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Budget 2017

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You are Here : Commodities FAQs

Q. Can one give delivery against futures contract?

A. Futures contract are contracts for delivery of goods and one can give delivery of goods against futures contracts depending upon the delivery logic of the contract design. But most of the futures contracts, the world over, are performed otherwise.

Q. Can the loss incurred on the futures market be set off against normal business profit?

A. The loss incurred on account of speculative transactions in futures market cannot be set off against normal business profit. This loss is however allowed to be carried forward for eight years, during which it can be set off against speculative profit.

Q. How are futures prices determined?

A. Futures prices evolve from the interaction of bids and offers emanating from all over the country - which converge in the trading floor or the trading engine of an Exchange. The bid and offer prices are based on the expectations of prices on the maturity date.

Q. How does futures market benefit farmers?

A. World over, farmers do not directly participate in the futures market. They take advantage of the price signals emanating from a futures market. Price-signals given by long-duration new-season futures contract can help farmers to take decision about cropping pattern and the investment intensity of cultivation. The farmers also benefit by the dissemination of the futures prices of the Exchange traded products as it improves his bargaining capacity.

Q. How many commodities are permitted for Futures Trading?

A. At present 113 commodities are in the regulated list i.e. these commodities have been notified under section 15 of the Forward Contracts (Regulation) Act. Forward trading in these commodities can be conducted only between, with, or through members of recognized associations. The commodities other than those listed under Section 15 are conventionally referred to as ’Free’ commodities. Forward trading in these commodities can be allowed.

Q. What are standardized contracts?

A. Futures contracts are standardized. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms of contracts standardized by the Exchange.

Q. What are the commodities Suitable for Futures Trading?

A. Commodities suitable for Future trading should be with Suitable demand and Supply conditions. The commodity should be free from substantial control from Govt. regulations, imposing restrictions on supply, distribution and prices of the commodity.Commodities Should be homogeneous, storable.

Q. What are the trading hours?

A. The trade timings of the Exchange from Monday to Friday are IST 10:00 a.m to 11.30 p.m. / 11.55 p.m.* (*during US day light saving period).

Q. What is a Futures Contract?

A. Futures are exchange - traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price.

Q. What is cash settlement?

A. It is a process for performing a futures contract by payment of money difference rather than by delivering the physical commodity.

Q. What is convergence?

A. The difference between spot and futures contract theoretically should have declining trend over the life of a contract and tend to become zero on the date on maturity.

Q. What is Warehouse Receipt?

A. It is a document issued by a warehouse indicating ownership of a stored commodity and specifying details in respect of particulars, like, quality, quantity and, some times, indicating the crop season.

Q. What is 'Backwardation'?

A. When the prices of spot, or contracts maturing earlier are higher than a particular futures contract, it is said to be trading at Backwardation.

Q. What is 'basis'?

A. It is normally calculated as cash price minus the futures price. Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis.

Q. What is 'Contango'?

A. Contango means a situation, where futures contract prices are higher than the spot price.

Q. Who Regulates Commodity markets?

A. SEBI regulates Commodity Derivative Markets Since September 2015. Prior to that Forward Market commission, Overseen by Ministry of Consumer Affairs regulated Commodities.

Q. Why do we need speculators in futures market?

A. Speculators are participants who are willing to take risk of hedgers in the expectation of making profit. Speculators provide liquidity to the market, therefore, it is difficult to imagine a futures market functioning without speculators.

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