Prepared By:

Swikar Gupta
Commodity Varun Gupta

Derivatives Anushka Jain

Bhuvan Jain

Deep Jain
 An introduction to
Commodity Derivatives
Commodity Derivatives Vs Physical Commodity

Derivative Commodity Physical Commodity

Derivative Contract has an It is a lifetime contribution

Expiry Date
expiry date with no expiration

Fresh sale of commodity It is possible in this case Not possible in this case
(without holding physical
commodity)

Calendar Spread Exists here Non possible in this case

Counterparty risk Doesn’t exist in this case Possible in this case

Types of Participants in Commodity Derivatives
Markets
Speculators
● Speculators are there for a very short period of time
● Thin margins, leveraged trades and rapid churning
● Agnostic to direction of the market
● Base their speculative trades on technical charts,
supports, resistances, break-outs, patterns etc.
● Provide Liquidity and ensure min bid-ask spreads
Arbitrageurs
● They even out the pricing inefficiencies
● Spot and futures markets in regulated by different
regulators
● Commodities have additional costs
● They ensure that the market becomes more efficient
in the process
Directional Margin Traders
● Slightly longer term view on specific commodities
● They use futures as a proxy for spot positions by
paying a margin
● Very strong fundamental premise
● Hints to traders and analysts regarding which
commodities are attracting long term interest
Hedgers
● Hedgers are producers or consumers who want to
transfer the price risk to the market as they have an
underlying exposure to a particular commodity
● Opposite position in derivatives thus indifferent to
the price movements.
● They lend stability and credibility to the commodity
markets
Commodity theories of future returns
● Contango - When future price is greater than spot price.
● Backwardation - When spot price is greater than future price.
Commodity theories of future returns
● INSURANCE THEORY OF FUTURE RETURNS
= Commodity producers determine the future price leading
backwardation
- Problem is market are contango generally
● HEDGING PRESSURE HYPOTHESIS
= Price determined by number of sellers as against number of buyers
- Generally producer’s price risk more than consumer’s risk
● THEORY OF STORAGE
= Commodity price are affected by cost of storage and convenience
yield.
- Convenience yield is difficult to determine.
 Components of Returns on Commodity Futures

Total Return = Spot Return + Roll Return + Collateral Return

● The spot return: the price appreciation in the spot price

● The roll return: the weighted accounting difference between the near-term
commodity futures contract price and the farther-term commodity futures contract
price.

● Collateral return: the return accruing to any margin held against a futures position.
Commodity Swaps
Investors can use swaps to increase or decrease exposure to commodities.

● Excess Return Swap

● Total Return Swap
The variable payments are based on
The variable payments are based on the difference between commodity price
the change in price of a commodity. and a benchmark value.

● Basis Swap ● Commodity Volatility Swap

The variable payments are based on The variable payments are based on
the difference in prices of two the volatility of a commodity price.
commodities.
Thank You