Commodities

70 terms · each links to a full explanation with a worked example and the exam traps

AGRIDEXNCDEX's agricultural commodity index, weighted across ten crops by production and liquidity — discontinued from 1 February 2022 after several of its constituent commodities stopped trading.
Average Daily Trading VolumeThe liquidity test a commodity future must pass before its price may carry weight in a tradeable commodity index — Rs 75 crore a day for agri, Rs 500 crore for non-agri.
BackwardationA market in which the futures price sits below the spot price — the cost of carry says futures should be dearer, and something is overriding it.
Barter systemThe direct exchange of one good for another, with no money involved — the starting point the workbook uses to trace how commodity trading evolved into spot markets, forward contracts and finally futures.
BrentThe benchmark crude oil price for oil produced in Europe and Africa, sourced from the North Sea and traded on ICE — one of the two global oil pricing benchmarks alongside WTI.
BULLDEXMCX's sectoral index tracking sentiment in the precious metals segment, currently weighted roughly 60% gold and 40% silver, based on futures prices rather than spot.
CommodityUnder Indian commodity derivatives law, any tangible good other than actionable claims, money and securities — sold in large, uniform quantities and approved by the government and SEBI for futures trading.
Commodity price riskThe risk that a rise or fall in a commodity's price hurts either its producer or its user, which is why both sides use the commodity derivatives exchange to hedge against it.
Commodity Trading AdvisorA category of fund manager, common in North American hedge fund markets, that runs a "Managed Futures" strategy in commodity, equity and currency futures using systematic or discretionary methods.
Composite indexA commodity index spanning several segments — energy, metals, bullion — whose constituents must each weigh 1 to 30 per cent, with at least 80 per cent of the weight in sufficiently liquid futures.
ContangoA market in which the futures price sits above the spot price, normally because the futures buyer is paying for the cost of carrying the commodity through to delivery.
Contango and backwardationThe two shapes a commodity futures curve can take — contango when the futures price is above spot, backwardation when it is below.
Convenience yieldThe rupee benefit of physically holding a commodity rather than holding a futures contract on it — the term that lets a futures price fall below spot plus carry.
Crop reportA government or research-agency publication giving acreage, planting progress, yield estimates and production levels for a crop — a key input to predicting agricultural commodity prices.
Currency effect on commodity pricesSince most commodities are priced globally in US dollars, a weaker rupee raises their rupee price even if the dollar price is unchanged, and a stronger rupee lowers it.
Digital goldA way of buying gold online, in amounts as small as Re 1, where the seller earmarks and stores an equivalent quantity of physical gold in a vault on the buyer's behalf.
Dollar indexA measure of the strength of the US dollar against six major currencies, used by commodity analysts as a single gauge of currency movement instead of tracking each one.
Dr CopperCopper's market nickname, earned because its demand — driven by power, construction and electronics — makes its price move closely with the health of the wider economy.
Electricity futuresExchange-traded, cash-settled contracts that let participants lock in a price for round-the-clock electricity delivery over a month, up to three months ahead, without any physical delivery obligation.
eNAMA Pan-India electronic trading portal that networks existing APMC mandis into one unified market for agricultural produce, run by SFAC under the Ministry of Agriculture and Farmers' Welfare.
Excess return indexAn index measuring an investment's performance purely against a benchmark or risk-free rate, without counting any income the underlying generates — the flip side of a total return index, which counts both.
Export banA government prohibition on exporting a commodity, used to protect the domestic market, which tightens global supply and drives world prices higher.
Ex-warehouse priceThe spot price quoted for a commodity as it sits in the warehouse, ready for pickup — including Mandi Cess but excluding GST, and the basis on which agricultural spot polling prices are collected.
FPI participation in commoditiesHow foreign money reached Indian commodity derivatives — hedging by eligible foreign entities from October 2018, the FPI route without underlying exposure from 2022, and direct market access from May 2023.
Gold futures and options horizonsThe workbook's comparison of holding periods across gold routes: gold futures run a 12-month horizon, gold options follow the exchange's own contract calendar, while gold ETFs and gold funds can be held for a lifetime.
GST on gold routesGST is incurred on physical gold, gold funds and gold ETFs, since each involves an actual gold purchase added to cost — but not on Sovereign Gold Bonds, which never buy physical gold at all.
GUAREXNCDEX's sectoral commodity index on the guar family, with only two constituents — guar seed at 59.35% and guar gum at 40.65% for the year 2022-23.
Inter-commodity spreadA long futures position in one commodity and a short position in a different but economically related commodity for the same month — such as guar seed against guar gum — to trade the gap between them.
Intra-commodity spreadA long futures position in one contract month and a short position in another month (or a different lot size) of the same commodity, taken to profit from a change in the gap between them.
Inventory dataThe quantity of a commodity held in storage at a given time — in warehouses, on exchanges or in government reserves — read as a direct signal of oversupply or scarcity.
Law of averagesThe averaging effect that makes a commodity index less volatile than its constituents — useful diversification for a hedger, and the workbook's main explanation for why index derivatives stay illiquid in India.
Liquidity valueOne of the two scores that fix a commodity's weight in an Indian commodity index — the average trading volume of its futures over the last 12 months.
LMEThe London Metal Exchange, the global benchmark exchange for base metals, whose prices Indian base metal prices closely follow.
Maximum tenorThe 12-month ceiling on a commodity index derivative — an index futures contract may not run longer than 12 months, and index options are permitted up to 12 months of expiry.
METALDEXMCX's base metal sectoral index — for 2025, copper 40%, aluminium 30%, zinc 26% and lead 4% — which the workbook also reads as a rough inflation gauge for the metals family.
Monsoon proxyUsing an agricultural commodity index future as a stand-in for a bet on the monsoon — buy it for a deficit monsoon, short it for a good one — which the workbook offers as an approximation only.
Naturally longThe position every business holds in its finished goods — it gains when their prices rise and loses when they fall, which is why finished goods are hedged by selling futures.
Naturally shortThe position every business holds in its raw materials — it must buy them in future, so a price rise hurts it exactly as a short position would, and a long hedge cancels the exposure.
NYMEXThe New York Mercantile Exchange, the global benchmark exchange for trading energy commodities — where WTI crude oil is priced and traded.
OPEC+A group of the 13 OPEC members plus Russia and other allied producers that coordinates crude oil output, together shaping a majority of the world's oil supply and reserves.
Osaka Rice ExchangeThe first known organised futures market, set up in Japan in 1730, where rice bills issued against stored rice turned from title certificates into a right to future delivery at the current price.
Over-hedgingHedging a larger position than the actual underlying exposure calls for, which turns a risk-reducing strategy into an unintended speculative bet.
Physical stocks disclosureThe warehouse stock data an exchange discloses, showing how far open interest is actually backed by goods — low stocks suggest the positions will be squared off rather than delivered.
Price-based indexAn index whose constituent weights stay fixed for the year, so the level moves only when prices move — how every Indian commodity index works, as against volume-based equity indices.
Production valueOne of the two scores that fix a commodity's index weight — the average value of deliverable supply over the past five financial years, where deliverable supply is production plus import.
Quotation factorThe physical unit a commodity is quoted in on the exchange — Rs per 10 grams for gold, Rs per kilogram for zinc — one of the three inputs that convert a one-tick price move into rupees.
Ready delivery contractThe spot-market transaction in which payment and delivery of a commodity both happen immediately — the workbook's own name for what is commonly called a cash or spot deal.
Reserve currencyA currency, chiefly the US dollar, that central banks and cross-border commodity trade prefer to hold and settle in, because it is the most widely accepted and convertible currency.
Roll yieldThe gain or loss from rolling an expiring futures position into the next contract month, over and above the pure cost of carry.
Safe haven assetAn asset investors turn to when an economy or a currency fails. In the workbook the safe haven asset is gold — considered by many the final shelter, though the opposite camp argues strongly against it.
Seasonality effectThe recurring swing in agricultural commodity prices between the sowing season, when spot supply is tight, and the harvest, when it becomes abundant — the main cause of backwardation in agri commodities.
Sectoral indexA commodity index built from the futures of a single segment — bullion, base metals, energy or the guar family — with fixed annual weights and no 30 per cent cap per constituent.
Selective hedgingHedging only some of a business's price exposure, based on a market view about which positions to cover — a choice that turns the hedged leg into its own form of speculation.
Selling a spreadAn intra-commodity spread strategy that sells the near-month futures contract and buys the far-month contract at the same time, taken when the near month looks overpriced relative to the far month.
SGB redemption priceThe rupee amount a Sovereign Gold Bond pays at maturity — the simple average of the closing price of 999 purity gold over the previous three working days, as published by the India Bullion and Jewellers Association.
Short speculatorA speculator who sells a commodity futures contract first, expecting to buy it back later at a lower price — profiting from a price fall with no intention of ever taking or giving physical delivery.
Soft and hard commoditiesThe basic split of the commodity universe: softs are perishable agricultural produce that is grown, hards are natural resources that are mined or processed.
Sovereign Gold BondA Government of India bond denominated in grams of gold, with an 8-year tenor, paying 2.5% a year over and above gold price appreciation. Discontinued from FY 2024-25.
Spot price pollingThe statistical process by which an exchange collects physical-market prices from an empanelled panel of traders and users, strips out outliers, and publishes a single daily spot price.
Spread tradeA paired buy-and-sell trade across two related futures contracts, such as a calendar spread, which exchanges exclude from index price computation as it is not a bonafide single-side trade.
StandardisationThe exchange fixing a futures contract's size, quality, delivery place, delivery date and permitted price moves, so strangers can trade the same contract on a public market.
Strengthening basisA change in basis (spot minus futures) towards a more positive or less negative number — spot rising relative to futures — which benefits a short hedger.
Swap exposure ruleThe workbook's mapping of directional commodity price exposure in a fixed-for-floating swap — fixed price payer long, fixed price receiver short, floating price payer short, floating price receiver long.
Three-month disclosure ruleThe requirement that a proposed rebalanced commodity index — its new weights and constituents — be publicly disclosed at least three months before the exchange starts publishing the index on those new weights.
Trailing stop lossA broker-level stop loss order whose trigger moves up with the price by a set rupee amount or percentage but never moves down, so it limits loss and locks in part of any gain.
Volume-based indexAn index whose weights shift daily with market value, the way equity indices work — unlike commodity indices, which fix weights for a year at a time.
Warehouse receiptA document of title issued by an exchange-accredited warehouse to whoever deposited goods in it, transferable by endorsement and deliverable against a short futures position.
Warehouse Service ProviderThe company accredited by a clearing corporation to store exchange-deliverable commodities — WDRA-registered for agricultural goods, capped at 33 times its net worth, and barred from trading in what it stores.
Weakening basisA change in basis (spot minus futures) towards a less positive or more negative number — futures rising relative to spot — which benefits a long hedger.
West Texas IntermediateA high-quality, low-sulphur crude oil explored and traded within the United States, priced on NYMEX, and one of the world's two benchmark crude grades alongside Brent.