Commodity Derivatives

What is a Commodity Derivative?

• ”Derivatives” is a financial product which is based on a derived asset called underlying asset.
Underlying can be Securities, Stock Market Index, Commodities, Bullion, Currency etc.

• Commodity Derivative implies a contract where underlying is the Commodity

• Futures and Options are the major exchange traded derivatives

• Derivatives are mainly used for Trading, Hedging and Arbitrage

2
 Commodities: A History

• The modern trade in Commodity Futures could trace its origins back to the 17th century in Osaka,
Japan. Organized trading on an exchange started in 1848 with the establishment of the Chicago Board
of Trade (CBOT).

• Organized commodity derivatives in India can be traced back to 1875 with the Bombay Cotton Trade
Association’s future trading. Over time the derivatives market developed in several other commodities
in India. Following Cotton, derivatives trading started in Oilseeds in Bombay (1900), Raw Jute in
Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920) but it was discontinued in the
mid 1960‘s due to war, natural calamities and the consequent shortages.

• In 2002, the government allowed the reintroduction of commodity futures on nationwide screen based
exchanges. After merging FMC with SEBI in Sept 2015, SEBI took various actions like introduction of
Commodity Options, Negotiable Warehouse Receipts (eNWR) and Index Based Contracts. Recently
SEBI has also permitted many new participants like Mutual Funds (MF), PMS, Eligible Foreign Entities
(EFE), Alternative Investment Funds (AIF) Category-III and stock exchanges NSE & BSE in Commodity.

3
Global Exchanges and Major Commodities Traded

NYMEX COMEX CBOT LME ICE BMD

•Crude Oil •Gold •Soybean •Copper •Cotton •Crude Palm

•Natural Gas •Silver •Soybean Oil •Lead •Sugar Oil
•Heating Oil •Platinum •Soybean Meal •Zinc •Brent Crude
•Palladium •Wheat •Nickel
•Corn •Aluminum

4
Commodity Exchanges in India

 Multi Commodity Exchange (MCX): 2003

 National Commodity and Derivatives Exchange (NCDEX): 2003

 Indian Commodity Exchange (ICEX): 2009-2014, 2017

 Bombay Stock Exchange (BSE): 1st Oct 2018

 National Stock Exchange (NSE): 12th Oct 2018

 MCX & NCDEX Average Daily Turnover for FY20 is Rs. 34300 Crore and 1815 Crore respectively

 MCX Option Average Daily Turnover for FY20 is 1160 Crore

5
Commodity Contracts Traded in India
Base Metals
• Aluminium, Copper, Lead, Nickel, Zinc, Steel

Bullions
Hard
• Gold, Gold Mini, Gold Guinea, Gold Petal, Silver, Silver Mini, Silver Micro, Commodities
Diamond

Energy
• Crude Oil & Natural Gas

Agri Commodities
• Barley, Chana, Maize, Wheat, Sugar, Turmeric, Jeera, Coriander, Moong, Soft
Cardamom, Mustard Seed, Cotton, Cotton Seed Oilcake, Crude Palm Oil Commodities
(CPO), Kapas, Mentha Oil, Castorseed, Castor Oil, Palmolien, Gaur Seed, Guar
Gum, Soy Bean, Rubber, Refined Soy Oil, Paddy (Basmati) and Black Pepper

6
Why to Invest or Trade in Commodity ?

Leverage

Transparency Liquidity

Inflation
Diversification
Hedge

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Factors affecting Commodity Prices
Primary Factors

• Production, Inventories, Demand and Supply, Seasonality

• Government Policies, Tariff, Import Duties and Other taxes
• Geo-political concerns
• Imports and Exports
• Global Economic Growth
• Weather situation

Other Factors

• Currency, Inflation and Interest rates

• Costs involved in storage and transportation
• Regulatory changes
• Extra-ordinary events

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Participants in Commodity Market
Hedgers:
• Exporters & Importers
• Refineries & Manufacturing
• Processing Companies
• Farmers & Producers

Arbitragers:
• Brokerage Houses
• Proprietary Traders
• Investors

Traders:
• Retail & HNI Investors
• Institutional Traders

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Factors affecting Commodity Prices

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Commodity Derivatives vs Equity Derivatives
Commodity Derivatives Equity Derivatives

• Fundamentals are easy to understand • Complex fundamentals

• Limited number of Commodities • Thousands of shares

• Small Lot Sizes (Gold Petal 1 Gram) • Contract value between 5 lakh and above

• Lower Initial Margin • Higher Initial Margin

• Market Timings till 11.30 PM / 11.55 PM • Market Timings till 3.30 PM

• High Volatility provides opportunity • Comparatively Limited Volatility

• Contracts available up to twelve months • Contracts available up to three months

• Directly connected to International Market • Multiple factors impacting share prices

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 Relationship between MCX iCOMODEX and Nifty
Nifty vs iCOMDEX
12,500.00 660

12,000.00 640

620
11,500.00
600
11,000.00
580
10,500.00
560
10,000.00
540
9,500.00 520

9,000.00 500
Oct-17
Apr-17

Jul-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19
Jun-18
May-17

Sep-17
Jun-17

Dec-17

Feb-18

Sep-18
Mar-18

May-18

Dec-18

Feb-19
Mar-19

May-19

Sep-19
Jun-19
Aug-17

Nov-17

Aug-18

Nov-18

Aug-19
NIFTY ICOMDEX

Data Source:www.investing.com

 Nifty is risk asset, whereas Commodities are price sensitive to economic instability and geopolitical risks.
So when geopolitical or economic risks suddenly rises, Commodity (Gold, Silver, Oil, etc.) prices go up and
equity falls.

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13
MCX Gold and Relationship with Nifty
Gold is primarily a monetary asset and partly a commodity. It is the world's oldest international currency and
an important element of global monetary reserve. Gold, the most sought-after of all precious metals, is
acquired throughout the world for its beauty, liquidity, investment qualities, and industrial properties.

As an investment vehicle, gold is typically viewed as a financial asset that maintains its value and purchasing
power during inflationary periods.

Gold vs Nifty
40,000 12,500.00

38,000 12,000.00

11,500.00
36,000
11,000.00
34,000
10,500.00
32,000
10,000.00

30,000 9,500.00

28,000 9,000.00
Oct-18
Jan-18

Apr-18

Jul-18

Jan-19

Apr-19

Jul-19
Dec-17

Feb-18

Sep-18

Sep-19
Mar-18

May-18
Jun-18

Dec-18

Feb-19
Mar-19

May-19
Jun-19
Nov-17

Aug-18

Nov-18

Aug-19
Gold Mini Nifty

Data Source:www.investing.com

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MCX Gold Contract Specification
Particular Gold Gold Mini Gold Guinea Gold Petal

Contracts Bi-Monthly Monthly

Expiry Day 5th Day of the Month Last Calendar Day

Trading Session Monday to Friday: 9.00 AM to 11.30 PM / 11.55 PM

Trading Unit (Lot Size) 1 KG 100 Grams 8 Grams 1 Gram

Price Quote Unit 10 Grams 10 Grams 8 Grams 1 Gram

Tick Size Rs. 1 /- Per Quote Unit

Rs. Change Per 1 Rupee
100 10 1 1
movement

• Note: Internationally Gold is quoted in Ounce per USD. 1 Ounce is equivalent to a volume of 31.10 Gram.

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Tender Period & End of Settlement (EOS) Illustration
May-2021

Sun Mon Tue Wed Thu Fri Sat

2 3 4 5 6 7 8

9 10 11 12 13 14 15

16 17 18 19 20 21 22

23 24 25 26 27 28 29

30 31

Note: Yellow colour background dates indicates Tender Period

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MCX Silver Contract Specification

Particular Silver Silver Mini Silver Micro

Expiry Day 5th Day of the Month Last Calendar Day

Trading Session Monday to Friday: 9.00 AM to 11.30 PM / 11.55 PM

Trading Unit (Lot Size) 30 KGS 5 KGS 1 KG

Price Quote Unit 1 KG

Tick Size Rs. 1 /- Per Quote Unit

Rs. Change Per 1 Rupee
30 5 1
movement

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Crude Oil Variants / Benchmark
Crude Oil is a unrefined naturally petroleum product and can be made into a variety of products, including
Gasoline ( Diesel Jet fuel, Heating Oil and Natural Gas.

• West Texas Intermediate (WTI) Crude Oil: A high-quality crude oil explored and physically traded in the U.S.,
West Texas Intermediate is one of the largest traded commodity in the world. Its API gravity is
approximately 39º API and has 0.24% sulphur content. The New York Mercantile Exchange (NYMEX
Division of CME Group) is the primary exchange facilitating futures trade in this light sweet crude oil.

• Brent Crude Oil: Crude oil from the North Sea, UK, Brent is a pricing benchmark for crude from Europe and
Africa. With an API gravity of 38º API and 0.4% or less of sulphur content by weight, Brent Crude Oil is the
second most traded variety of crude in the world.

• Middle East Crude Oil: It is generally taken as the arithmetic average of Dubai and Oman crude grades. An
API gravity between 31º API and 37º API and 2.05% or less of sulphur content by weight makes Middle East
Crude Oil a heavy and sour crude oil. It is a variety with a very large physical market in the Gulf region. Most
of the Indian refineries use crude benchmarked against Middle East Sour Crude Oil. TOCOM is a prominent
futures trading platform that offers trading in this grade of crude oil.

In India, MCX is following WTI Crude as benchmark while BSE and NSE is using Brent Crude for benchmarking.

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Affecting Factors and Crude Oil vs USDINR and Nifty
• Economic factors: Industrial growth, Global financial crisis, Recession and Inflation
• OPEC announcements, US Crude inventories and refinery utilisation
• Exchange rate, Geopolitical events and Government trade policies (import duties, penalties, and quotas)
• Changes in the refining sector; for example, a drop in the rate

Crude Oil ($) vs USD/INR Crude Oil vs Nifty

110 75 6,500 12,500.00
100 73 6,000 12,000.00
71 5,500 11,500.00
90

MCX Crude Oil

69 11,000.00
Crude Oil ($)

5,000
80

USD/INR
67 10,500.00
4,500

Nifty
70 65 10,000.00
4,000
60 63 9,500.00
61 3,500 9,000.00
50 3,000
59 8,500.00
40 57 2,500 8,000.00
30 55 2,000 7,500.00
Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Jul-16
Oct-16

Oct-17

Oct-18

Apr-19
Apr-14
Jul-14

Jan-15
Apr-15
Jul-15

Jan-16
Apr-16
Jul-16

Jan-17
Apr-17
Jul-17

Jan-18
Apr-18
Jul-18

Jan-19

Apr-16

Jan-17
Apr-17
Jul-17

Jan-18
Apr-18
Jul-18

Jan-19

Jul-19
Crude $ USD Crude Oil Nifty

Data Source:www.investing.com

• Crude Oil ($) and USD/INR generally having inverse relationship.

• Crude Oil and Nifty also having inverse relationship. As higher Crude Oil prices adversely affects
corporate earnings and government Current Account Deficit (CAD).

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MCX Energy Specifications

Particular Crude Oil Natural Gas

Contracts Monthly Monthly

Expiry Day As per the Contract Launch Calendar
Trading Session Monday to Friday: 9.00 AM to 11.30 PM / 11.55 PM
Trading Unit (Lot Size) 100 Barrels 1250 mmBtu

Price Quote Unit 1 Barrel 1 mmBtu

Tick Size 1 Rupee 0.10 Rupee
Rs. Change Per 1 Rupee
Rs. 100 Rs. 1250
movement

• Note: A volume of 1 Barrels is equivalent to a volume of 158.99 Liters

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MCX Base Metals Specifications
Particular Aluminium Copper Lead Nickel Zinc
Contracts Monthly
Expiry Day Last Calendar Day
Trading Session Monday to Friday: 9.00 AM to 11.30 PM / 11.55 PM
Price Quote Unit 1 Kgs
Trading Unit 5 MT 2500 KG 5 MT 1500 KG 5 MT
Tick Size 0.05 Rupee 0.10 Rupee 0.05 Rupee

Rs. Change Per 1 Rupee movement 5000 2500 5000 1500 5000

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MCX Agri Commodities Specifications

Particular Cotton CPO

Contracts Monthly

Expiry Day Last Calendar Day

Trading Session Monday to Friday: 9.00 AM to 9.00 PM

Trading Unit (Lot Size) 25 bales 10 MT

Price Quote Unit 1 Bales (of 170 Kgs) 10 Kg

Tick Size 10 Rupees 0.10 Rupee

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MCX Commodity Indices
• MCX offers trading in BULLDEX, METLDEX and ENRGDEX Futures

• BULLDEX is a sectoral index based on the Gold 1 Kg (66.60%) and Silver Futures 30 Kg (33.40%)

• METLDEX is based on Base Metal Futures i.e. Aluminium (12.12%), Copper (34.55%), Lead (5.36%), Nickel
(31.78%) and Zinc (16.19%)

• ENRGDEX is based on the Crude Oil (75%) and Natural Gas (25%)

• Weights are rebalanced annually, during January Roll period

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MCX Commodity Indices Specifications

Particular BULLDEX METLDEX ENRGDEX

Contracts Monthly
Expiry Day As per the Contract Launch Calendar
Trading Session Monday to Friday: 9.00 AM to 11.30 PM / 11.55 PM
Trading Unit (Lot Size) 50 Unit 125 Unit
Price Quote Unit 1 Unit
Tick Size 1 Rupee
Rs. Change Per 1 Rupee movement Rs. 50 Rs. 125

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 Brokerage, Taxes & Charges
Brokerage: Rs. 20 per order only

• Commodities Transaction Tax (CTT) : 0.01% on Future Sell turnover (Rs. 1000 per crore)

• SEBI Charges: SEBI turnover charges at 0.0001% (₹ 10 per crore) for Non Agri commodities
and 0.00001% (₹ 1 per crore) for Agri commodities

• Stamp Duty: 0.002% on Buy Side (Rs. 200 per crore)

• Transaction Charges: 0.0026% (Rs. 260 per crore)

• Goods and Service Tax (GST) : 18% on Brokerage and other Charges

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Commodity Future BEP Analysis: Brokerage @ Rs. 20 Per Order
Particular Gold Gold Mini Silver Crude Oil Natural Gas Copper
Number of Lots 1 1 1 1 1 1
Buy Price 50,000 50,000 70,000 5,000 200 700
Sell Price 50,100 50,100 70,100 5,050 205 705
Buy Side Brokerage 20 20 20 20 20 20
Sell Side Brokerage 20 20 20 20 20 20
Total Brokerage 40 40 40 40 40 40
Exchange Transaction Charges (Both Side) 0.0026% 260 26 109 26 13 98
SEBI Charges (Both Side) 0.0001% 10 1 4 1 1 4
GST on Brokerage & Other Charges 18.00% 56 12 28 12 10 25.52
CTT (Sell Side) 0.01% 501 50 210 51 26 189
Stamp Duty (Buy Side) 0.002% 100 10 42 10 5 38
Total Expense (Including Brokerage) 967 139 433 140 94 394
Break Even Price 50,010 50,014 70,014 5,001 201 753
BEP in % 0.02% 0.03% 0.02% 0.03% 0.38% 0.42%
Net Profit / Loss 9033 861 2567 4860 6156 19031

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