Commodity derivatives
Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
Commodity derivatives are futures and options contracts on commodities such as metals, energy and farm produce. Their value comes from the price of the underlying commodity. They help markets discover prices and let producers and users protect themselves against price swings (hedging). In India, the Forward Markets Commission (FMC, set up in 1953) regulated them until it was merged into SEBI in September 2015. SEBI has regulated them since. The main commodity exchanges are MCX and NCDEX.
Example
Futures trading in seven farm commodities has been suspended since December 2021, and the suspension has been extended. The seven are wheat, non-basmati paddy, chana, mustard, soybean, crude palm oil and moong. The concern was that speculation could push up food prices.
Don't confuse with
- Spot commodity market: the commodity is bought and sold for immediate delivery. In commodity derivatives, you trade contracts for a future date.
Related concepts
- Derivatives
- Forward contract
- Futures
- Options
- Swap
- Interest rate swap
- Credit default swap
- Hedging
- Arbitrage
- Futures and options trading