CONTENTS

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Foreword I-3
About NISM Certifications I-5
Acknowledgement I-7
About the NISM-Series-XVI: Commodity Derivatives Certification Examination I-9

CHAPTER 1
INTRODUCTION TO COMMODITY MARKETS
1.1 History of Commodity Trading 1
1.2 Spot and Derivatives Trading in Commodities 5
1.3 Major Commodities Traded in Derivatives Exchanges in India 11
1.4 Participants in Commodity Derivatives Markets 12
1.5 Commodities Trading vis-à-vis Trading in Other Financial Assets 14
1.6 Commodity Markets Ecosystem 15
1.7 Commodity Market Indices 16
1.8 Factors Impacting the Commodity Prices 17

CHAPTER 2
COMMODITY FUTURES
2.1 Introduction to Futures 25
2.2 Distinction between Forwards and Futures 26
2.3 Cost-of-Carry 27
2.4 Convergence 28

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2.5 Fair Value of a Futures Contract 29
2.6 Convenience Yield 32
2.7 Commodity Futures and Commodity Forwards 33
2.8 Pay-off profile for Futures Contracts 33
2.9 Spot Price Polling 38

CHAPTER 3
COMMODITY OPTIONS
3.1 Introduction to Options 43
3.2 Option Terminology 44
3.3 Pay off Profiles of Options Contracts 46
3.4 Determinants of Option Premium 51
3.5 Options on Commodity Futures 59

CHAPTER 4
USES OF COMMODITY DERIVATIVES
4.1 Hedging 63
4.2 Long Hedge and Short Hedge Strategy: Using Futures 66
4.3 Speculation 70
4.4 Arbitrage 72
4.5 Spread Trading 74
4.6 Basis 78
4.7 Option Trading Strategies 82

CHAPTER 5
TRADING MECHANISM
5.1 Membership on Commodity Derivatives Exchange 91
5.2 Trading System in Commodity Derivatives Exchanges 93

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5.3 Selection Criteria of Commodities for Trading on Derivatives 97
Exchanges
5.4 Contract Specifications for Various Commodity Derivatives Contracts 98
5.5 Profit/Loss per Contract for a Change of One Tick 114
5.6 Order Types and Conditions 115
5.7 Tracking Commodity Futures and Options prices 118

CHAPTER 6
CLEARING SETTLEMENT AND RISK
MANAGEMENT OF COMMODITY DERIVATIVES
6.1 Clearing and Settlement 124
6.2 Delivery Process 127
6.3 Entities Involved in the Clearing and Settlement Process 130
6.4 Premium/Discount 136
6.5 Penalty for Delivery Default by the Seller 137
6.6 Deliveries in the Case of Physical Delivery 137
6.7 Risk Management for Exchange Traded Commodity Derivatives 138
Markets
6.8 Position Limits and Computation of Open Position 140
6.9 Salient Features of Risk Containment Measures 140
6.10 Margin Mechanism 142

CHAPTER 7
ACCOUNTING AND TAXATION
7.1 Important Accounting Aspects related to Trading in Commodity 149
Derivatives
7.2 Guidance Note Issued by ICAI on Accounting Treatment of 151
Derivative Transactions
7.3 Important Tax Aspects related to Trading in Commodity Derivatives 155

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CHAPTER 8
LEGAL & REGULATORY ENVIRONMENT OF
COMMODITY DERIVATIVES IN INDIA
8.1 Regulatory Structure of Commodities Market 161
8.2 Securities Contracts (Regulation) Act, 1956 163
8.3 Securities and Exchange Board of India Act, 1992 165
8.4 SEBI’s Code of Conduct for Brokers 166
8.5 Risk Disclosure to Client and KYC 169
8.6 Investors Grievance Redressal Mechanism 173

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