Future Market

Futures trading

A future contract is a commitment to make/take delivery of a specific quantity and quality of a given commodity at a pre-determined place and time in future.Here, except price, all other specifications of the contract, i.e. quantity, quality, time and location of delivery are standardized. The price payable for the commodity at that particular time of delivery is ‘discovered’ gradually in the futures market.

Evolution
Futures trading have been evolved to address the needs of various trading interests in the commodity market, to regulate trade, maintain stability and volatility of prices. Futures market has reportedly been used for price discovery and risk management by producers of seasonal agri-commodities even from 1800 AD. References of futures market can be found in Kautialya’s ‘Arthasastra’. Today’s futures market covers literally any standardized products like for example – oil, electricity, metals, cattle, weather to atmospherics carbon content etc.

Need
Future prices are not price predictions, but are collective opinion of a wider marketplace of where the prices appear to be heading. This price and direction are very sensitive and dynamic and can change in an instant, which makes trading in these markets so challenging and potentially rewarding. This mechanism eliminates the need for physical buffer stocks, thereby saving huge investments in storage and considerably minimizing extra investment, wastage and similar problems.

Hedgers and speculators
These are the main participants in the futures market. They have divergent goals. Hedge means protection. It is the avoidance or lessening of loss in their regular market by entering into a counter balancing contract. Hedgers do not necessarily seek to profit in the futures markets. A gain or loss in the futures market is usually offset to some degree by the corresponding loss or gain in the regular market for the commodity.

Speculators facilitate hedging by providing liquidity to the market. They  do seek to profit from the market movement because they do not have offsetting physical positions. Taking clues from their analysis of the conditions, they buy in a rising market or sell into a falling market to cover their positions later and book profits. Thus they fulfill a critical market role in providing liquidity that hedgers need for easy entering and exiting positions.

Capital Structure
First Commodities Exchange of India Limited is a closely held Public Limited Company, incorporated in the year 2000. Commodity Trading started during 2001. The Authorised Capital of the Company is Rupees 10 million divided into 1000 shares of Rupees 10,000 each. Current Paid up Capital is Rupees 4.85 million. For the last financial year (2005-06) 10% Dividend was paid to the Equity shareholders.