What are Commodity Futures?

Commodity Futures are contracts to buy specific quantity of a particular commodity at a future date. It is similar to the Index futures and Stock futures but the underlying happens to be commodities instead of Stocks and indices

What are the major commodity Exchanges?

In Nepal the major Multi Commodities Exchange is Nepal Mercantile Exchange limited At international level there are major commodity exchanges in USA, Japan and UK Some of the most popular exchanges around the world are given below along with the major commodities traded:

Commodity markets are small. Aren't They?

This is the biggest myth about the commodities market. Commodities (spot) Markets in Nepal are about Rs.0.25 trillion worth per annum. Internationally the futures market in commodities is 5- 20 times that of the spot market.

What are the working hours for the commodity exchanges?

Commodity Exchanges (Mercantile Exchange Nepal Limited ) function from 3:45 Am to 3.00 AM with a break of 45 minutes

Who benefits from dealing in commodity futures and how?

Commodity futures are beneficial to a large section of the society, be it farmer, businessmen, industrialist, importer,. If you are an investor, commodities futures represent a good form of investment because of the following reasons.

• Diversification - The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification.
• Less Manipulations - Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations by individuals.
• High Leverage - Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations by individuals.
• - The margins in the commodity futures market are less than the Cash section of the equity market.

If you are an importer or an exporter, commodities futures can help you in the following ways.

• Hedge against price fluctuations - - Wide fluctuations in the prices of import or export products can directly affect your bottom-line as the price at which you import/export is fixed before-hand. Commodity futures help you to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any fluctuation in prices that happen subsequently.

If you are a producer of a commodity, futures can help you as follows:

• Lock-in the price for your produce - If you are a farmer, there is every chance that the price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures you can effectively lock-in the price at which you wish to sell your produce
• Assured demand - Any glut in the market can make you wait unendingly for a buyer. Selling commodity futures contract can give you assured demand at the time of harvest.
• Increase in holding power - You can store the underlying commodity in exchange approved warehouse and sell in the futures to realize the future value of the commodity.

If you are a large scale consumer of a product, here is how this market can help you:

• Control your cost - If you are an industrialist, the raw material cost dictates the final price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying commodity futures, you can fix the price of your raw material.
• Ensure continuous supply - Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.

How risky are these markets compared to stock & bond markets?

Commodity prices are generally less volatile than the stocks and this has been statistically proven. Therefore it's relatively safer to trade in commodities.

Also the regulatory authorities ensure through continuous vigil that the commodity prices are market-driven and free from manipulations.

However all investments are subject to market risk and depends on the individual decision. There is risk of loss while trading in commodity futures like any other financial instruments.

Are the trades/ settlement guaranteed by the exchanges?

YES, the commodity exchanges have got some of the most high profile corporate as their promoters. Such a high profile share-holding provides these exchanges valuable experience, knowledge and also high standards of operations . Also the exchange guarantees the settlement of trades and so eliminates the counter-party risk in the transactions.

Are there physical deliveries in commodity futures exchanges?

YES, the exchanges, in order to maintain the futures prices in line with the spot market, have made available provisions of settlement of contracts by physical delivery. They also make sure that the price of futures and spot prices coincide during the settlement so that the arbitrage opportunities do not exist.

How the deliveries are made possible?

The exchange has enlisted certain cities for specific commodities as the delivery centres. The seller of commodity futures, upon expiry of the contract may choose to deliver physical stock instead of settling the positions by cash, in which case he would be required to deliver the stocks to the specified warehouses. The buyer of the commodity futures, if he is interested in physical delivery would be matched with a seller and would be required to take delivery of the specified quantity of stock from the designated warehouse. World-wide commodity futures are generally used for hedging and speculation and hence physical deliveries are negligible. However the possibility of physical delivery has made these markets more attractive in Nepal.

Please note the delivery and settlement procedure differs for each exchange and commodity. Read the delivery/ settlement procedure carefully or contact us before deciding to give/ take physical delivery.