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Commodity Derivatives in India

Learn about the history of commodity derivatives, global context of the market share, and the commodity market in India which is dominated by MCX.

Tejas Khoday
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History of Commodity Derivatives

As we saw in the previous chapter, there are two exchanges that dominate the commodity derivative market in India, the MCX and the NCDEX. While both the exchanges trade all types of commodities, the MCX is more renowned for the trading of non-agricultural commodities, while the NCDEX is more renowned for the trading of agricultural commodities. In this chapter, we will give a brief overview of the two exchanges and the various commodity derivative contracts that are traded in each of them.

 

Global and Domestic context of Commodity Derivatives

Before talking about commodity derivatives in India, let us first have a look at the global picture of the derivatives market. The table below shows the region wise figures of global futures and options volumes (in billion contracts):

global-domestic-context

As can be seen, the total trading in the derivatives segment (futures + options) accounted for 25.2 billion contracts in 2017, little changed from 2016. Of these, commodities represented 5.50 billion contracts, implying a share of around 22% in the global derivatives market (see pie chart below). This figure, however, represented a drop of over 13% from the year ago figure of 6.34 billion contracts, when commodities represented a share of around 25% in the global derivatives market.

trading in the derivatives segment

Notice above that commodity occupies the second position in the global derivatives market share, accounting for over a fifth of the total traded volume.

On the domestic front, futures turnover of all the commodity exchanges stood at ₹60.09 lakh crores in FY18, which represented a decline of 7% from FY17. The decline came despite the introduction of commodity options for a select group of commodities. Since FY15, total commodity futures turnover on Indian exchanges have ranged between ₹60 lakh crores and ₹70 lakh crores, nearly a third of that seen during FY12 and FY13.

 

Multi-Commodity Exchange of India Ltd (MCX)

Headquartered in Mumbai, the MCX started its operations in 2003. Since then, MCX has gone on to achieve a lot of milestones such as becoming India’s largest commodity exchange with a market share of nearly 90% as well as being ranked among the top 10 commodity exchanges in the world. The various commodities that are traded on the MCX include precious metals, base metals, energy products, and agricultural commodities. In FY18, the total futures turnover of MCX stood at stood at ₹53.83 lakh crores, a drop of 8% from FY17 numbers. With a total market share of nearly 90% including over 99% for bullion and 100% each for base metals and energy, MCX clearly dominates the commodities derivative segment in India. In 2017, MCX also introduced commodity options contract by launching gold options.Since then, the exchange has expanded its options universe and now includes copper, crude oil, zinc, and silver contracts.

The table below shows the average daily turnover for non-Agro commodities traded on the MCX:

Commodity Average Daily Turnover (₹m)
Gold 29163
Silver 24933
Crude oil 56925
Natural gas 13653
Aluminium 7626
Copper 18401
Lead 15641
Nickel 10411
Zinc 31090

The table below shows the list of all the commodity futures contracts that are traded on the MCX:

com-future-contracts
The table below shows the contract specifications for commodities that are traded on the MCX:As can be seen above, metals are available for trading in various sizes such as the regular contract and the mini contract. This enables a trader to trade in different sizes based on his risk appetite and trading capacity. As of now, agricultural commodities, natural gas, and brass are available for trading in regular contracts only, while the rest are available for trading in regular as well as in mini contracts.

specifications-com-contracts

Some key things to note in the above table:

Trading unit: refers to the trading size per contract. For instance, the trading size for gold is 1 kg. So, if a trader trades 1 lot of gold contract, he is gaining exposure to 1 kg worth of gold. Similarly, if he trades 100 lots of gold contract, he is gaining exposure to 100 kgs worth of gold.

Quotation/base value: refers to the price of the commodity that is reflected on the trading terminal. For instance, gold price is shown per 10 grams. So, a gold price of ₹33050 reflects the price per 10 grams of gold contract.

Profit/loss per ₹1 movement: commonly referred to as the lot size. This is the minimum profit or loss that will occur for every ₹1 move in the commodity. For instance, if gold price moves up by ₹1, a trader who is long gold will make a profit of ₹100 (₹1 price movement * 100 lot size), while a trader who is short gold will make a loss of ₹100. Similarly, if gold price moves up by ₹200, a trader who is long gold will make a profit of ₹20000 (₹200 price movement * 100 lot size), while a trader who is short gold will make a loss of ₹20000.

Tick size: refers to the minimum price movement in the commodity. For instance, the minimum price movement in gold is 1 rupee, while that in case of zinc is 5 paise. So, if gold is currently trading at ₹33050, the possible price movement in the next tick will be ₹1 or in multiples of ₹1. As such, the next tick, for instance, could be ₹33051 or ₹33045 etc., but cannot be something like ₹33052.5.

Initial margin: refers to the amount of money that must be deposited by traders (both buyers and sellers) in order to trade a commodity futures contract. This is usually a certain percent of the total contract value. For commodity futures contract on the MCX, the initial margin is the higher of the minimum specified percent by the exchange or the SPAN margin. As can be seen in the above table, the minimum initial margin in most cases is 4% for commodity futures on the MCX.

SPAN: As we saw above, initial margin is calculated as a certain minimum percent that is specified by the exchange or the SPAN margin, whichever is higher. SPAN is a sophisticated tool whose primary objective is to identify the largest possible loss that could reasonably occur from one day to the next based on a 99% Var (value at risk) methodology.

The table below shows the initial margin of all the commodity futures contracts traded on the MCX for the period February 25th, 2019. Keep in mind that this is calculated everyday by the exchange and thereby keeps changing depending on various factors.

Symbol Expiry Date Initial Margin (%)
Aluminium mini 28-Feb-19 5.94
Aluminium 28-Feb-19 5.78
Brass 28-Feb-19 4.38
Cardamom 15-Mar-19 8.33
Castor Seed 20-Mar-19 4.00
Copper 28-Feb-19 5.87
Copper mini 28-Feb-19 5.89
Cotton 28-Feb-19 4.00
Crude palm oil 28-Feb-19 4.72
Crude oil 19-Mar-19 9.43
Crude oil mini 19-Mar-19 9.64
Gold 05-Apr-19 4.00
Gold guinea 28-Feb-19 4.00
Gold mini 05-Mar-19 4.00
Gold petal 28-Feb-19 4.00
Lead 28-Feb-19 5.91
Lead mini 28-Feb-19 5.85
Mentha oil 28-Feb-19 8.48
Natural gas 25-Feb-19 13.43
Nickel 28-Feb-19 7.93
Nickel mini 28-Feb-19 7.88
Pepper 20-Mar-19 4.00
RBD palmolein 28-Feb-19 4.00
Rubber 15-Mar-19 4.00
Silver 05-Mar-19 4.20
Silver mini 28-Feb-19 4.20
Silver micro 28-Feb-19 4.17
Zinc 28-Feb-19 7.46
Zinc mini 28-Feb-19 7.52

 

National Commodity and Derivative Exchange Ltd (NCDEX)

NCDEX started its operations in 2003 and is today the second largest commodity exchange in India. It is a public limited company and some of its top shareholders include Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India (NSE), Canara Bank, and Punjab National Bank (PNB). NCDEX trades a wide range of agricultural and non-agricultural commodities. However, it is renowned for trading of agricultural commodities in India, where it occupies a bulk of market share. In FY18, NCDEX accounted for an 85% share in agricultural commodities that are traded on Indian exchanges. NCDEX started options trading in FY18, announcing the launch of option contract on guar seed futures, a commodity which contributes to over a fifth of the exchange’s total annual turnover. As of FY18, NCDEX offered 27 commodities for trading, which included 25 agricultural commodities and 2 non-agricultural commodities.

In FY18, the average daily turnover of NCDEX stood at around ₹2377 crores, which represented a growth of 3.5% from the previous year. The table below shows the bifurcation of the average daily turnovercommodity-wise:

Commodity Average Daily Turnover (in %)
Guar seed 22
Soya bean 13
Soya oil 13
Guar gums 11
Chana 9
Others 32

 

As can be seen above, the guar family accounts for a bulk of the turnover with a share of 33% followed by the soya family which contributed to over a fourth of the total turnover.

The table below shows the list of agricultural commodities that are traded on the NCDEX platform.

com-futures-contracts

The table below shows the contract specifications for agricultural commodities that are traded on the NCDEX:

agriculture-contracts
 

Summary

  • There are two exchanges that dominate the commodity derivative market in India, the MCX and the NCDEX.

  • While both the exchanges trade all types of commodities, the MCX is more renowned for the trading of non-agricultural commodities, while the NCDEX is more renowned for the trading of agricultural commodities.

  • The total trading in the derivatives segment (futures + options) accounted for 25.2 billion contracts in 2017. Of these, commodities represented 5.50 billion contracts, implying a share of around 22% in the global derivatives market.

  • With a total market share of nearly 90% including over 99% for bullion and 100% each for base metals and energy, MCX dominates the commodities derivative segment in India.

  • In 2017, MCX also introduced commodity options contract by launching gold options. Since then, the exchange has expanded its options universe and now includes copper, crude oil, zinc, and silver contracts.

  • In FY18, NCDEX accounted for an 85% share in agricultural commodities that are traded on Indian exchanges.

  • NCDEX started options trading in FY18, announcing the launch of option contract on guar seed futures, a commodity which contributes to over a fifth of the exchange’s total annual turnover.

  • As of FY18, NCDEX offered 27 commodities for trading, which included 25 agricultural commodities and 2 non-agricultural commodities.

 

Next Chapter

Understanding Commodity Derivatives

16 Lessons

it helps understand the the trading concepts in the commodity futures market with examples. It also explains the fundamentals of options trading in commodities and how to use them to hedge/trade using multiple different situations.

Basis, Contango, and Backwardation

9 Lessons

Understanding these concepts will help in gauging the prevailing sentiment and direction of commodity markets.These comprehensive lessons give a thorough explanation to help in trading and hedging using derivatives.

Comments & Discussions in

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Responses

Niven commented on May 9th, 2019 at 10:03 PM  
This is great! I can try my hand at commodity trading now. Never done that before as there was very little info available


tejas commented on June 5th, 2019 at 11:06 PM  
Yeah, barely anyone talks about the basics of commodity trading in India. It's like all the attention is on BNF derivatives ;). But don't worry, we're here and we'll add value in this regard. I intend to write a lot more on commodities.


tejas commented on May 9th, 2019 at 10:29 PM  
Hi Niven, Make sure to read it in detail!


Daniel Mathew commented on May 10th, 2019 at 8:44 PM  
Hi Tejas, if we look at the F&O market share chart we could see that the commodity segment actually contributes as much as the equity segment does. Do you feel that this share might increase in the near future provided increasing the awareness among the traders?


tejas commented on May 14th, 2019 at 5:33 PM  
Hi, the segment will surely grow but the equity & Equity derivative markets are much much larger in terms of total turnover.


Harsha Vardhan commented on May 10th, 2019 at 8:58 PM  
This is very useful. As an employee I don't have time to trade. Commodity is one segment where we can trade after office hours. I was looking for some good materials where I can learn the basics. Thanks you very much sir. It is quite handy.


tejas commented on June 5th, 2019 at 11:03 PM  
Thanks, Harsh Vardhan, Assuming that you work in the first half, commodities are most suitable for you as the majority of the moves happen during American hours which is post 7 PM,


Dr.Tushara Rao commented on May 10th, 2019 at 9:04 PM  
I am new to the stock market. I really liked "School of stocks". As a beginner to stock market, all the modules are in the simple and easy to understand. Thank you so for helping us to understand the stock market.


tejas commented on June 5th, 2019 at 11:10 PM  
Hi Dr. You're welcome! Your good words will help motivate me to write more in the future. Stay tuned.


Vara Prasad commented on May 10th, 2019 at 9:12 PM  
I am so impressed the way the trading platform in coming up based on the clients feedback. Thank you so much for introducing commodity. Most of the traders fear to trade commodity because of the fear. The knowledge will help us to overcome this fear. This is very useful to gain the knowledge. Thanks a lot Tejas for adding Commodity in the school of stocks. Very helpful modules.


tejas commented on June 5th, 2019 at 11:11 PM  
Thank you! Do spread the word and help others learn the basic fundamentals of commodities. After we got the MCX license, I was so surprised by the lack of knowledge about basics among the retail trading community. There are many veterans who have spent a lot of time to understand stuff, but due to the lack of reliable information, there is little awareness. Let's change that.


Rakesh commented on May 13th, 2019 at 1:09 PM  
I used to search on Google for about 2 years, how to learn the commodity trading in India and Google hardly answered to the questions :).. But now i believe that search has came to an end at "School of Stocks". Thank you Fyers!.


tejas commented on June 5th, 2019 at 11:13 PM  
:-)


Mahesh commented on May 22nd, 2019 at 10:39 PM  
Very informative!!! Thank you so much for introducing commodities and this module will also help me know the complete information about the MCX.


pratyush commented on June 4th, 2019 at 5:51 PM  
currently which commodity exchange deals with more trading of commodities MCX or NCDEX?


tejas commented on June 5th, 2019 at 11:14 PM  
MCX has a virtual monopoly in the commodity markets as of now. Recently, NSE and BSE have launched commodity segments too but so far there is no action there.


Suresh commented on June 14th, 2019 at 11:03 PM  
Great Initiative , Keep going FYERS. What potential you see in the Indian Commodity Market in near Future.


tejas commented on August 14th, 2019 at 4:18 PM  
Thx Suresh, unless agri products or other innovative products are launched, the scope will not change by much. There will be incremental growth in volumes as the number of retail market participation is on the rise.


Bhupati commented on June 14th, 2019 at 11:10 PM  
Which is the best asset among the stock and commodity as commodity appreciation is cyclic in nature.


tejas commented on August 14th, 2019 at 4:19 PM  
Bhupati, Stocks are the best long-term assets. Commodities are meant for traders and the cyclicality is actually a boon if you're a short-term trader.


chandan commented on July 15th, 2019 at 11:31 PM  
I haven't started trading in MCX what about the margin required for the contracts, & what is the minimum margins required to trade in MCX.


tejas commented on August 14th, 2019 at 4:24 PM  
For margin requirements, you can refer to our margin calculator.


commodities