What are commodity futures contracts and how do they work ?

Posted by Epicram on June 28th, 2017

Commodity futures contracts are agreement between two parties a buyer and a seller, to buy and sell a particular commodity in future at pre decided date and price.Both the parties are under obligation to fulfill the commitments as stated in the contract. Depending on needs different contracts can be framed in future market which have their own specifications.Large number of traders , trades in future contracts of commodities like gold, silver, aluminum, copper, crude oil,zinc, nickel using precise mcx tips of market experts.

 

 

Some important features of commodity futures contract are discussed below:

 

1)Standardized contracts

These are highly standardized contracts and commodities traded on exchange like mcx and ncdex are required to be delivered on price and date as stated in the contract, ignoring all the changes in current market price.

 

2)No counter-party risk

 

Counter-party risk is the risk which is faced by both the parties involved in future contract if any one of them do not fulfill the commitments made by them.To ensure that all the terms of contracts are fulfilled commodity future exchange uses a clearing house.

 

3)Well organized contracts

 

These contracts are traded on organized exchange like ncdex, mcx in India.Since they are traded on exchange there is no chance of fraud here. Traders can learn about specification of contracts before entering in to it.

 

4)Allows margin trading

 

Traders do not have to pay entire value of contract to enter in it. A margin which is near about 4-8% of total value of contract is required to be paid.Traders can take benefits of leveraged positions here.

 

 

How commodity futures contracts works:

 

The two parties: buyer and seller gets benefited when price fluctuation takes place in their favor.A buyer is benefited when the price commodity whose future contract he is having rises up, as price of that commodity is more and he is able to buy it at lower price and further he can sell it in the market at a higher price.When price of a commodity falls then seller of that particular commodity gets benefited as he is able to sell it at a high price.Physical delivery of commodity is generally not made. Traders try to get benefited from price fluctuations.

 

Trading in future contracts of commodities is performed similarly as in stocks, but here underlying asset is different. Such contracts give a way to successfully hedge against future price risk.Efficient trading in commodity futures requires some kind of volatility in the underlying commodity, more number of buyers , sellers and underlying commodity should be exchangeable.Market experts with good knowledge help traders with useful recommendation on currency tips , mcx trading tips and more.Following these advise facilitates in earning more profitable returns without facing much risk.Along with traders, speculators also exists in future market.Beware of this fact and restrict your decisions on the basis of facts only.

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