Commodity Market Guide to Beginners

Commodity Futures are contracts to buy/sell 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.
Arbitrage
The simultaneous purchase and sale of similar commodities in different markets to take advantage of a
price discrepancy.
Basis
The difference between the spot or cash price of a commodity and the price of the nearest futures
contract for the same or a related commodity. Basis is usually computed in relation to the futures
contract next to expire and may reflect different time periods, product forms, qualities, or locations.
CASH –FUTURES = BASIS.

A derivative contract is an enforceable agreement whose value is derived from the value of an
underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or,
indices of commodities, stocks etc. Four most common examples of derivative instruments are
forwards, futures, and options.

A forward contract is a legally enforceable agreement for delivery of goods or the underlying asset on a
specific date in future at a price agreed on the date of contract. Under Forward Contracts (Regulation)
Act, 1952, all the contracts for delivery of goods, which are settled by payment of money difference or
where delivery and payment is made after period of 11 days, are forward contracts.

Futures contracts are standardized. In other words, the parties to the contracts do not decide the terms
of futures contracts; but they merely accept terms of contracts standardized by the Exchange.