21. What is “Contango” in commodity trading?
Contango means a situation, where futures contract prices are higher than the spot price and the futures contracts maturing earlier. It arises normally when the contract matures during the same crop season. In a well-integrated market, Contango is equal to the cost of carry viz. Interest rate on investment, loss on account of loss of weight or deterioration in quantity etc.
22. What is meant by backwardation?
This situation arises when the price of futures contract is below the spot price of the same commodity. This happens when there is a shortage for the underlying asset in the cash market, but also there is an expectation that the supply of the commodity will increase in the future.
23. What is initial margin?
It is the minimum percentage of the contract value required to be deposited by the members/clients to the exchange before initiating any new buy or sell position. This
must be maintained throughout the time their position is open and is returnable at delivery, exercise, expiry or closing out.
24. What do you mean by delivery period margin?
It is the extra margin imposed by the exchange on the contracts when it enters the concluding phase i.e. it starts with tender period and goes up to delivery/settlement of trade. This amount is applicable on both the outstanding buy and sell positions.
25. What is Mark-to-market (MTM)?
Mark-to-market margins (MTM or M2M) are payable based on closing prices at the end of each trading day. These margins will be paid by the buyer if the price declines
and by the seller if the price rises. This margin is worked out on difference between the closing/clearing rate and the rate of the contract (if it is entered into on that day) or the previous day's clearing rate. The Exchange collects these margins from buyers if the prices decline and pays to the sellers and vice versa.
26. What is meant by the term “tender period”?
The contract enters into the tender period a few days before the expiry. This enables the members to express their intention whether to give or take delivery.
27. What is due date rate?
It is the rate at which the contract is settled on the expiry date. Usually it is the average of the spot prices of the last few trading days (as specified by the exchange) before the contract maturity.
28. What is spread?
Spread is the difference between prices of two futures contracts of the same underlying commodity. Futures market can be a normal market or an inverted market. If the price of the far month futures contract is higher than the near month one, then it is referred to as “normal market”. On the other hand, if the price of a far month futures contract is lower than the near month one, then the situation can be referred to as “inverted market”
29. What is bull spread in commodity futures?
In most commodities and financial derivatives market, the term refers to buying contracts maturing in nearby month, and selling the deferred month contracts, to profit from the wide spread which is larger than the cost of carry.
30. What is bear spread in commodity futures?
In most of commodities and financial derivatives market, the term refers to selling the nearby contract month, and buying the distant contract, to profit from saving in the cost of carry.
Contango means a situation, where futures contract prices are higher than the spot price and the futures contracts maturing earlier. It arises normally when the contract matures during the same crop season. In a well-integrated market, Contango is equal to the cost of carry viz. Interest rate on investment, loss on account of loss of weight or deterioration in quantity etc.
22. What is meant by backwardation?
This situation arises when the price of futures contract is below the spot price of the same commodity. This happens when there is a shortage for the underlying asset in the cash market, but also there is an expectation that the supply of the commodity will increase in the future.
23. What is initial margin?
It is the minimum percentage of the contract value required to be deposited by the members/clients to the exchange before initiating any new buy or sell position. This
must be maintained throughout the time their position is open and is returnable at delivery, exercise, expiry or closing out.
24. What do you mean by delivery period margin?
It is the extra margin imposed by the exchange on the contracts when it enters the concluding phase i.e. it starts with tender period and goes up to delivery/settlement of trade. This amount is applicable on both the outstanding buy and sell positions.
25. What is Mark-to-market (MTM)?
Mark-to-market margins (MTM or M2M) are payable based on closing prices at the end of each trading day. These margins will be paid by the buyer if the price declines
and by the seller if the price rises. This margin is worked out on difference between the closing/clearing rate and the rate of the contract (if it is entered into on that day) or the previous day's clearing rate. The Exchange collects these margins from buyers if the prices decline and pays to the sellers and vice versa.
26. What is meant by the term “tender period”?
The contract enters into the tender period a few days before the expiry. This enables the members to express their intention whether to give or take delivery.
27. What is due date rate?
It is the rate at which the contract is settled on the expiry date. Usually it is the average of the spot prices of the last few trading days (as specified by the exchange) before the contract maturity.
28. What is spread?
Spread is the difference between prices of two futures contracts of the same underlying commodity. Futures market can be a normal market or an inverted market. If the price of the far month futures contract is higher than the near month one, then it is referred to as “normal market”. On the other hand, if the price of a far month futures contract is lower than the near month one, then the situation can be referred to as “inverted market”
29. What is bull spread in commodity futures?
In most commodities and financial derivatives market, the term refers to buying contracts maturing in nearby month, and selling the deferred month contracts, to profit from the wide spread which is larger than the cost of carry.
30. What is bear spread in commodity futures?
In most of commodities and financial derivatives market, the term refers to selling the nearby contract month, and buying the distant contract, to profit from saving in the cost of carry.
