Académique Documents
Professionnel Documents
Culture Documents
Introduction
• 19th Century,
• Chicago – Wheat
• CBOT – 1848
– Started as ‘spot’ market, but evolved into future
market
• India
– Bombay Cotton Trade Association - 1875 (First
organized Exchange in India )
Economic Benefits of
Commodity Futures Markets
• Price Discovery
– Buyers and Sellers trade based on
• Inputs regarding specific market information, expert
views and comments, demand and supply equilibrium,
government policies, inflation rates, weather forecasts,
market dynamics
• Price-Risk Management
– Hedging
Legal Framework
Commodity Exchanges
Bye-Laws and Business rules
Market Status
FORWARDS FUTURES
Private contract between 2 parties Exchange traded
F=S+C
F = S (1 + r)^T
r = cost of financing (%) – annually compounded
T = time till expiration of contract
Futures
Price
Spot Price
Time
(a) 2.19
Participants in Futures Market
1) Hedgers
– Protection from price fluctuation
– Risk averse / mitigation
2) Speculators
– Profit from price fluctuation
– Risk takers
3) Arbitragers
– Risk-less Profit seekers
Hedging
• In June 2011,
Price of Wheat in Spot Market / Mandi
– May Increase or Decrease
Long Hedge Example …
• If spot price in June 2011 is increased to
Rs. 1100 per Quintal
• Strengthening of basis
– Cash price increasing at a faster rate than future
price
– Strong Basis is indicative of short supply in spot
market
Spread
– Intra-commodity spread
– Inter-commodity spread
Arbitrage
Mathematically,
F(o,n) = So (1+c)
F(o, n) = Futures price of commodity at
‘t =0’ for expiry at ‘t=n’
So = Spot price of commodity at ‘t=0’
10:00 AM to 11:30 PM
• Saturday (all commodities)
10:00 AM to 2:00 PM
• Holidays notified in advance
Electronic Market Place
• Closing Price
– At the end of trading session, the system calculates the closing price
of each and every contract traded on the system
• Weighted average of trades during last 30 minutes
• In the whole day less than 10, then weighted average of all trades
• Expiry Date
55
Price Related Condition Orders
• Limit Order
– Specifies the Price at (better than) which the trade be executed
– Limit Buy /Sell – Placed below/above existing market price
• Market Order
– Executed at prevailing price on or after submission of such order