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Understanding the concept about Commodity Derivative Market

Understanding the concept about Commodity Derivative Market


Category : Knowledge Center

Commodity Derivative Market: It's a place where investors can directly trade contracts based on commodities like gold, oil, or agricultural products. These contracts are settled in the future, and they help manage risks associated with price fluctuations.

Need for Commodity Derivative Market: There are two main needs - (a) Hedgers use it to reduce risk and protect themselves from price changes in commodities they deal with, and (b) Convenience seekers use it for easy access to trading and efficient clearing systems.

Features of Commodity Derivative Markets: It complements investments in companies that use commodities, gives insights into a country's production and consumption patterns, and offers gains through price increases.

Difference between Spot Market and Derivative Market: In the spot market, buyers and sellers directly deal with each other, while in the commodity derivatives market, trading happens anonymously on stock exchanges using standardized contracts.

Advantages of Commodity Derivative Markets: It helps discover commodity prices, allows hedging to manage price risks, creates investment opportunities, and adds diversification to investment portfolios.

Nature of Commodities Traded: Eligible commodities must be durable, uniform, have frequent price fluctuations, and involve cash market risks for the derivative market to work effectively.

Players in Commodity Derivative Market: There are two main groups - Hedgers, who manage their risks by trading futures contracts, and Investors, who speculate to make profits from market inequalities.

Regulatory Framework: The Securities and Exchange Board of India (SEBI) regulates the commodity derivatives market to ensure fairness, transparency, and protect the interests of stakeholders and investors.

Types of Commodities Traded: Commodities are classified into four segments - Agricultural Commodities, Bullion and Gems, Energy Commodities, and Metal Commodities.


Conclusion: Commodities, like gold, oil, and agricultural products, are traded through commodity derivatives contracts to manage risks and make investments. This market helps stabilize prices, provides opportunities for profit, and diversifies investment options.

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