Derivatives gain their value from the underlying security and have no value on their own. In the case of Derivative Commodity, the value is derived from the commodity, which is an underlying asset. It is an investment instrument that enables investors to trade commodities without buying them. The buyer purchases the right to exchange a commodity for a specific price at a future date.
If they sell them before the settlement date, they need not accept the delivery of the commodity. Also, the buyers need not pay the total value of their invested amount. Instead, they only pay a small price called Margin Price. The international financial markets and global trade rely heavily on these commodities. While trading in the Derivatives Market was introduced in India at the start of the 21st century, investors have seen heavy interest.
Now, in India, commodities are traded via two separate markets: Spot and Derivatives. While the Spot Market trades items to be delivered within four to five days, the Derivatives Market in India deals with Futures, Options, Currencies, and Swaps. Traders can alsoconsiderHybrid Derivative Instruments.
What types of commodities are traded in the CommodityMarket?
Commodities are divided into two parts: soft and hard. They are further distinguished based on where they get traded: locally, regionally, nationally, or internationally. Hard commodities like crude oil and metals have a good shelf life. On the other hand, soft commodities have a shorter shelf life and are perishable like agriculture products such as wheat, corn, soybean, cotton, etc.
Crude oil or petroleum is the most popular commodity traded globally. It has a slew of by-products like petroleum and diesel that make up an inherent part of our daily lives, hence the rising demand. Soybean is an essential commodity traded in the market. Its demand is based on the weather, biodiesel, and dollar.
Among metals, precious metals like gold and silver are also traded in the Commodity Derivatives Market. The price and direction of gold and crude oil are interrelated. Investors buy more gold when the US dollar falls as it is considered a hedge against inflation. On the contrary, when the dollar’s value rises, investors let go of the precious metal favoring the US dollar.
The Commodity Market is an excellent indicator of volatility, confidence, and sentiments. In India, the following significant indices facilitate Commodity Trading:
- Multi Commodity Exchange of India (MCX)
- National Commodity and Derivatives Exchange (NCDEX)
Commodities are the perfect way to diversify your portfolio beyond the traditional financial assets like gold. Plus, they serve a crucial role in securing capital amid periods of market bearishness.