Multi Commodity Exchange of India Limited (MCX)

Commodities traded on the MCX platform

MCX is India’s first listed exchange, which is started in November 2003
MCX is leading commodity derivatives exchange with a market share of 90.1%
And MCX awarded as the best commodity exchange of India in 2017 from Ph.D. Chamber of Commerce and Industry.

MCX Chairman: Saurabh Chandra
MD and CEO: Mrugank Paranjape
President: P. K. Singhal

The MCX commodity market can be classified as the following types of commodities.

Products for trading in MCX

Trade timings as follows

Investors or traders:

The commodities are traded on daily basis by millions of investors like:

Banks – they keep increasing returns of their large capital,

Speculators – common traders who are not interested in taking over or delivering commodities. They only speculate on price movements (you may also become this kind of the trader in the future.

Funds – for example mutual or hedge funds, which manage the capital of passive speculators who indirectly give their money to traders who trade on their client’s behalf with the aim to increase the value of their investments.

Commodity Producers – Mining Companies, Farmers, Growers, etc.

Commodity Manufacturers – they need commodities for their business purposes, e.g. corn starch manufacturers buy corn, electronics manufacturers need silver to produce necessary components etc.

FAQs

What is a commodity?
Commodity means a raw material or primary agricultural product which can crude oil, natural gas, crude palm oil etc. we can buy or sell this product in a commodity market.

What is commodity market?
This is the marketplace for buying, selling and trading raw or primary products for traders and facilitates in worldwide trading experience to hedge price risks.

Generally, commodities are categorized into two types:

1. Hard commodity

• Hard commodities are typically natural resources that must be mined or extracted (such as gold, silver, rubber and crude oil)
• Derivatives are either exchange-traded or over-the-counter (OTC)

2. Soft commodity

• Soft commodities are agricultural products or livestock (such as corn, wheat, coffee, sugar, soybeans, and pork

Categories of commodities:

• Metals (including gold, silver, platinum, and copper)
• Energy (including crude oil, heating oil, natural gas and gasoline)
• Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar)

How does the commodities market work?
The commodities market works like any other market. It’s physical or virtual space, where one can buy, sell (or) trade various commodities at current or future date. A futures contract is an agreement between the buyer and seller wherein the buyer promises to pay the agreed-upon sum at the moment of the transaction when the seller delivers the commodity at a pre-decided date in the future.

What is commodity futures contract and how does it work?
It is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future. Buyers use such contracts to avoid the risks associated with the price fluctuations of a futures’ underlying product or raw material.

It works like:

• Futures contracts are standardized agreements that typically trade on an exchange.
• Future contracts can be used by speculators to make directional price bets on raw materials.
• Buyers and sellers can use commodity futures contracts to lock in the purchase of sale prices weeks, months or years in advance.
• One party to the contract agrees to buy a given quantity of securities or a commodity and take delivery on a certain date.
• If the price of the underlying commodity goes up, the buyer of the futures contract makes money. He gets the product at the lower, agreed-upon price and can now sell it at the today’s higher market price.

What is commodity options contract and how does it work?
An option is a derivative contract which gives the buyer (holder) the right to buy or sell an underlying, but not the obligation. For owning this right, the option holder pays a price (option premium) to the seller of this right. The seller (writer) of an option, on the other hand, bears the obligation to honor the contract should the buyer choose to exercise the option.

It works like:

• MCX offers options on commodity futures contracts traded on the exchange.
• Commodity options are useful risk management tools, particularly for the small stakeholders, as the option buyer does not generally have to maintain margins.
• The option buyer will exercise their option only when the price of the underlying is favorable to them, otherwise not
• Based on the right of the holder, options are of two types:
  • Call options: It gives the buyer the right to buy the underlying
  • Put options: It gives the buyer the right to sell the underlying
• Based on exercise, options can primarily be of two types:
  • American: The buyer can choose to exercise the option at any time before the expiry of the option contract.
  • European: The buyer can choose to exercise the option only on the date of expiration of the contract.
• As per current regulatory norms, only European style commodity options are available in India at present.
• Commodity options on exercise devolve (transferability) into the underlying futures contracts. All such devolved futures positions open at the strike price of exercised options.
• There is comparable to price insurance for the hedgers which can be bought by paying only a one-time option premium.

Margin:

• Initial Margin: Customer’s funds put up as security for a guarantee of contract fulfillment at the time a futures market position is established.
• Additional Margin: Margins imposed on both long and short sides over and above the other margins.
• Special Margin: The margins which are imposed only on one side, i.e. either on the long side or short side.
• Tender Period Margin: Imposed at such percentages as defined in the product/ contact specification on the incremental basis and applicable on both outstanding buy and sales side, which continues up to the expiry of the contract. A tender Period margin is released for the position when Delivery Period Margin is imposed.
• Delivery Period Margin: When a contract enters the delivery period at the end of its life cycle, the delivery period margin is imposed as per contract specification and is applicable on all outstanding buy and sales side and continues up to the settlement of delivery obligation. When a seller submits delivery documents along with surveyor’s certificate, his position is treated as settled and his delivery period margin to such extent is reduced. When a buyer pays money for the delivery allocated to him, his delivery period margin is reduced on such quantity for which he has paid the amount.
• Extreme Loss Margin: Levied to cover the expected loss in situations that lie outside the coverage of the SPAN-based initial margin. The SPAN margin is based on a statistical concept called VAR (Value at Risk). It basically means that the initial margin should be large enough to cover the loss of your position in 99 % of the cases.

What is Hedging in the commodity market and how does it work?
Hedging is the act of reducing your risk of losing money in the future.

Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another. Technically, to hedge you would invest in two securities with negative correlations.

It works like:

The prices of commodities fluctuate constantly. If traders want to protect themselves from the risk of future fluctuations, they buy or sell positions in the futures markets.

Let us understand this with the help of an example. If an individual involved in sugar processing believes that the price of sugar—which is currently saying Rs. 20/kg—will increase in the coming months, he will buy a position in the futures market at today’s price. So, even if the price rises from Rs. 20/kg to Rs. 23/kg in a month, he will get a price of Rs. 20/kg from the seller at the end of the contract. This act of buying long positions to avoid upside risk in the futures market is called long hedging.

Similarly, if a farmer anticipates that the price of wheat might fall from Rs 50/kg to Rs 40/kg, he will sell future contracts at today’s price (i.e. Rs 50/kg). So, even if the price falls to Rs 40/kg, he will still get Rs 50/kg according to the contract. This act of selling positions in the future market in order to protect one’s investments against downside risk is called short hedging.

How to invest in commodities?

• Consult with a professional financial advisor who is familiar with commodities and who do not earn a commission from convincing you to make a particular investment
• Open a brokerage account.
• Determine how much money you are ready to invest
• Deposit money into your brokerage account
• Invest in physical commodities
• Maintain a balanced allocation of assets.
• Don’t hold too much of your money in commodities
• Rebalance your portfolio periodically.

What are the required documents to open a trading account in commodity market?

• Pan Card
• Address Proof
• Bank Canceled Cheque
• Two passport size photos
• Six months bank statement also required

How you’ll get profits?
Risk and returns are very high in the commodity market. Your profits based on your risk factor.

Why should we invest in commodity market?
It depends on Investor who can take many risks he/she will get high returns.

What is the investment amount you should have for trading in commodity market?
The minimum amount of capital requirement is depending on the contract size and contract value and in general referred as initial margin. Approximately, the requirement will be around 5-10% for MCX or NCDEX, once your minimum maintenance amount is crossed then you need to top up your account again.

Can NRI trade in commodities?
Yes, one can open an account here in India.

At MCX one has to open NRE account for individuals working in outside India. Documents required to submit as follows:

• Identity card
• Overseas Address Proof is mandatory and has to be self-attested by the applicant.
• NRI needs to open PIS Bank Account with a designated bank.
• Copy of RBI Approval/Permission Letter from the PIS Banker (Attested by the Banker).
• D-mat account details.

Can HUF trade in commodities?
Yes, one can open trading D-mat commodity account in the name of HUF.

Almost all brokers provide this facility.

• Duly filled Trading & D-mat/Commodity form with a photograph of Karta affixed and signed across.
• Pan Card of HUF and Karta.
• Address proof of HUF and
• Income proof: bank statement of HUF indicating its existence.
• Declaration to be given by Karta & all major co-parceners of the HUF. HUF Declaration for D-mat account.
• Karta seal/stamp is mandatory on all the signature fields and on all the proofs provided.
• Karta should sign the Account Opening Form and other documents under the stamp of HUF.

Why can one not invest long term in commodity market?

• Just like another asset as stock and bonds, Investment in commodities doesn’t generate large income for the investor.
• Commodities have fluctuated markets and most volatile security among other assets.
• Commodities are almost double as stocks and four times as volatile as bonds.
• Volatility makes commodities very risky for some traders.
• Disinflationary and deflationary pressures are proving persistent. Assets, like commodities, which act as a hedge against rising prices have become less attractive.

How many commodity exchanges are there in India?
In India – six commodity exchanges are there

• National Commodity and Derivatives Exchange Ltd. (NCDEX)
• Multi commodity exchange of India Ltd. (MCX)
• National Multi Commodity Exchange
• Indian Commodity Exchange
• ACE Derivatives Exchange
• Universal Commodity Exchange