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| Contract Note Ref 2 |
31. What is rolling over of hedge positions?
Rolling over of hedge position means the closing out of existing position in the futures contract and simultaneously taking a new position in a futures contract with a later date of expiry.
32. What is meant by calendar spread?
A calendar spread means taking opposite positions in futures contract of the same commodity with different expiry dates. It is also known as an intra-commodity spread.
33. What is hedge ratio?
Hedge ratio is the ratio of number of futures contracts to be purchased or sold, to the quantity of cash asset that is required to be hedged. It is calculated as product of the coefficient of correlation between the change in cash prices and the change in futures prices, and the ratio between the standard deviation of the change in cash price and the standard deviation of the change of futures prices of the commodity.
34. What is the significance of hedge ratio?
It is significant because the spot price and futures price may not vary in the same proportion. By using this ratio, one can cover his basis risk, which is the difference between the spot price and futures price.
35. What do you mean by convergence of futures price with spot price?
This refers to the tendency of difference between spot and futures contract to decline continuously, so as to become zero on the date on maturity.
36. What is novation?
Some Clearing Houses interpose between buyers and sellers as a legal counter party i.e., the clearing house becomes buyer to every seller and vice versa. This obviates the need for ascertaining credit-worthiness of each counter party and the only credit risk that the participants face is the risk of clearing house committing a default. Clearing House puts in place a sound risk-management system to be able to discharge its role as a counter party to all participants.
37. What is Cash Settlement?
It is a process of settling a futures contract by payment of money difference rather than by delivering the physical commodity or instrument representing such physical
commodity (like, warehouse receipt). In India, most of the future trades are cash settled.
38. Are there any circuit breakers in commodities like in equity markets?
Yes, like equity markets, commodity market has circuit breakers. Exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its set price limit will fall in circuit breaker category.
39. What kinds of risks do participants face in derivatives markets?
A.Credit risk: Credit risk on account of default by counter party: This is very low or almost zeros because the Exchange takes on the responsibility for the performance of contracts
B.Market risk: Market risk is the risk of loss on account of adverse movement of price.
C.Liquidity risk: Liquidity risks is the risk that unwinding of transactions may be difficult, if the market is illiquid
D.Legal risk: Legal risk is that legal objections might be raised; regulatory framework might disallow some activities.
E.Operational risk: Operational risk is the risk arising out of some operational difficulties, like, failure of electricity, due to which it becomes difficult to operate in the market.
40. Can I take delivery of the commodity? If yes, how can I do the same?
A settlement takes place either through squaring off your position or by cash settlement or physical delivery. Squaring off is taking a opposite position to the initial stance, which means in the case of an original buy contract an investor would have to take a sell contract.
An investor who intends to give or take delivery would have to inform his broker of the same prior to the start of delivery period. In case of delivery, a warehouse receipt is provided. Delivery is at the option of the seller; a buyer can take delivery only in case of a willing seller. All unmatched/rejected/excess positions are cash settled; all open positions for which no delivery information is submitted are also cash settled.
Under cash settlement, the difference between the contract price and settlement price is to be paid or received. In online commodity trading, client can not go for delivery & all positions are cash settled.
41. What are the costs involved in trading of commodities?
While trading in commodities, with any registered broker, client has to pay certain charges (apart from margin requirements for trading) which are as follows:
1. Brokerage
2. Service tax
3. Education Cess
4. Exchange Transaction Charges
