Commodity / Derivatives
Commodity Derivatives are investment instruments allowing investors to reap profits by investing in commodities without owning them. A commodity is any item that can be exchanged or traded. On the other hand, its derivative comprises the value of the underlying assets.

Derivatives are available as forwards, options, futures, and swaps, with the commodities like gold, copper, cotton, and crude oil, as underlying assets. These commodity derivatives help manage price risks that are likely to affect the producers, manufacturers, etc.

The commodity derivatives market offers investors a chance to invest directly in the commodities, not through the firms that trade them. These are invested in as forwards, options, futures, or swaps. However, whichever form they are traded in, the transaction occurs at a predetermined price and decided date.

Risk Givers and Risk Takers participate in the transaction of these derivatives. The former is the one who has physical exposure to the commodities, realizes the associated risk, and tries to pass it on to someone else by selling or purchasing the position on the stock exchange. On the other hand, risk takers are not exposed physically to the commodity but are ready to take risks by selling or buying the positions. While the risk givers are hedgers here, the risk takers are the investors.

The derivatives transaction can either be undertaken via the spot market, where the assets could be transacted on the spot or within two business days, or in the futures market or forwards market, where the transactions are booked for a future date.

Features
The features that make commodity derivatives trading one of its kind include its presence in multiple forms, its trading mechanism, and the settlement process.
• Types: These derivatives are available as contracts of different forms:

• Forwards contract – A private agreement whereby the buyer promises to purchase those derivatives.

• Futures – These are similar and standard forward contract formats for commodities that trade on exchanges.

• Options – This agreement offers the holders the right to buy or sell the underlying asset on a predetermined future date.

• Swaps – It is a contract using which two parties agree to exchange cash flows.

• Mechanism: The market is for those who do not require the items for their use but invest in them per the price movements only to reap profits.

• Settlement: The market involves the exchange of funds and goods, and a Clearing House handles the settlements related to commodity derivatives.
Types

Based on how these are traded, the derivatives are classified into two types – Over-the-Counter (OTC) and Exchange Traded commodity derivatives.

The OTC derivatives are structured contracts whereby two parties transact outside the exchange. On the other hand, exchange-traded derivatives are standardized contracts for the transaction to occur on a stock exchange.

“My Rupee Mantra’s Role
– Help accurately measure market volatility.
– Help in identifying the effects of the rise and fall of the prices in various industries.
– Help in proper risk assessment.
– Analyse the market sentiments, investors’ interest, and market confidence as reflected via the rise and fall of commodity prices.
– Create a Mantra for the clients to reap profits.