Working of commodity market
There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the warehouse.
But some one trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go.
Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity.
The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil.
For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt.
The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities.
The commodity trading system consists of certain prescribed steps or stages as follows:
I. Trading: - At this stage the following is the system implemented-
Order receiving
Execution
Matching
Reporting
Surveillance
Price limits
Position limits
II. Clearing: - This stage has following system in place-
Matching
Registration
Clearing
Clearing limits
Notation
Margining
Price limits
Position limits
Clearing house.
III. Settlement: - This stage has following system followed as follows-
Marking to market
Receipts and payments
Reporting
Delivery upon expiration or maturity.
There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the warehouse.
But some one trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go.
Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity.
The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil.
For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt.
The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities.
The commodity trading system consists of certain prescribed steps or stages as follows:
I. Trading: - At this stage the following is the system implemented-
Order receiving
Execution
Matching
Reporting
Surveillance
Price limits
Position limits
II. Clearing: - This stage has following system in place-
Matching
Registration
Clearing
Clearing limits
Notation
Margining
Price limits
Position limits
Clearing house.
III. Settlement: - This stage has following system followed as follows-
Marking to market
Receipts and payments
Reporting
Delivery upon expiration or maturity.