Commodity Queries from visitors and it's answers

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1) What is a "Commodity"?

Commodity is a product having commercial value that can be produced, bought, sold and consumed. It is normally in a basic raw unprocessed state. But products derived from Primary sector and structured products are also traded at exchanges in Nepal. The list includes metals like Gold, Silver, Copper and non metals like Sugar, Coffee, Soya, Crude Oils etc. 

2) What are the different types of participants in Commodity markets?

Broadly, the participants can be classified as Hedgers, Arbitragers and Speculators. In other words, manufacturers, traders, farmers, exporters and investors are all participating in this market.

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3) How is trading done in the commodity exchanges?

Like the stock market online trading system, commodity exchanges are also typically on the online trading system. It is an order-driven, transparent trading platform, which is reachable to the various participants through the Internet,

4) What is the meaning of "Futures Contract"?   

Futures contract is an agreement between two parties to buy or sell a specified quantity and defined quality of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract. This is typically traded at regulated commodity exchanges.

5) What is the difference between spot market and futures market?

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 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.

6) What is meant by Hedging?

Hedging means taking a position in the futures or option 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.

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7) Who is a Speculator?

A speculator is one who enters the market to profit from the future price movements. He does not have any physical exposure. Speculators accept the risk that hedgers seek to avoid, giving the required liquidity to the market.

8) What is meant by arbitrage in commodity markets?

Arbitrage is making purchases and sales simultaneously in two different markets to profit from the price differences prevailing in those markets. The factors driving arbitrage are the real or perceived differences in the equilibrium price as determined by supply and demand at various locations.

9) What is the benefit of futures trading in commodities?

The biggest advantage of trading in Commodity futures is Price Risk Management and Price Discovery. An investor can avoid price risk, they can lock in their prices. Similarly, Farmers can protect themselves against undesirable price movements and decide upon cropping pattern. 

10) What is the statutory framework for regulating commodity exchanges in Nepal?

The Commodity Exchanges are regulated by Security Board of Nepal(SEBON) 
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11) What is the meaning of Basis?

Basic is the difference between the spot price of an asset and the futures price of the same asset underlying. The spot price is the ready price of prevailing in the physical commodity market while the futures price is the price of any specific contract that is prevailing in the exchanges where it is traded. 

12)  What is meant by ‘basis risk’?

Generally, the spot price of a commodity and future price of the same underlying commodity do not change by the same amount during the life of the futures contract. This uncertainty in the variation of basis is called as Basis Risk. 

13)What happens to the price of a futures contract on its maturity date?
On the expiry date the futures price usually converted with the spot price.
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14) What do you understand by the term contango?

Under normal market conditions, futures contracts are priced higher than the spot price. This condition is called as "Contango Market". Where the basis is in Negative Region.


15) What is meant by ‘backwardation’?

This situation arises when the price of futures contract is below the spot price of the same commodity. This happens when there is a shortage for the underlying asset in the cash market.
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16) What is Initial Margin?

It is the minimum percentage of the contract value required to be deposited by the clients or members to the exchange before initiating any new contract(Buy or Sell Position).

17)What is the role of clearing-house in commodity markets?

Clearing house of the exchange performs every activity related to  settlement of Profit or Loss, Delivery of the products,  margins and managing the settlement guarantee. 

18) What is the meaning of Spread?

Spread is the differences between Bid Price and Ask Price of Commodity. 

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If you have any comments and queries regarding Commodity and Derivative Market, Please feel free to ask us and don't hesitate to comment us. You can contact us though  our email. prajwol.munankarmi@gmail.com