6:58 pm
My Trading Corp.
Know the Market
The basic markets where the commodities are bought and sold for immediate cash and immediate delivery are known as the spot market.
Any contract entered into based on the current market prices for a future delivery and payment obligations are know as the derivative contracts of the underlying spot commodity. A few derivative contracts are listed below.
FORWARDS: Customized, Risk Exposed, Contracted to be bought or sold for a future date
FUTURES: Standardized, Exchange Traded, Daily Settled forward contract.
So a commodity futures contract is a standardized forward contracts traded on the recognized Commodity Exchange.
There are about 22 local Commodity Exchanges recognized by FMC (Forward Markets Commission), Which is a division of Government of Consumer Affairs and Public Distribution that are permitted for Futures Trading. Theses are at present mostly agricultural commodities like Oilseeds, Seeds, Deoiled Cakes, Coffee, etc. These commodities are standardized as per the following criteria for facilitating trading in the futures market: -
COMMODITY | Commodity Such as castor Seed, Groundnut Oil, RBD Palmolein, Coffee etc |
QUANTITY/ CONTRACT SIZE OR TRADED ABLE LOTS | These are the minimum quantity specified in a single order and all orders should be in multiples of it. For example 1MT might be the lot size for a particular commodity in a specific exchange and orders can be in multiples of it (It is also know as the contract size) |
DELIVERY MONTHS | A commodity Futures contract can be traded for a delivery of all those months for which the Exchange has allowed it. So at a time there can be more than 1, may 2 or 3 contract months of the same commodity for which, the price might be quoted for trading with different delivery months. (The time duration from the start of the contract for trading until the expiry date is know as the cycle of the contract) |
PRICE QUOTES | How are the price quoted for trading purpose. E.g.: - RBD Palmolein may be quotes as RS/10 kgs while the contract size may be 1 MT. Therefore in this example the Price quoted has to multiplied by 100 to get the trade value of one contract in RBD Palmolein (because 10kgs X 100= 1 MT) |
QUALITY SPECIFICATIONS | They are quality or grades and other specifications of the commodities are also standardized and will be available with the Business rules of the exchange |
The market participants |
Besides the commodity Brokers there are other participants whose purpose to trade in the futures market could be quite interesting to know for all those who intend to participate in the Futures market.
They can be broadly classified into two main categories. One who is looking for potential profits from price movements with an intention of making money. And they could be INVESTORS, TRADERS, SPECULATORS, ARBITRAGERS, and INVESTMENT OR PORTFOLIO ANALYST.
While the others are know as HEDGERS
These are the ones who are concerned about which way the prices are moving and want to transfer their risk against any adverse price movements the commodity they are actually physically dealing. Some of the hedgers are listed below and their objective fro trading in this market: -
EXPORTERS: who need protection against higher prices of commodities contracted fro a future delivery but not yet purchased.
IMPORTERS: who want to take advantage of lower prices against the commodities contracted for future delivery but not yet received.
FARMERS: who need protection against declining prices of crops still in the field or against the rising prices of purchased inputs such as feed
MERCHANDISERS, ELEVATORS: who need protection against lower prices between the time of purchase or contract of purchase of commodities from the farmer and the time it is sold.
PROCESSORS: who need protection against the increasing raw material cost or against decreasing inventory values.
The Margin System |
Futures market work on system called as Margin System
Margin is good faith deposit money that has to be kept with a registered Member of the exchange (they can be clearing member, trading cum clearing Member, register broker or any other category of membership of the exchange who are permitted to accept orders for the clients), in order to initiate or be eligible for trading in commodity futures. The Member in turn has to maintain a MARGIN ACCOUNT with the Exchange besides keeping a security Deposit with the clearing house of the Exchange
While the exchange takes care of the smooth and orderly execution of the trades, the clearinghouse acts as the third party entity to ensure and guarantee all the trades done on the exchange floor or the electronic platform. So trader need not have to directly deal with another trader, the clearing corporation takes the role of the buyer for every seller and the role of the seller fro every buyer. In order to see and guarantee the financial fulfillment of the trade, it takes margin deposit from both the buyer and seller before allowing them to trade.
Every exchange is a Membership organization, regulated by the FORWARD MARKETS COMMISSION, a division of Government of India, Ministry of Consumer Affairs and Public distribution. While the Exchanges establish the rules for trading, the FMC establishes the regulations for controlling the functioning of these commodities futures markets.
So when a trader wants to trade in commodities worth say 25,00,000 then he need not have to invest that much. He can trade that much by keeping a margin amount that is a certain percentage of the actual value (usually that is around 2% to 15%) depends on exchange to exchange and on commodity to commodity.
This is called as leveraging …it can work for you…
Or against you…depend on how your trading style, rule and need are???
Things to Know before your First Futures Trade |
Since Futures Contract are contracted for a future date, it is important know where the spot market is, before you can make your analysis of what the futures price might be at the time of delivery, to arrive at a reasonable level to buy or sell. While an Hedger would be just making his calculation to arrive at the price protection level and the quantity that has to hedged.
The spot prices of various commodities that are permitted for futures trading are available at various private and Government Sponsored web sites. We are in synergy with institutes to get the real time spot market prices on our web site very soon. You can also get some fundamental news about the markets and of the commodity of your choice in leading newspapers or other web-news agencies.
Theoretical relationship between the spot and futures prices are calculated as follows: -
Futures Price= Spot Price + Cost of Carry
A futures Trade necessitates storing and carrying the underlying commodity until the delivery date. This entails costs, Benefits, or both to the potential deliverer. ‘Cost of Carry” includes storage costs, transportation costs, insurance costs, interest costs, other opportunity costs as well as benefits.
Also the actual difference between the futures price and the spot price traded on a particular day is called as the BASIS for that particular contract month of the commodity.
Usually the Futures Price of Commodity > Spot Price (With the further months contracts priced slightly Higher). However it is not necessary in all cases.
For most storable commodity the difference between the spot price traded on a particular day is positive and as the contract month keeps coming nearer to the expiry date, it goes on decreasing and finally on the day of the delivery, the Future Price is nearly the same as the spot price.
Having Know this you will have to find out the following information’s for making the first trade.
Of course a few practices and mock trades are recommended. The initial preparation would involve like getting to know which commodities are traded on which exchanges, who are registered members, what are the delivery months for those commodities, what are the margin requirements, what is the volume of activity on those commodities, etc. Much of these required initial information’s you would find it in our site.
Having collected all this information’s, you are now ready for you first trade.
Your First Trade |
Now let us assume that the spot price of MUSTERED OIL on 9th September 2002 is 350/10kgs and the prices quoted on the exchange are available for SEP,OCT, NOV, DEC and JAN.( Assuming that the current Date is 9the September 2002)
(Earlier contract months won’t be available as they are already expired, while the later months beyond Jan are also not available, as they are not yet started. Note again the present Month that is September; here there won’t be much volume as it has entered into the delivery period. (Assuming that the delivery period for the contract is from 1st to 15th of the Delivery Month). Avoid taking fresh positions in such contracts. Instead go for the next immediate contract month that is OCT.
Let us say after you analysis about the market, you are bearish about the market and would like to SELL 10MT of MUSTERED OIL @ 360 for OCT Delivery.
Having sold in the market, we will have to wait for the market to gives us a lower level to buy back the contract before the delivery date in OCT.
The obligation to take delivery by a BUYER can be removed by selling back the contract before the delivery period.
The obligation to gave delivery by a SELLER can be removed by Buying back the contract before the delivery period
So now you your first sample trade as follows: -
SELL 10 lots OCTOBER MUSTERED OIL @ 360/10kgs
Top
Profit and Loss Calculations |
Your order was: -
SELL 10 OCT MUSTERED OIL @ 360
Lets say after a few days the market goes down and you are able to come buy back it from the market at 354/ 10 kgs. Then your square off trade or liquidation would be
BUY 10 OCT MUSTERED OIL @ 354
Your profit and loss calculations will be as follows: -
PROFIT/<LOSS>=
(Selling Price- Buying Price) X No of Units or lots X Price Factor – Fees
Price Factor=Contract Size/Price Quotes quantity
In this case the Price Factor = 1000kgs (1MT)/ 10 Kgs (price quoted for 10kgs)
Now,
The PROFIT/<LOSS>=
=(360- 354) X 10 X 100 – Fees
=RS 6000 – Fees
In case you have to keep the initial SELL open for several days before you can get your level of exit or square off or liquidation. Then in that case the clearing corporations of the exchange will calculate your open position value on mark-to-market bases at the close of the day each day and depending on the profit or loss made in the position, the amount will be credited or debited in your account.
Fees are usually charged only once during entry and exit. There is no carry forward cost involved.
Final Points |
Choose your broker properly in this market, who can not only educate you about trading in these markets, but also is able to keep you informed about various activities in the markets. Enter the market where there is liquidity and high volume. Keep track of your daily trading activity and the mark-to-market profit or loss. Have trading Plan no matter whether it’s for hedging or for investment purpose.
0 comments:
Post a Comment