A Beginner’s Guide to Indian Commodity Futures Markets

What are the main differences between commodity spot and derivatives markets?

There are two types of commodity markets: spot (physical) and derivatives (such as futures, options and swaps).

NCDEX Commodity

In a spot market, a physical commodity is sold or bought at a price negotiated between the buyer and the seller. The spot market involves buying and selling of commodities in cash with immediate delivery. There are spot markets for individual consumers (retail market) and the business-to-business (wholesale market) category. Spot markets also include traditional markets such as Delhi’s Azadpur Mandi that deal in fruits and vegetables. 

On the other hand, a commodity can be sold or bought via derivatives contract as well. A futures contract is a pre-determined and standardized contract to buy or sell commodities for a particular price and for a certain date in the future. For instance, if one wants to buy 10 tonne of rice today, one can buy it in the spot market. But if one wants to buy or sell 10 tonne of rice at a future date, (say, after two months), one can buy or sell rice futures contracts at a commodity futures exchange. 

The futures contracts provide for the delivery or receipt of a physical commodity of a specified amount at some future date. Under the physically settled contract, the full purchase price is paid by the buyer and the actual commodity is delivered by the seller. But in a futures contract, actual delivery takes place later. For instance, a farmer enters into a futures contract to sell 10 tonne of rice at $100 per tonne to a miller on a future date. On that date, the miller will pay the full purchase price ($1,000) to the farmer and in exchange will receive the 10 tonne of rice.