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GeStepAhead Masteryourmoney Earnings

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Q. Are options also allowed in commodity derivatives?

A. Options in goods are presently prohibited under Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or person can organize or enter into or make or perform options in goods. However the market expects the government to permit options trading in commodities soon.

Q. Are there any custody charges?

A. No. There are no custody charges for holding the demat units

Q. How is the futures contract defined?

A. Gold Pure Mumbai 1-Kg future contract expiring on 20th Mar, 2006 is defined as "NCD-FUT-GLDPURMUMK-20-MAR-2006". Wherein "NCD" stands for NCDEX, "FUT" stands for Futures as derivatives product, "GLDPURMUMK" for underlying commodity and "20-MAR-2006" for expiry date.

Q. How is the value of the trade calculated?

A. It is not necessary that the unit of quantity and price is the same. For eg. Price for Gold is expressed in Rs per 10 gms but the quantity is submitted in gms. Therefore the quantity can not be multiplied directly. The value of an order/trade can be computed by multiplying the quantity with the price and then the result by the 'multiplier'. For eg. Multiplier incase of Gold is 10.

Q. How many days does it take to open a beneficiary account?

A. It takes at least 1 to 3 working days to complete all formalities of opening a beneficiary account

Q. I have placed the square off order. Can I modify that order?

A. No, square off orders cannot be modified. You can always cancel the same and place another square off order.

Q. Is Sales Tax applicable on all trades?

A. If the trade is squared off sales tax is not applicable. The sales tax is applicable only if a trade results into delivery for the seller. Normally itís the sellerís responsibility to collect and pay the sales tax. The sales tax is applicable at the place of delivery.

Q. Is Sales Tax Registration Compulsory?

A. Those who want to give (seller) physical delivery need to have sales tax registration number.

Q. Is the concept of trading in commodity futures new in India?

A. Commodity futures market was very much there in earlier times in India. In fact it was one the most vibrant markets till the early 70s. But due to numerous restrictions the market could not develop further. Now that most of these restrictions have been removed, there is enormous scope for the development and growth of the commodity futures market in the country.

Q. Is the margin % uniform for all stocks?

A. It may not be so. Margin percentage may differ from commodity to commodity based on the risk involved in it, which depends upon its liquidity and volatility besides the general market conditions. But all contracts within the same underlying would attract same margin %.

Q. Is there any charge for opening a beneficiary account?

A. The charges are notified by the DPs to all the clients holding beneficiary account with them. The DPs normally charge Annual Maintenance Charges (AMC) and transaction charges on all debit instructions. It is similar to the practice followed in equity market

Q. Is there any difference between the procedures of opening pool and beneficiary accounts?

A. Yes. Members of the Exchange can open a CM pool account with any of the DPs empanelled with NSEL. The Exchange issues a member ID intimation letter to the member, which has to be submitted along with the request for opening a CM Pool Account. Clients are required to submit their KYC documents for opening a beneficiary account.

Q. What are commodity futures?

A. A commodity futures contract is an agreement between two parties to buy or sell the commodity at a future date at today's future price. Futures contracts differ from forward contracts in the sense that they are standardized and exchange traded. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms standardized by the Exchange.

Q. What is a commodity market?

A. A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In spot market, commodities are bought and sold for immediate delivery, whereas in derivatives market, various financial instruments based on commodities are traded. These financial instruments such as 'futures' are traded in exchanges.

Q. What is an "Underlying" and how is it different than "Contract"?

A. A commodity enabled for trading on futures is called an "Underlying" e.g. Pure Gold, Rubber. There may be various tradable contracts for the same underlying based on their different expiration period. For example NCD-FUT-RBRRS4KTM-20-Jan-2006, NCD-FUT-RBRRS4KTM-20-Feb-2006 are "contracts" available for trading in futures having Rubber as "underlying".

There can be more than one underlying for different grades and location (for price basis) of the same commodity. For Eg. COTJ34BTD is Cotton J34 grade Bhatinda location and COTLSCKDI is Long Staple Cotton grade Kadi location. Similarly, COTS06KDI and COTS06SRN are two underlyings for the same grade of cotton but have their prices quoted as per different locations.

Q. What is dematerialised or demat form of commodities?

A. Dematerialisation of commodities implies that these commodities are stored in Exchange-designated vaults/warehouses and the record of the ownership is in electronic form, just like trading in equity shares. The legal and beneficial owner of the goods gets a credit in his account electronically, which is similar to holding a pass book in the bank. Similarly, transfer of ownership against buy and sale is done from one account to the other, just like money transfer through a cheque. The depository keeps records of holding and transfers in electronic form. The opening of account and transfer instructions are carried out by the agents of the depository, called Depository Participants (DPs).

Q. What is meant by calendar spread?

A. Calendar spread means risk off-setting positions in contracts expiring on different dates in the same underlying. For example, you take buy position for 20 MT in NCD-FUT-RBRRS4KTM-20-Feb-2006 @ 6550 per quintal and sell position for 10 MT in NCD-FUT-RBRRS4KTM-20-Mar-2006 @ 6850. 10 MT buy position in NCD-FUT-RBRRS4KTM-20-Feb-2006 and 10 MT sell position in NCD-FUT-RBRRS4KTM-20-Mar-2006 forms a spread against each other and hence called spread position. This spread position would be levied spread margin % for margin calculation instead of IM%. In this example, the balance 10 MT buy position in NCD-FUT-RBRRS4KTM-20-Feb-2006 would be non-spread position and would attract initial margin.

Q. What is the difference between delivery in physical form and delivery in demat form?

A. In case of physical delivery, a person gets a warehouse receipt in paper form, while in case of delivery in demat form, he gets a credit entry in his demat account.

Q. What is the pay-in and pay-out time for e-Series contracts?

A. Funds and delivery pay-in-is at 1:00 pm and pay-out is at 5:30 pm. Pay-in and pay-out for e-Series products are executed on the T+2 basis. Settlement is done from Monday to Friday, excluding holidays notified by the Exchange.

Q. What is the process of opening a demat beneficiary account?

A. The process is similar to opening demat account for equity. The investor is required to fill up a demat account opening form available with any of the DPs mentioned above and provide his KYC (know your client) documents

Q. Which are the major commodity exchanges in India?

A. There are 24 commodity exchanges in India. There are three national level commodity exchanges to trade in all permitted commodities. They are:

Multi Commodity Exchange of India Ltd, Mumbai (MCX)

MCX is an independent and de-mutualised multi commodity exchange. MCX features amongst the world's top three bullion exchanges and top four energy exchanges. Its key shareholders are Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank, Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and SBI Life Insurance Co. Ltd.
National Commodity and Derivative Exchange, Mumbai (NCDEX)

A consortium of institutions promotes NCDEX. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).

National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)

It is the first de-mutualised electronic multi-commodity Exchange of India. Some of its key promoters are Central Warehousing Corporation (CWC), National Agricultural Co Operative Marketing Federation of India Limited (NAFED), Gujarat Agro Industries Corporation Limited (GAIC) and Punjab National Bank (PNB).

Q. Who invests in commodities?

A. a. Investors.
b. Producers / Farmers.
c. Importers / Exporters.
d. Commodity financers.
e. Agricultural credit providing agencies.
f. Hedgers, speculators, arbitrageurs.
g. Large scale consumers. For e.g. refiners, jewelers, textile mills
h. Corporate having risk exposure in commodities.

Q. Who regulates the commodity market?

A. Just as SEBI regulates the stock market, Forward Markets Commission (FMC) regulates commodity market.

Q. Who regulates the commodity market?

A. Just as SEBI regulates the stock market, Forward Markets Commission (FMC) regulates commodity market.

Q. Why invest in commodities?

A. Transparency and Fair Price Discovery: Trading in commodity futures is transparent and a process of fair price discovery is ensured through large-scale participation. The large participation also reflects views and expectations of a wider section of people concerned with that commodity. Online Platform: Producers, traders and processors, exporters/importers get an online platform through MCX / NCDEX for price risk management.

Hedging: It provides a platform for producers to hedge their positions according to their exposure in physical commodity.

No Insider Trading: Dealing in commodities is free from the evils of insider trading. Besides, there are no company specific risks as those seen in stock markets.

Simple Economics: Commodity trading is about the simple economics of demand and supply. More the demand for a commodity higher is its price and vice versa.

Trade on Low Margin: Commodity Futures traders are required to deposit low margins, roughly 5 to 10% of the total value of the contract, much lower compared to other asset classes. The low margin, which again varies across exchanges and commodities, facilitates the taking of large positions at lower capital.

Seasonality Patterns: Quite often provide clue to both short and long term players.

No Counter party Risk: Much like the exchanges in the equity market, Commodity Futures market have Clearing Houses, which guarantee that the terms of the contracts are fulfilled, thereby eliminating the counter party risk.

Wide Participation: The emergence of online trading would enable growth in the commodity market, much akin to the one seen in the equity market. It would also ensure bringing the market closer to both, the user and the trader.

Evolved Pricing: The rise in participation would decrease the risk of cartelisation, ensuring a holistic view on the commodity. Hence, pricing would be more practical and less irrational leading to Fair Price Discovery Mechanism.

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