but can also be used for speculative purposes
COMMODITY & FINANCIAL DERIVATIVES

 On MCX and NCDEX different commodity’s future contract are

traded, for which underlying asset is the spot market price of
particular commodity. MCX and NCDEX are the Exchange in
which trading on commodity derivative contract are held.

 Commodities are traded on its future contract that has a specific

expiry date of that contract and each individual can buy or sell a
specific quantity of a individual commodity.
COMMODITY & FINANCIAL DERIVATIVES-
DIFFERENCES

 The basic concept of a derivative contract remains the same

whether the underlying happens to be a commodity or a financial
asset.

 In the case of financial derivatives, most of these contracts are cash

settled. Since financial assets are not bulky, they do not need
special facility for storage, transport even in case of physical
settlement. On the other hand, due to the bulky nature and
physically existence of the underlying assets, physical settlement in
commodity derivatives creates the need for warehousing.
COMMODITY & FINANCIAL DERIVATIVES-
DIFFERENCES

 Similarly, the concept of varying quality of asset does not really exist as far as
financial underlying are concerned. However, in the case of commodities, the
quality of the asset underlying a contract can vary largely.

 This becomes an important issue to be managed. Physical Settlement Physical

settlement involves the physical delivery of the underlying commodity, typically
at an accredited warehouse.

 The seller intending to make delivery would have to take the commodities to the
designated warehouse and the buyer intending to take delivery would have to go
to the designated warehouse and pick up the commodity.
 The issues faced in physical settlement are enormous. There are limits on storage facilities
in different states. There are restrictions on interstate movement of commodities.
COMMODITY & FINANCIAL DERIVATIVES-
DIFFERENCES

 Similarly, the concept of varying quality of asset does not really exist as far as
financial underlying are concerned. However, in the case of commodities, the
quality of the asset underlying a contract can vary largely.

 This becomes an important issue to be managed. Physical Settlement Physical

settlement involves the physical delivery of the underlying commodity, typically
at an accredited warehouse.

 The seller intending to make delivery would have to take the commodities to the
designated warehouse and the buyer intending to take delivery would have to go
to the designated warehouse and pick up the commodity.
 The issues faced in physical settlement are enormous. There are limits on storage facilities
in different states. There are restrictions on interstate movement of commodities.
 TRADING IN COMMODITIES
 Derivative Trading consists of Futures and Options Trading. Futures and
Options are two different trading contracts which fall under derivatives trading.

 Further, contracts can be indices, currency, stocks or commodities. So, in theory,

we can have stock futures contract and options contract, index futures contract
and options contract and so on.

 Commodities are essentially futures only. No options available yet for

commodities in India. Futures and options are leveraged instruments and are
basically used to manage the risk in the markets.

 Participation is restricted to retail and wholesale traders, and corporate hedgers.

No foreign, NRI or bank participation is permitted at present
 TRADING IN COMMODITIES
 Options:

 It is a derivatives product like a futures contract, but different, in that risk is

limited for a buyer, while profit is unlimited . For the seller return is restricted to
premium buyers pay to buy an option that gives them the right to buy (call
option) or right to sell (put). The seller has an obligation to buy from the put
buyer or to sell to the call buyer.

 Loss are limited to the premium paid by buyer to the seller of a call (right to buy)
option or a put (right to sell) option.

 In India, options are European style, which can be exercised only upon maturity
of the contract. The American style options can be exercised any time over the
life of a contract.
 TRADING IN COMMODITIES

 Commodities are traded on its future contract that has a specific expiry
date of that contract and each individual can buy or sell a specific
quantity of a individual commodity.

 Different Commodities has different lot size Like

 Gold -100, Silver-30, Zinc Aluminium and Lead has lot size of 5000 and
Copper-1000 , Nickel-250, Crude Oil- 100 and Natural Gas has lot size
of 1250.

 To purchase a single lot of a commodity, the investor need not have to

pay full amount they have to just have pay a margin amount that is
decided by the Exchange
 TRADING IN COMMODITIES
 If one wants to buy 1lot of Zinc September Contract and its CMP is 153.20 then

153.20*5000= 766000 * 4–8% would be the investment.

 For a beginner a proper knowledge about the market is most important as

Bullions, Base Metals and Energy are the international commodities

 Trading in Commodity is little risky compared to future and options in NSE . If

one selects a stock like TCS , INFOSYS etc. at fair valuation and hold for some
weeks the investor can expect some profits from there but when it comes to
commodity they charge very less margin and movement is high so it becomes
little risky.


INDIAN SCENARIO OF COMMODITY EXCHANGES

 The first organized futures 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 oilseeds, jute and food grains. The
derivatives trading in India however did not have uninterrupted legal approval

 By the Second World War, i.e., between the 1920’s &1940’s, futures trading in
organized form had commenced in a number of commodities such as – cotton,
groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar,
precious metals like gold and silver

 During the Second World War futures trading was prohibited under Defence
of India Rules
INDIAN SCENARIO OF COMMODITY EXCHANGES

 After independence, the subject of futures 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

 Deregulation and liberalization following the forex crisis in early 1990s,

also triggered policy changes leading to re-introduction of futures trading in
commodities in India
INDIAN SCENARIO OF COMMODITY EXCHANGES

 The growing realization of imminent globalization under the WTO

regime and non-sustainability of the Government support to
commodity sector led the Government to explore the alternative of
market-based mechanism, viz., futures markets, to protect the
commodity sector from price-volatility

 In April, 1999 the Government took a landmark decision to remove all

the commodities from the restrictive list. Food-grains, pulses and
bullion were not exceptions
INDIAN SCENARIO OF COMMODITY EXCHANGES

 The long spell of prohibition had stunted growth and modernization of the
surviving traditional commodity exchanges

 Therefore, along with liberalization of commodity futures, the Government

initiated steps to cajole and incentives to the existing Exchanges to modernize
their systems and structures. Faced with the grudging reluctance to modernize
and slow pace of introduction of fair and transparent structures by the existing
Exchanges

 Government allowed setting up of new modern, demutualised Nation-wide

Multi-commodity Exchanges with investment support by public and private
institutions. National Multi Commodity Exchange of India Ltd. (NMCE) was the
first such exchange to be granted permanent recognition by the Government
MULTI COMMODITY EXCHANGE OF INDIA LIMITED
(MCX)

 The Exchange, started its operations in November 2003

 India’s first listed exchange, is a state-of-the-art, commodity futures

exchange that facilitates online trading, and clearing and settlement of
commodity futures transactions, thereby providing a platform for risk
management

 MCX offers trading in varied commodity futures contracts across

segments including bullion, ferrous and non-ferrous metals, energy, agri-
based and agricultural commodities

 MCX is India’s leading commodity futures exchange with a market share

of about 86 per cent in terms of the value of commodity futures contracts
traded
MULTI COMMODITY EXCHANGE OF INDIA LIMITED
(MCX)
 The Exchange’s flagship index, the MCXCOMDEX, is a real-time
composite commodity futures price index which gives information
on market movements in key commodities

 Other commodity indices developed by the exchange include

MCXAgri, MCXEnergy, and MCXMetal

 MCX has been certified to three ISO standards including ISO

9001:2008 quality management standard, ISO 27001:2005
information security management standard and ISO 14001:2004
environment management standard
MULTI COMMODITY EXCHANGE OF INDIA LIMITED
(MCX)
 With an aim to seamlessly integrate with the global commodities
ecosystem, MCX has forged strategic alliances with leading
international exchanges such as CME Group, London Metal
Exchange (LME), The Baltic Exchange, Dalian Commodity
Exchange (DCE) and Taiwan Futures Exchange (TAIFEX)

 The Exchange has also tied-up with various trade bodies,

corporates, educational institutions and R&D centres across the
country. These alliances enable the Exchange in improving trade
practices, increasing awareness, and facilitating overall
improvement of commodity futures market
MULTI COMMODITY EXCHANGE OF INDIA LIMITED
(MCX)
 Gramin Suvidha Kendra, a social inclusion programme in
partnership with India Post, seeks to enhance farmers’ value
realisation from agricultural activities

 The turnover of the exchange for the fiscal year 2009 was US$ 1.24
trillion, and in terms of contracts traded, it was in 2009 the world's
sixth largest commodity exchange

 In February 2012, MCX has come out with a public issue of

6,427,378 Equity Shares of Rs. 10 face value in price band of 860 -
1032 Rs. per equity share to raise around $134 million

 It is the first ever IPO by an Indian exchange

MULTI COMMODITY EXCHANGE OF INDIA LIMITED
(MCX)

 Key shareholders in MCX:

 Financial Technologies (I) Ltd., State Bank of India and its

associates, National Bank for Agriculture and Rural Development
(NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund
(Mauritius) Ltd. - an affiliate of Fidelity International, Corporation
Bank, Union Bank of India, Canara Bank, Bank of India, Bank of
Baroda, HDFC Bank, SBI Life Insurance Co. Ltd., ICICI
ventures, IL & FS, Merrill Lynch, and New York Stock Exchange
NATIONAL COMMODITY & DERIVATIVES EXCHANGE

 National Commodity & Derivatives Exchange Limited (NCDEX) is an

online commodity exchange based in India. It has an independent board of
directors and professional management, who have interest in commodity
markets. It provides a commodity exchange platform for market participants to
trade in commodity derivatives. It is a public limited company, incorporated on
23 April 2003 under the Companies Act, 1956. It obtained its Certificate for
Commencement of Business on 9 May 2003, and began operations on 15
December 2003. NCDEX is the only commodity exchange in the country
promoted by national institutions. NCDEX is regulated by the [Securities and
Exchange Board of India] (SEBI), and is subject to the Companies Act 2013,
Stamp Act, Contracts Act, Forward Commission (Regulation) Act, and various
other laws.
NATIONAL COMMODITY & DERIVATIVES EXCHANGE

 NCDEX had 848 registered members and client base of @ 20 Lakh as of 31 July
2013.

 It offers trading on more than 49,000 terminals across 1,000 centers in India as
of 31 July 2013.

 It facilitates deliveries of commodities through a network of over 594 accredited

warehouses through eight warehouse service providers, with holding capacity of
around 1.5 million tonnes.

 It offers average deliveries of 1 lakh MT at every contract expiry. Average

delivery ratio for Q1 of 2013-14 is 98%.

 NCDEX has offices in Mumbai, Delhi, Ahmedabad, Indore, Hyderabad, Jaipur,

and Kolkata.
NATIONAL COMMODITY & DERIVATIVES EXCHANGE

 India's National Commodity & Derivatives Exchange (NCDEX), the

country's second largest commodity derivatives exchange, has
been listing contracts since 2003

 NCDEX has grown rapidly since its inception, ranking among the world's
top 50 derivatives exchanges

 The NCDEX ranked number 32nd in 2010 in the Futures Industry

Association's global list of top 53 derivatives exchanges measured by
volume, rising 34.16% on 2009 volume.

 The exchange posted volume of 40.1 million contracts in 2010, up from

29.9 million in 2009, according to FIA data published in April 2011
NATIONAL COMMODITY & DERIVATIVES EXCHANGE

 As of 2014, India has six commodity exchanges including: National

Multi-Commodity Exchange (NMCE), Multi Commodity
Exchange (MCX), Indian Commodity Exchange ICEX, ACE Derivatives
and Commodity Exchange and Universal Commodities Exchange (UCX)

 The NCDEX formed in April 2003, shortly after its regulator the Forward
Markets Commission (FMC) made reforms to India's futures markets
aimed at encouraging growth and competition

 Its three initial shareholders- the National Stock Exchange of

India (NSE), the Life Insurance Corporation of India and the National
Bank for Agriculture and Rural Development - were later expanded to ten
 NCDEX- CONTRACTS TRADED
 On April 4, 2011, the exchange launched polyvinyl chloride (PVC)
futures and announced plans to relaunch Brent crude oil futures

 In 2008 the NCDEX also launched carbon credits but cannot create
a market in them because Indian law permits only sellers of such
contracts
 As of March 31, 2017, the Exchange offered trading in 25 commodity contracts,
which includes 22 agricultural commodity contracts, 1 bullion commodity
contracts and 2 metal commodity contracts.
 NCDEX- CONTRACTS TRADED
 NCDEX ranked number 31 in 2009 in the Futures Industry
Association's global list of top 53 derivatives exchanges measured
by volume posting 29.9 million contracts, up 21.6% from 24.6
million in 2008
 NCDEX offers futures contracts in the following categories:
– Agricultural Products
– Precious metals
– Base and ferrous metals
– Energy Products
– Polymers
– Carbon credits
 NCDEX- COMMODITES TRADED
 Currently, the exchange facilitates futures trading in 59 commodities, out of which 39 are
agricultural, 6 precious metals, 3 polymers, 4 energy produces, 6 metals and carbon

trading.

 Aluminium, Barley, Brent Crude Oil, Cashew, Castor Seeds, Certified Emission Reduction
(CER), Chana, Chilli, Coffee, Copper, Coriander, Cotton, Cotton Seed Oil Cake, Crude
Palm Oil, Domestic Soya Meal Export, Furnace Oil, Gold, Ground Nut Oil, Ground Nut
Shell, Guar Gum, Guar Seed, Gur, Jeera, Light Crude Oil, Linear Low Density
Polyethylene Butene Film (LLDP), Maize, Masoor, Mentha Oil, Nickel, Pepper,
Polypropylene, Potato, Polyvinyl Chloride (PVC), Rape Mustard Seed, Rapeseed-Mustard
Seed Oilcake, Raw Jute, RBD Palmolein, Refined Soya Oil, RM Expeller Oil, Rubber,
Sesame Seed, Silver, Soy Bean, Soya Meal, Steel, Sugar, Thermal Coal, Turmeric, Wheat,
Yellow Peas, Zinc.
 NCDEX- MAJOR SHAREHOLDERS
 National Commodity & Derivatives Exchange Limited (NCDEX) is a
professionally managed on-line multi commodity exchange. The shareholders of
NCDEX comprises of large national level institutions, large public sector bank
and companies.

 Promoter shareholders: ICICI Bank Limited (ICICI) (not anymore), Life

Insurance Corporation of India (LIC), National Bank for Agriculture and Rural
Development (NABARD) and National Stock Exchange of India Limited (NSE).

 Other shareholders: Canara Bank, Punjab National Bank (PNB), CRISIL

Limited, Indian Farmers Fertiliser Cooperative Limited (IFFCO), Goldman
Sachs, Intercontinental Exchange (ICE), Shree Renuka Sugars Limited, Jaypee
Capital Services Limited and Build India Capital Advisors LLP, Oman India
Joint Invesmtnet Fund, IDFC Private Equity Fund III.
 CLEARING & SETTLEMENT
 Presently NCDEX has tied-up with National Commodity Clearing Limited (NCCL) for
clearing the trades and for settlement of trades. All contracts with open positions not
intended for delivery and non-deliverable contracts would be cash settled.

 All contracts with open position which is intended for delivery would have to be settled by
delivery and in case of delivery defaults compensation as per the Exchange norms would
be paid to the buyers.

 All contracts settling in cash would be settled on the following day after the contract
expiry date. All contracts materializing into deliveries would settle in a period of 2-7 days
after the expiry. The exact settlement day would be specified in the settlement calendar
released by the Exchange for every expiry month.

 Any buyer intending to take physical delivery would have to submit Remat request to its
Depository Participant, who would pass on the same to the registrar and the warehouse.
On a specified day, the buyer would go to the warehouse and pick up the commodity after
confirmation from warehouse.
 CLEARING & SETTLEMENT
 Participants in the market:

 Exchanges: 22 commodity exchanges in total, 5 main exchanges - MCX, NMCE,

NCDEX, ACE and ICEX.

 Regulator: Forwards Market Commission (FMC)

 Clearing and settlement: Warehouse, registrar and transfer agent, assayer for
physical settlement and clearing houses of exchanges for the settlement of
closing out positions, and clearing banks for the settlement of payments

 FIs, NRIs, Banks, MFs etc are not allowed to participate in commodity
exchanges currently.

 Instruments traded: agri commodities, metals, non-metals, energy

 CLEARING & SETTLEMENT
 The fund settlement and margin payments are executed through the clearing
bank.

 Two types of settlement: daily mark-to-market (MTM) and final MTM

settlement; cash settled by debiting/ crediting the clearing accounts of CMs with
the respective clearing bank.

 Settlement involves payments (Pay-Ins) and receipts (Pay-Outs) for all the
transactions done by the members.

 Settlement of futures contracts can be done in two ways physical delivery of the
underlying asset and by closing out open positions.
CLEARING & SETTLEMENT: ELECTRONIC BALANCE
OF THE PHYSICAL HOLDINGS
 The process is called dematerialization. The seller intending to make delivery
would have to take the commodities to the designated exchange accredited
warehouse. These commodities would have to be assayed by the Exchange
accredited assayer. The assayer report must confirm the quality of commodities
to be meeting the contract specifications with allowed variances. If the
commodities meet the specifications as required, the warehouse would accept
them. Warehouses would then ensure updating the receipt in the warehousing
system, then the agent intimates the concerned depository which finally provides
the demat credit in the form of electronic balances into the beneficiary account of
the depositor.

 The seller's would issue and dispatch the respective invoices to its clearing
member, who would then dispatch the invoice to the buyer's clearing member.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 Pay-in and Pay- out:

 Pay in day is the day when the brokers shall make payment or
delivery of securities to the exchange. Pay out day is the day when
the exchange makes payment or delivery of securities to the broker.
Settlement cycle is on T+2 rolling settlement basis w.e.f. April 01,
2003.

 The exchanges have to ensure that the pay out of funds and
securities to the clients is done by the broker within 24 hours of the
payout. The Exchanges will have to issue press release immediately
after pay out.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 A futures contract (futures) is a standardized contract between two
parties to buy or sell a specified asset of standardized quantity and
quality for a price agreed upon today (the futures price) with delivery and
payment occurring at a specified future date, the delivery date. The
contracts are negotiated at a futures exchange, which acts as an
intermediary between the two parties.

 The party agreeing to buy the underlying asset in the future, the "buyer"
of the contract, is said to be "long", and the party agreeing to sell the
asset in the future, the "seller" of the contract, is said to be "short“.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 While the futures contract specifies a trade taking place in the
future, the purpose of the futures exchange institution is to act as
intermediary and minimize the risk of default by either party.

 A futures contract is not a private and customized transaction.

Instead, it is a public, standardized transaction that takes place on
a futures exchange

 Thus the exchange requires both parties to put up an initial amount

of cash (performance bond), the margin.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 A financial derivative that represents a contract sold by one party (option writer)
to another party (option holder). The contract offers the buyer the right, but not
the obligation, to buy (call) or sell (put) a security or other financial asset at an
agreed-upon price (the strike price) during a certain period of time or on a
specific date (exercise date).

 Call options give the option to buy at certain price, so the buyer would want the
stock to go up. Put options give the option to sell at a certain price, so the buyer
would want the stock to go down.

 Under Securities Contracts (Regulations) Act,1956 options on securities has been

defined as "option in securities" means a contract for the purchase or sale of a
right to buy or sell, or a right to buy and sell, securities in future, and includes a
teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 An Option to buy is called Call option and option to sell is called Put option.
Further, if an option that is exercisable on or before the expiry date is called
American option and one that is exercisable only on expiry date, is called
European option. The price at which the option is to be exercised is called Strike
price or Exercise price.

 Therefore, in the case of American options the buyer has the right to exercise the
option at anytime on or before the expiry date. This request for exercise is
submitted to the Exchange, which randomly assigns the exercise request to the
sellers of the options, who are obligated to settle the terms of the contract within
a specified time frame.

 The underlying asset could include securities, commodities, an index of prices of

securities etc.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 A call option, often simply labeled a "call", is a financial contract between two
parties, the buyer and the seller of this type of option. The buyer of the call option
has the right, but not the obligation to buy an agreed quantity of a
particular commodity or financial instrument (the underlying) from the seller of
the option at a certain time (the expiration date) for a certain price (the strike
price).

 The seller (or "writer") is obligated to sell the commodity or financial instrument
to the buyer if the buyer so decides.

 The buyer pays a fee (called a premium) for this right. When you buy a call
option, you are buying the right to buy a stock at the strike price, regardless of
the stock price in the future before the expiration date.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 A put or put option is a stock market device which gives the owner the right, but
not the obligation, to sell an asset (the underlying), at a specified price
(the strike), by a predetermined date (the expiry or maturity) to a given party
(the buyer of the put). Put options are most commonly used in the stock market to
protect against the decline of the price of a stock below a specified price.

 If the price of the stock declines below the specified price of the put option, the
owner of the put has the right, but not the obligation, to sell the asset at the
specified price, while the seller of the put, has the obligation to purchase the
asset at the strike price if the buyer uses the right to do so (the buyer is said
to exercise the put or put option).

 In this way the owner of the put will receive at least the strike price specified
even if the asset is worth less.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 An option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying asset at a set price within a specified time. The
buyer of a put option estimates that the underlying asset will drop below the
exercise price before the expiration date.

 Put options are basically the reverse of calls: a call gives the owner the right to
buy stock at a given price (the strike) for a certain period of time. A put, on the
other hand, gives the owner the right to sell stock at the strike price for a limited
time. If you own a put on stock XYZ, you have the right to sell XYZ at the strike
price until the put option expires. The math for determining the profit is equal to
the strike price less the premium paid for the put. On the other hand, the
maximum potential risk is losing the entire premium paid to purchase the option.
This happens if the stock is at or above the strike price at expiration.
 FUTURE & OPTIONS- PAY OFF: CLEARING &
SETTLEMENTS
 In futures contracts, the buyer and the seller have an unlimited loss
or profit potential. The buyer of an option can make unlimited
profit and faces limited downside risk. The seller, on the other
hand, can make limited profit but faces unlimited downside.

 Investing in F&O needs less capital as the investor is required to

pay only a margin money (5-20 per cent of the contract) and take a
larger exposure. However, it is meant for high networth
individuals.
 HEDGING & FUTURES CONTRACT
 Futures contracts are one of the most common derivatives used to hedge
risk. A futures contract is as an arrangement between two parties to buy
or sell an asset at a particular time in the future for a particular price.
The ultimate goal of an investor using futures contracts to hedge is to
perfectly offset their risk.

 Investors can use hedging as a way to limit their investment risks from
economic uncertainty. More specifically, futures trading can be a useful
financial instrument to hedge against the swings of commodity prices.

 When there is uncertainty in the price of commodities that you own,

futures trading can be an effective way to hedge against that risk.
 HEDGING & FUTURES CONTRACT
 Investors who use futures to hedge

 As an example, a seller in the commodity market who holds a large amount of

gold might want to hedge his exposure against the price of gold in the cash
market. He can do so by taking an equal but reverse position in the futures
market. If the spot price of gold falls in the cash market, he will have protected
himself by taking the short position in the futures market.

 A short position is effectively forecasting that an asset price will fall.

 Let's say the seller takes the short position on a futures contract for 100 grams of
gold at Rs. 1,300/gram. If, on the expiry date of the contract, gold trades at
Rs.1,200/gram, the seller would have gained Rs. 10,000. Although, since the
seller actually owns an amount of gold, Rs. 10,000 has simply offset the loss in
value of his physical stock.
 PSYCHOLOGY OF TRADING
 Many investors, especially those who frequently trade, realise the importance of
staying on top of market trends and carefully monitoring their risks. However,
many of these same investors also know they sometimes make trading decisions
based on instincts or emotions, rather than careful analysis or reasoning. When
markets are volatile, emotions like concern and fear can sometimes cloud
judgement and lead to decisions they would not normally make.

 Understanding these obstacles and having a strategy in place to help overcome

them can lead to more considered trading.

 Overcoming emotional reactions

 When a stock is down or there’s bad news in the market, traders can get nervous
about their positions. This can lead to an overreaction or a lack of action,
resulting in a negative outcome. Emotion may be crowding out rational thought.
 PSYCHOLOGY OF TRADING
 In these situations, identify what the investor might perceive as a threat, then
plan a strategy to address it. This can include putting in place defensive
strategies, such as hedging.

 It’s natural for traders to want to hold onto winning positions. However, in this
pursuit of profit they may not be alert to market signals that indicate it may be
time to sell. Have a trading strategy in place that will help them leave positions
before market sentiment shifts.

 Building discipline and confidence

 While experience is critical to building trading discipline, there are strategies

and tools that can help the investors build their discipline too. Many investors
establish buy and sell price targets, and stick to them regardless of emotions.
 PSYCHOLOGY OF TRADING
 Others set targets for how much they are prepared to gain or lose across
their entire portfolio over a certain time period, and create trading
strategies designed to achieve these targets. One of the best ways to build
trading confidence is through market research or the support of a market
specialist adviser. Many investors study market charts, read company
reports and announcements, talk to or learn about management teams,
and analyse economic and industry trends.

 By putting in place strategies that can help manage emotions, the investor
can build discipline and confidence, and stay on track to meet to their
investment goals.