Trading in Commodity Derivatives

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Commodity are the raw or primary agricultural product that could bought or sold such as gold, silver, copper, pulses etc. Derivative contract are the contract whose value is derived from underlying asset there are some types of derivative.
Concept of future or commodity derivative comes when the farmers have to travel a huge distance to sold there goods or agricultural produce at market place, there may be a probability that the produced may be rotted. and he could not sold that on accepted price due to some bad quality specification.
on other hand buyer and seller have risk of price uncertainty.
To avoid this farmer and buyer make a contract that at fixed future date will deliver the produced and will accept the delivery (Buyer) at fixed price. that is called derivative contract.
in this above case there are some limitation :
Buyer will make the payment or not
Seller will deliver the goods or not due to future price uncertainty
Seller will deliver the goods or not .
the above example that we have discuss that is forward contract a OTC (Over the Counter : the trade occur between the two parties only) contract in which above limitation are there because both buyer or seller doesn't have to pay any advance amount or margin as security in case any party default. but Future are the standardized from forward contract.
In commodity future contract a investor ( both buyer and seller) have to pay a margin amount.for this underlying asset is spot market price of that particular commodity future contract on the basis of which future contract price decided.
for ex. if a investor buy a Aug Future contract of gold buying by paying a initial margin to exchange, he is making a contract with a seller that before or on expiry will accept the delivery by paying a full amount.
and seller making a contract that will deliver the gold to buyer on execution of contract.
Commodity tips  future contract are the Exchange Traded Security in which Exchange work as mediator. by chance if any party default some penalty will charged on it by exchange, to ensure a fair play. be cause in market there are so many buyer and seller are available .there may be a possibility that the person who is delivering may not be fulfill the quality specification of that particular commodity.
while in spot market instant delivery is possible and buyer and seller meet with each other to exchange the commodities.

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