The market in which the physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts is called commodity market. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. The main terminal markets in commodities are in London, New York, and Chicago, but in some commodities there are markets in the country of origin.

The history of the commodity markets in the world and in India are to be known as a lot has to be learnt from the previous experiences. The instruments through which the commodities are traded are commodity derivatives like forwards, futures, option and swaps. The pricing of the commodity contracts helps us to understand the costs involved in the contracts like initial margin, maintenance margin and premium to be paid by the investors.

The commodity trading system helps us to understand how the commodities are traded using the tools by the investors to hedge their risks because of the price fluctuations which depends upon the demand and supply of the commodities. The role of arbitrage, hedgers and speculators are also observed in the trading system. Every trade involves the risk, the commodity trading too involves the risks there is volatility in the prices which depends on the demand and supply of the products. The risk management is very much important in commodity trading. The investor should enter into the commodity trading with the good knowledge about the markets, prices and risk factors involved in the trading.

Derivatives markets can broadly be classified as commodity derivatives market and financial derivatives markets. As the name suggest, commodity derivatives markets trade contracts are those for which the underlying asset is a commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. or energy products like crude oil, natural gas, coal, electricity etc. Financial derivatives markets trade contracts have a financial asset or variable as the underlying. The more popular financial derivatives are those which have equity, interest rates and exchange rates as the underlying. The most commonly used derivatives contracts are forwards, futures and options.

 

Executive Summary
Industry Overview
History of Commodity Markets
History of Commodity Trading in India
Commodity Market Trading System
Order Matching Mechanism
Trade Clearing Mechanism
Clearing and Settlement
Global commodity Exchanges
Indian Commodity Exchanges
Instruments of Commodity Contracts
Forward Contracts
Limitations of forward contracts
Future Contracts
Options
Commodity Trading System
Time Conditions
Price Conditions
Other Condition
Future contract Margins
Pricing of Future Commodity Contracts
The Cost of Carry Model
Option Payoffs
Payoff for Buyer of Call Options: Long Call
Payoff for Writer of Call Options: Short Call
Payoff for Buyer of Put Options: Long Put
Payoff for Writer of Put Options: Short Put
Pricing of Option Commodity Contracts
Complex Derivative-Swaps
Commodity Swaps
Interest rate swaps
Interest rate Swap Options
Currency Swaps
Equity Swaps
Credit Swaps
Risks Factors involved in Commodity trading
Annexure
Definitions
Abbreviations
Bibliography
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