Commodity Spot and Futures

The Derivative as a tool for managing risk first originated in the Commodities Markets. It was found as a useful hedging tool in financial markets. A Commodity Futures Market is defined as a public market where commodities are contracted for purchase or sale at an agreed price for delivery on a specified date. This purchase or sale of commodities must be made through a broker who is a member of an organized exchange and the purchase should be made under the terms and conditions of a standardized futures contract. The Commodity Market in India has been of great significance for both the country’s general economic prosperity and for the financial sector in particular. From an investment standpoint a commodity is considered as an alternate asset class and investing in a commodity attracts the investors in further as commodities have a significantly lower degree of association with other traditional asset classes and offer an effective hedge against inflation. Besides being a unique hedging instrument it also provides for efficient portfolio management arising from diversification benefits which results in improved returns to domestic as well as international investors.