NISM Series XVI · Chapter 1: Introduction to Commodity Markets

L1 · Foundation

Foundation — From barter to exchanges, and the spot market

How commodity trading evolved from barter through forwards to futures, and why forwards failed; the Osaka Rice Exchange of 1730, CBOT 1848 and LME 1877; the Indian story from Kautilya through the Bombay Cotton Trade Association of 1875 to the shift of regulation to SEBI on 28 September 2015; soft and hard commodities; the physical mandi and its inefficient price discovery; and the electronic spot exchange with eNAM.

22 min read · Worth 10% of the paper · Written from pages 12–32 of the official NISM workbook · Updated 18 September 2026

The history of commodity trading and the spot market

1. From barter to futures

In plain words: people have traded goods for as long as there have been towns. The method changed over time. It moved from swapping goods, to spot markets, to derivatives.

The stages, in order:

Stage	What happened
⚠️ BARTER	"Goods were exchanged between TWO PARTIES WITH MATCHING AND OPPOSITE NEEDS (for example, BAGS OF WHEAT WERE EXCHANGED FOR CATTLE)"
Gold and silver	"Commodities brought from distant places were exchanged for GOLD AND SILVER"
⚠️ MONEY	"With the introduction of MONEY AS A MEDIUM OF EXCHANGE, there was A PARADIGM SHIFT... The value of commodity being expressed IN MONETARY TERMS"
SPOT MARKETS	"Those with trading interests met at these common places where goods were brought for IMMEDIATE SALE AND DELIVERY at the market price decided by THE DEMAND AND SUPPLY FORCES"
⚠️ FORWARD CONTRACTS	"Counterparties started entering into agreements TO DELIVER COMMODITIES AT A SPECIFIED TIME IN FUTURE AT A PRICE AGREED TODAY"

The workbook's example: "on May 25, a trader agreed to sell rice for delivery on a future specified date (say one month from May 25, i.e. on June 25) IRRESPECTIVE OF THE ACTUAL PRICE PREVAILING ON JUNE 25."

In plain words: in a forward, the price is fixed today and the goods change hands later. The price on the delivery day does not matter.

1.1 Why forwards failed — and futures were born

Both sides had the same temptation:

⚠️ "A SELLER PULLED OUT OF THE CONTRACT IF THE SPOT PRICE WAS MORE PROFITABLE FOR HIM THAN THE CONTRACTED PRICE"
⚠️ "A BUYER ALSO BACKED OUT FROM EXECUTING THE CONTRACT ON MATURITY IF HE WAS ABLE TO GET THE COMMODITY AT A CHEAPER PRICE FROM THE SPOT MARKET"

In plain words: if the market price rose, the seller walked away. If it fell, the buyer walked away. Either way, one side broke the deal.

That single sentence explains the entire existence of the futures market. The problem was never the idea of a forward price — it was that nobody had to honour it.

1.2 Standardisation and the arrival of speculators

"The contracts gradually got 'STANDARDIZED' IN TERMS OF QUANTITY AND QUALITY... The contracts also BEGAN TO CHANGE HANDS BEFORE THE DELIVERY DATE."

⚠️ "If the buyer of a wheat contract decides that HE DOES NOT WANT THE WHEAT, HE WOULD SELL THE CONTRACT TO SOMEONE WHO NEEDED IT. Also, if the farmer didn't want to deliver his wheat, HE COULD PASS ON HIS CONTRACTUAL OBLIGATION TO ANOTHER FARMER."

In plain words: once every contract had the same quantity and quality, contracts could be passed on. A buyer who no longer wanted wheat could sell the contract. A farmer who did not want to deliver could hand the duty to another farmer.

⚠️ "Gradually, even those individuals WHO HAD NO INTENTION OF EVER BUYING OR SELLING WHEAT began trading in the futures contracts, EXPECTING TO MAKE SOME PROFITS BY BETTING ON THEIR EXPECTATIONS. THEY WERE CALLED SPECULATORS."

In plain words: soon people who never wanted wheat joined in. They traded only to profit from price moves. These were the speculators.

In plain words: farmers passed their price risk to speculators, who were willing to carry it.

2. Evolution of commodity exchanges

In plain words: futures began in Japan. The first organised futures market was the Osaka rice exchange of 1730.

Why rice, and why Osaka: "In the 17TH CENTURY, OSAKA EMERGED AS THE MAJOR TRADING CENTER FOR RICE IN JAPAN... rice played an important role in the Japanese economy as it was THE MAIN AGRICULTURAL COMMODITY. Rice from all over the country was sent to Osaka and stored there. It was SOLD BY WAY OF AUCTIONS, and once deals were made, THE SELLERS ISSUED A CERTIFICATE OF TITLE IN EXCHANGE FOR MONEY."

In plain words: rice from all over Japan was stored in Osaka and sold at auction. The buyer paid and got a certificate showing ownership.

⚠️ "The certificates were called RICE BILLS. In the early stage, the rice bills were issued UPON MAKING A GOOD-FAITH DEPOSIT, which was directly and fully paid after the auction and WITH DELIVERY OF RICE WITHIN A SHORT PERIOD. Merchants COULD HOLD THE BILLS OR COULD SELL THEM expecting to make a quick profit."

In plain words: those certificates were rice bills. At first, a buyer paid a deposit, paid in full after the auction, and got the rice soon after. Merchants could keep a bill or sell it on for a quick profit.

In plain words: over time deposits got smaller and delivery got later. A rice bill became a right to rice in the future at today's price. That is the idea behind a futures contract.

The two Western landmarks: ⚠️ "THE CHICAGO BOARD OF TRADE (CBOT) IN USA AND THE LONDON METAL EXCHANGE (LME) IN UK SUCCESSFULLY LAUNCHED THEIR OPERATIONS IN 1848 AND 1877, RESPECTIVELY."

In plain words: in the West, the Chicago Board of Trade opened in 1848. The London Metal Exchange followed in 1877.

"Many more exchanges were set up in ARGENTINA, CHINA, EGYPT, RUSSIA, HUNGARY, TURKEY AND INDIA. AFTER THE 1990s, WITH MARKET LIBERALIZATION AND EXPLOSIVE GROWTH IN INFORMATION TECHNOLOGY, COMMODITY EXCHANGES STARTED MUSHROOMING AROUND THE WORLD."

In plain words: many countries, including India, set up exchanges. After the 1990s, open markets and better technology led to many more.

3. The Indian story

"Forward trading in ANIMAL, AGRICULTURAL PRODUCE AND METALS are believed to have existed IN ANCIENT INDIA and references to such markets appear in KAUTILYA'S 'ARTHASASTRA' (during Samrat Ashok time)."

⚠️ "Terms relating to commerce such as 'TEJI', 'MANDI', 'GALI' AND 'PHATAK' have been coined and freely used AS EARLY AS 320 B.C."

In plain words: forward trading in India is very old. Kautilya's Arthasastra mentions such markets. Trade words like teji and mandi were in use by 320 B.C.

3.1 The organised era

Year	Milestone
⚠️ 1875	⚠️ "Organized trading in commodity derivatives started in India by THE BOMBAY COTTON TRADE ASSOCIATION LIMITED with COTTON as the underlying commodity"
A few years later	⚠️ "GUJARATI VYAPARI MANDALI was set up, which started trading in CASTOR SEED, GROUNDNUT AND COTTON"
⚠️ 1919	⚠️ "THE CALCUTTA HESSIAN EXCHANGE was set up which started trading in RAW JUTE AND JUTE GOODS"

"Subsequently, many other centres emerged in HAPUR, AMRITSAR, BHATINDA, RAJKOT, JAIPUR, DELHI, facilitating trading in forward contracts of commodities that the farmers in the nearby regions were SPECIALIZING IN."

In plain words: organised trading began in Bombay in 1875, with cotton. Other centres followed, each trading the crops grown nearby.

3.2 The era of controls

⚠️ "Due to reasons such as SPECULATION, HOARDING, WARS AND NATURAL DISASTERS, several controls were placed on trading of certain commodities."

In plain words: speculation, hoarding, wars and disasters led the government to restrict trading in some goods.

Year	Measure
⚠️ 1919	"The Government of Bombay passed THE BOMBAY CONTRACT CONTROL (WAR PROVISION) ACT and set up THE COTTON CONTRACTS BOARD"
⚠️ September 1939	"An ORDINANCE PROHIBITING OPTIONS TRADING IN COTTON, later replaced by THE BOMBAY OPTIONS IN COTTON PROHIBITION ACT, 1939"
⚠️ 1943	"THE DEFENCE OF INDIA ACT was passed PROHIBITING FORWARD TRADING in some commodities (SPICES, VEGETABLE OILS, SUGAR, CLOTH) and REGULATING such trading in others on all India basis"
After the lapse	"These orders were retained with necessary modifications in THE ESSENTIAL SUPPLIES TEMPORARY POWERS ACT 1946"

3.3 After Independence

⚠️ "The Constitution of India placed the subject of 'STOCK EXCHANGES AND FUTURES MARKET' IN THE UNION LIST and therefore the responsibility for regulation of forward contracts DEVOLVED ON THE GOVERNMENT OF INDIA."

In plain words: after Independence, the Constitution put futures markets in the Union List. So the central government became the regulator.

⚠️ "The Parliament passed THE FORWARD CONTRACTS REGULATION ACT IN 1952 to regulate the forward contracts in commodities across the country."

"With the liberalization of Global trade and INDIA BECOMING FULL-FLEDGED MEMBER OF THE WORLD TRADE ORGANIZATION, the government decided to liberalize trading in futures contracts as part of the policy announcements during THE NATIONAL AGRICULTURAL POLICY, 2000. NATIONALIZED ONLINE EXCHANGES BECAME OPERATIONAL FROM 2003 ONWARDS."

In plain words: Parliament passed the FCRA in 1952 to regulate forwards. Later, after India joined the WTO, the National Agricultural Policy of 2000 opened up futures trading. National online exchanges started from 2003.

In plain words: on 28 September 2015 the FCRA ended. SEBI became the regulator of commodity derivatives, under the SCRA.

⚠️ The modern products: "There has been A GROWING SOPHISTICATION OF COMMODITIES INVESTMENTS with the introduction of EXOTIC PRODUCTS SUCH AS WEATHER DERIVATIVES, MONSOON DERIVATIVES, ELECTRICITY DERIVATIVES, POWER DERIVATIVES AND ENVIRONMENTAL EMISSIONS TRADING (CARBON CREDITS TRADING)."

In plain words: newer products are more complex. They include weather, monsoon, electricity and power derivatives, and carbon credit trading.

4. Soft and hard commodities

The test is not value but origin: grown and perishable against mined or processed.

5. The spot market

"The spot market is a place where the commodity is traded, and THE TRANSFER OF OWNERSHIP TAKES PLACE IMMEDIATELY to complete the cycle of DELIVERY VERSUS PAYMENT."

In plain words: in a spot market, you pay and take the goods at once.

⚠️ "This concept is also termed as 'READY DELIVERY CONTRACT' under which PAYMENT AND DELIVERY OF GOODS HAPPENS IMMEDIATELY."

⚠️ "Spot markets operate in TWO MODES: PHYSICAL SPOT MARKET AND ELECTRONIC SPOT MARKET."

(The workbook notes that cash market, spot market, physical market, mandis and APMC are used synonymously.)

5.1 The physical spot market

"In a physical spot market, the commodities are physically bought and sold FOR IMMEDIATE DELIVERY. In addition to the buyers and the sellers, the spot market has TRADERS WHO ARE LICENSED BY THE MANDI to trade in the market. THESE TRADERS HAVE TO PAY MANDI FEES."

In plain words: goods are bought and sold for immediate delivery. Traders in a mandi need a mandi licence and pay mandi fees.

"The spot markets can be either A RETAIL MARKET (which serves the ACTUAL CONSUMERS) or A WHOLESALE MARKET (a market for SUPPLY CHAIN INTERMEDIARIES)."

5.2 The mandi problem

⚠️ "In a MANDI, the farmers bring their produce, and THE TRADERS OR MIDDLEMEN KNOWN AS COMMISSION AGENTS OR 'ARHATIYAS' INSPECT THE QUALITY OF THE PRODUCE AND BID BASED ON THEIR ASSESSMENT OF QUALITY. THE BUYER WITH THE HIGHEST BID ACQUIRES THE PRODUCE."

In plain words: the farmer brings the crop. The commission agents check its quality and bid. The highest bid wins.

In plain words: the traders set the price and the farmer has no say. So the price does not truly reflect supply and demand.

Note where the defect lies: the buyer both assesses the quality and sets the bid. The farmer has no independent grading and no alternative buyer in the room.

5.3 The electronic spot exchange

"A spot commodity exchange is AN ORGANIZED MARKETPLACE where buyers and sellers come together to trade commodity-related contracts FOLLOWING THE RULES SET BY THE RESPECTIVE COMMODITIES EXCHANGE."

"An electronic spot commodity exchange provides a marketplace where THE FARMERS OR THEIR FARMER PRODUCER ORGANIZATION (FPO) CAN SELL THEIR PRODUCE, and the PROCESSORS, EXPORTERS, TRADERS, AND OTHER USERS CAN BUY."

In plain words: an electronic spot exchange is an organised market with fixed rules. Farmers or their FPOs sell there, and processors, exporters and traders buy.

In plain words: here the farmer names an asking price. The farmer helps set the price instead of just watching.

5.4 eNAM

⚠️ "ELECTRONIC NATIONAL AGRICULTURE MARKET (eNAM) is A PAN-INDIA ELECTRONIC TRADING PORTAL WHICH NETWORKS THE EXISTING APMCs (MANDIS) TO CREATE A UNIFIED NATIONAL MARKET PLATFORM FOR AGRICULTURAL COMMODITIES."

⚠️ "SMALL FARMERS AGRIBUSINESS CONSORTIUM (SFAC) IS THE LEAD AGENCY FOR IMPLEMENTING eNAM UNDER THE AEGIS OF MINISTRY OF AGRICULTURE AND FARMERS' WELFARE, GOVERNMENT OF INDIA."

In plain words: eNAM links existing mandis online into one national market. SFAC runs it for the Ministry of Agriculture.

Its three purposes:

⚠️ "PROMOTE UNIFORMITY IN AGRICULTURE MARKETING BY STREAMLINING THE PROCEDURES ACROSS VARIOUS APMC MARKETS"
⚠️ "REMOVING INFORMATION ASYMMETRY BETWEEN BUYERS AND SELLERS"
⚠️ "PROMOTING REAL TIME PRICE DISCOVERY BASED ON ACTUAL DEMAND AND SUPPLY"

"The idea behind eNAM is THE INTEGRATION OF APMCs ACROSS THE COUNTRY THROUGH A COMMON ONLINE MARKET PLATFORM to facilitate PAN-INDIA TRADE, providing BETTER PRICE DISCOVERY THROUGH TRANSPARENT AUCTION PROCESS BASED ON QUALITY OF PRODUCE ALONG WITH TIMELY ONLINE PAYMENT."

In plain words: eNAM aims for the same procedures in every mandi, equal information for buyers and sellers, and live prices. Auctions are open, based on quality, and payment is online and on time.

Think of it like this

A promise nobody has to keep

Two neighbours agree in May that one will sell the other a buffalo in June for Rs 60,000. By June the market rate is Rs 75,000. The seller finds a reason not to deliver. Had the rate fallen to Rs 45,000, the buyer would have found a reason not to pay. The agreement was real; the enforcement was not.

The workbook describes exactly this failure: ⚠️ MORE OFTEN THAN NOT, THESE FORWARD CONTRACTS WERE NOT HONORED BY EITHER OF THE CONTRACTING PARTIES DUE TO PRICE CHANGES AND MARKET CONDITIONS.

Both sides face the same temptation, in opposite directions: ⚠️ a SELLER PULLED OUT IF THE SPOT PRICE WAS MORE PROFITABLE FOR HIM THAN THE CONTRACTED PRICE, and ⚠️ a BUYER ALSO BACKED OUT IF HE WAS ABLE TO GET THE COMMODITY AT A CHEAPER PRICE FROM THE SPOT MARKET.

And this is the one sentence that explains why futures markets exist at all: ⚠️ FUTURES EMERGED AS AN ALTERNATIVE FINANCIAL PRODUCT TO ADDRESS THESE CONCERNS OF COUNTERPARTY DEFAULT, AS THE EXCHANGE GUARANTEED THE PERFORMANCE OF THE CONTRACT.

The futures price was never the innovation. Forwards already fixed a future price. What the exchange added was someone standing behind the promise — which is why the whole apparatus of margins, clearing corporations and settlement guarantee funds in later chapters exists.

The rice bill that quietly became a futures contract

A cloakroom ticket is a claim on a coat. If you could sell the ticket to someone else, and if the coat need not be collected for six months, and if you paid only a small deposit for it — the ticket has stopped being a receipt and become something closer to a bet on the price of coats.

That is precisely what happened at the Osaka Rice Exchange, set up in 1730 — the world's first known organised futures market, a full century before Chicago.

Rice arrived in Osaka, was sold by way of auctions, and the sellers issued a certificate of title in exchange for money. These were rice bills. At first they were honest warehouse receipts: issued upon making a GOOD-FAITH DEPOSIT, which was directly and fully paid after the auction, WITH DELIVERY OF RICE WITHIN A SHORT PERIOD.

Then two things drifted: ⚠️ AS THE MARKET DEVELOPED, THE DEPOSITS SHRANK, AND THE DELIVERY DATES EXTENDED.

A small deposit, a distant delivery date, a transferable claim — and the workbook draws the conclusion itself: ⚠️ the rice bills represented THE RIGHT TO TAKE UP DELIVERY OF AN AGREED QUANTITY OF RICE AT A FUTURE DATE BUT AT THE CURRENT PRICE. THIS WAS THE PRECURSOR TO FUTURES.

Merchants could hold the bills or could sell them expecting to make a quick profit — speculation arriving in the market before anybody had a name for it.

The umpire who is also the batsman

Imagine a cricket match where the fielding side both bowls and gives the decisions. Nobody claims the batsman is cheated on every ball — but nobody would call the outcome a fair contest either.

That is the structural defect in the traditional mandi, and the workbook is blunt about it: ⚠️ THE TRADERS OR MIDDLEMEN KNOWN AS COMMISSION AGENTS OR 'ARHATIYAS' INSPECT THE QUALITY OF THE PRODUCE AND BID BASED ON THEIR ASSESSMENT OF QUALITY.

The same party judges the goods and names the price.

⚠️ THE TRADITIONAL 'MANDI' SYSTEM LEAVES THE FARMER WITH NO BARGAINING POWER AS THE PRICE SETTING POWER COMPLETELY RESTS IN THE HANDS OF THE TRADERS AND MIDDLEMEN. And the economic consequence: ⚠️ AS IT DOES NOT TRULY REFLECT THE SUPPLY AND DEMAND FUNDAMENTALS, THIS TYPE OF TRANSACTION RESULTS IN A VERY INEFFICIENT PRICE DISCOVERY MECHANISM.

The electronic spot exchange changes one thing, and it is the decisive one: ⚠️ HERE THE FARMER PLAYS A ROLE IN THE PRICE DISCOVERY BY PUTTING HIS ASK PRICE AND THEREBY NOT A MERE WITNESS TO THE SALE.

eNAM extends that across the country by networking the existing APMCs into a unified national market platform, removing information asymmetry between buyers and sellers and enabling transparent auction based on quality of produce. A farmer facing one buyer has no market. A farmer facing the country has one.

The gambler at the insurance company's door

An insurance company can only sell you fire cover because somewhere there is capital willing to accept the risk of your house burning. That capital is not being charitable — it expects to be paid more in premiums than it pays out in claims. Its motive is profit; its function is to absorb your risk.

Speculators occupy exactly this position in the commodity market, and the workbook says so without embarrassment: ⚠️ THE HEDGERS BEGAN TO EFFICIENTLY TRANSFER THEIR MARKET RISK OF HOLDING PHYSICAL COMMODITIES TO THESE SPECULATORS BY TRADING AT THE FUTURES EXCHANGES.

They arrived by accident. ⚠️ EVEN THOSE INDIVIDUALS WHO HAD NO INTENTION OF EVER BUYING OR SELLING WHEAT BEGAN TRADING IN THE FUTURES CONTRACTS, EXPECTING TO MAKE SOME PROFITS BY BETTING ON THEIR EXPECTATIONS.

And the market needs them. Risk transfer is listed as one of the four key economic functions of the commodity derivatives market: ⚠️ HEDGERS TRY TO HEDGE THEIR SPOT POSITIONS VIA DERIVATIVES; ON THE OTHER HAND, THERE ARE SPECULATORS WHO TAKE UP TRADING BETS AND TRY TO GAIN ON TRADING RISKS. THUS, VOLATILITY RISKS GET TRANSFERRED FROM HEDGERS TO THE SPECULATORS.

A market of hedgers alone would not function — everyone wanting to lay off the same risk, with nobody to take it. The farmer's protection is bought from someone willing to be wrong.

Short on flour, long on bread

A baker's fortunes run in two directions at once. When wheat gets dearer he suffers; when bread gets dearer he gains. He is exposed twice, on opposite sides, without having placed a single bet.

The workbook generalises this into the single most useful sentence in the chapter: ⚠️ FOR ANY BUSINESS OR VALUE CHAIN PARTICIPANT, THEY ARE NATURALLY SHORT ON RAW MATERIALS AND LONG ON FINISHED GOODS.

Which unpacks to: ⚠️ THEY GAIN IF RAW MATERIAL PRICES REDUCE, AND THEY LOSE WHEN RAW MATERIAL PRICES INCREASE. SIMILARLY, ON FINISHED GOODS, THEY GAIN WHEN THEIR PRICES RISE, AND THEY LOSE WHEN THEIR PRICES FALL.

And the hedge follows mechanically: ⚠️ HEDGERS GENERALLY HEDGE BY BUYING RAW MATERIALS IN DERIVATIVES MARKETS OR SELLING FINISHED GOODS IN DERIVATIVES MARKETS OR BOTH.

You do not choose your exposure — your business gives it to you. The hedge simply cancels what you already have. This is why a food processor hedges against rising raw material costs, while a farmer hedges against falling crop prices: the same commodity, opposite sides, because their businesses sit on opposite ends of it.

Hedging implies TAKING POSITION IN FUTURES MARKETS IN SUCH A WAY THAT OVERALL NET MARKET RISK IS MINIMIZED OR MITIGATED — not eliminated profit, but eliminated exposure.

Why the tomato is cheapest when the lorries arrive

Every household knows that vegetables are cheap in the weeks after a harvest and dear before the next one. Nothing has changed about how much people want tomatoes; what changed is how many arrived at the market this morning.

The workbook builds this into a formal identity:

⚠️ OPENING STOCK + DOMESTIC PRODUCTION + IMPORTS = DOMESTIC CONSUMPTION + EXPORTS

Both sides must balance. ⚠️ IF SUPPLY IS MORE THAN DEMAND, THE BALANCE RESIDUAL LEFT OUT AT THE END OF THE CROP YEAR IS CLOSING STOCKS, WHICH IS CARRIED FORWARD TO THE NEXT YEAR. IF DEMAND IS MORE THAN SUPPLY, TRADERS TRY TO MEET THE SAME THROUGH IMPORTS IF THE TRADE POLICY PERMITS, OR ELSE THE EQUILIBRIUM PRICES WILL RISE.

Seasonality is this identity moving through the calendar: ⚠️ DURING THE HARVEST SEASON, AS FARMERS RUSH TO THE MARKETS, IT CAUSES EXCESSIVE SUPPLY OFTEN HIGHER THAN THE DEMAND, AND PRICES TEND TO COME DOWN; WHEREAS DURING THE SOWING SEASON, THE OVERALL SUPPLY REMAINS LOWER, WHICH LEADS TO AN INCREASE IN PRICES.

The cotton example makes it concrete: sown April to August, harvested from September, so prices decrease from September onwards, remain under pressure until December or January when supplies peak, and from February onwards, as supply pressure diminishes, prices typically begin to recover.

And metals invert the logic — for gold and silver, during the festival season, INCREASED DEMAND helps prices to remain stronger. Same equation, different side moving.

Key terms in this chapter

Arbitrageur: One who simultaneously buys and sells in two markets to capture a riskless profit after transaction costs. In commodities this arises between futures and spot or within futures during heavy backwardation, but opportunities are infrequent, vanish quickly, and need funds and stocks for both legs.
Barter system: The earliest form of commodity trading, where goods were exchanged between two parties with matching and opposite needs — bags of wheat for cattle. Its limitation was the need to find a counterparty who both had what you wanted and wanted what you had.
Clearing Corporation: A separate undertaking under SEBI's Stock Exchange and Clearing Corporation Regulations, 2012, which carries out clearing and settlement of exchange trades. It is the entity that GUARANTEES settlement, and SEBI has mandated its use.
Commodity (definition): Tangible goods other than actionable claims, money and securities — things of value, of uniform quality, and produced in large quantities by many producers. Derivatives on them need both Government of India permission and SEBI approval on a specific exchange.
Currency effect on commodity prices: Most commodities are denominated in US dollars, so when a country's currency appreciates against the USD the commodity becomes cheaper in that country, and a depreciating currency makes imports costlier — which is reflected in futures prices too.
Day trader, position trader and market maker: A day trader liquidates before the close of the same day. A position trader holds overnight for weeks or months and must roll over, since liquidity sits in near-month contracts. A market maker is obligated to provide liquidity by giving two-way quotes at all times.
Delivery notice period: The period during which a seller of commodity futures may give notice of delivery, giving the buyer adequate time to prepare — arranging finances for payment against delivery, and loading, unloading and transportation.
Derivative: A financial instrument whose price is derived from one or more underlying assets — equity indices, debt instruments, commodities or intangibles such as weather. It offers risk protection with minimal upfront investment and very low transaction costs.
Dr Copper: Copper's nickname as an effective indicator of economic growth, since its demand rises with power generation, transmission, construction and electronics. Gold, by contrast, is regarded as a hedge against inflation.
Electricity futures: Monthly, exchange-traded, standardised, cash-settled contracts covering 28/30/31 days of round-the-clock delivery up to three months ahead — with no physical delivery and no transmission scheduling, operating alongside rather than within the physical market.
eNAM: The Electronic National Agriculture Market — a pan-India portal networking existing APMCs into a unified national platform, implemented by the Small Farmers Agribusiness Consortium under the Ministry of Agriculture and Farmers' Welfare.
eNWR: Electronic Negotiable Warehouse Receipts, issued by repositories under WDRA guidelines. NeRL (a subsidiary of NCDEX) and CCRL (a subsidiary of CDSL) provide the platforms, facilitating easy pledge financing on stored goods.
Fixed-for-floating swap: A commodity swap where one party pays a fixed price agreed at execution and the other pays a floating price reset periodically — the floating price being a spot price, the nearest futures price, or an average over a period.
Forward contract: A legally enforceable OTC agreement for future delivery at a price agreed today, fully customisable as to commodity, quantity, timing and place. Its two note-worthy features are that no cash changes hands at signing and that inherent credit or default risk remains.
FPI participation in commodities: Foreign entities with underlying Indian exposure were allowed to hedge from October 2018; the FPI route without underlying exposure opened in 2022, limited to cash-settled non-agricultural contracts and indices — primarily crude oil and natural gas — with direct market access permitted from 10 May 2023.
Futures contract: A legally binding exchange-traded agreement standardised in size, quantity, grade and time, stating the quantity and quality to be delivered, the acceptable delivery date and place, and the method for closing the contract — at the originally contracted price regardless of the prevailing price.
Multi-asset mutual fund: A hybrid fund that must invest a minimum of 10 percent in at least three asset classes. SEBI allowed such schemes to invest in commodity derivative markets in 2018.
Natural short and long: Every value-chain business is naturally short on raw materials and long on finished goods — losing when input prices rise and when output prices fall. Hedgers therefore buy raw materials or sell finished goods in the derivatives market, or both.
Option premium: The non-refundable amount the buyer pays the writer for the right to buy (call) or sell (put). It is what creates the asymmetry — the buyer has the right but no obligation, the seller no right but an obligation.
Osaka Rice Exchange: The first known organised futures market, set up in Japan in 1730. Its rice bills started as warehouse receipts but, as deposits shrank and delivery dates extended, became the right to take delivery at a future date at the current price — the precursor to futures.
Price discovery: In spot markets, determining the commodity price through actual forces of demand and supply. In futures markets, determining the futures price through EXPECTED demand and supply after discounting expected news, data releases and information on alternative products.
Ready delivery contract: The spot market concept where payment and delivery of goods happen immediately, completing the cycle of delivery versus payment.
Repository Participant: An intermediary — a bank, financial institution, regulated entity, corporate, LLP or partnership — that undertakes KYC of depositors and facilitates the issuance, modification, transfer, pledge and e-auction of eNWRs.
Risk transfer: The function by which volatility risk moves from hedgers, who seek to avoid it, to speculators, who accept it in an attempt to profit from price changes.
Soft and hard commodities: Soft commodities are perishable agricultural products — corn, wheat, coffee, cocoa, sugar, soybean. Hard commodities are natural resources that are mined or processed — crude oil, gold, silver.
Swap exposure rule: Paying fixed is being long the underlying, because a rising market leaves your locked cost below the prevailing price. So the fixed payer and floating receiver are long; the fixed receiver and floating payer are short.
The 28 September 2015 shift: The date the Forward Contracts Regulation Act 1952 was repealed and regulation of the commodity derivatives market moved to SEBI under the Securities Contracts Regulation Act 1956.
The demand-supply identity: Opening stock + domestic production + imports = domestic consumption + exports. Excess supply becomes closing stock carried to the next year; excess demand is met by imports if trade policy permits, or else prices rise.
The four interest rate channels: High rates reduce commodity prices by increasing the incentive to extract today, decreasing the desire to carry inventories, encouraging speculators to shift into treasury bills, and appreciating the domestic currency. Low rates do the opposite.
The mandi price discovery problem: In a traditional mandi the arhatiya both inspects the quality and bids on it, so price-setting power rests entirely with traders and middlemen. Because it does not reflect supply and demand fundamentals, price discovery is very inefficient.
Warehouse receipt: A document of title to commodities issued by an exchange-recognised warehouse against goods deposited, transferable by endorsement or delivery against an open position committed for delivery on exchanges.
WDRA: The Warehousing Development and Regulatory Authority — a statutory authority under the Warehousing (Development and Regulation) Act, 2007, regulating warehouses used for storing agricultural commodities.
Why forwards failed: Forward contracts were often not honoured: a seller pulled out if the spot price was more profitable than the contracted price, and a buyer backed out if the commodity was cheaper in the spot market. Futures emerged because the exchange guaranteed performance.

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Original explanatory writing based on the official NISM workbook for Series XVI, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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