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Chapter 4

Structuring of Derivative Contracts

Index of Contents:

Like in every derivative contracts, the commodity derivative contracts also have a fixed expiry date, benchmarks for the spot price, strike prices in case of options, etc. More or less, all these factors are standardized to the extent possible. There is a small difference on the concept of spot price of the underlying in each of these commodities. While equities have a standard method of using the stock price, the commodity futures and options use the spot commodity underlying with clear standards of quality and grading defined. Unlike in the case of equity futures and options, there is no standard contract cycle that expires on the last Thursday of the month. Instead, each commodity has its own unique contract cycle. Before we get into the specifics of various classes of contracts, let us quickly look at how deliveries are handled in case of commodity futures.

Concept of delivery against futures in commodities

Index options and currency options and futures are necessarily settled in cash. There is no underlying spot that is exchanged. It is just the profit and loss that gets adjusted. However, commodities are used by genuine hedgers and hence they either need to take delivery or give delivery at a future date. Hence commodity markets offer the dual facility of either trading and squaring up the futures position or actually taking or giving physical delivery against the contract.

There are some basic things you need to understand about delivery. Trading unit is different from delivery unit. Trading unit represents the minimum size that can be traded while delivery unit is the minimum size that can be delivered. For example, In the case of Gold Petal contract, trading unit is 1 gram but delivery unit is 8 grams. Deliveries shall always take place at the warehouses accredited/approved as designated delivery centres, typically through warehouse receipts (WRs). Warehouse receipts represent a document whether in physical or electronic form evidencing a commodity being held in the in the accredited/approved warehouses and is considered tantamount to physical delivery.

There are four different types of delivery contract available on the MCX at the current point of time. They are as under:

Compulsory Delivery: In this case, all open interest position of the members at expiry of the contract will necessarily result in physical deliverable obligations.

Seller Option: In case of delivery based on seller option contract it is based on the seller’s choice. If the seller gives valid intention to give delivery within the stipulated time limit, the MCXCCL will mark the delivery to the Buyer Member. Rest of the open positions on expiry of the contract, will be closed out at the Due Date Rate (DDR)

Both Option: When intentions of both Buyer and Seller Member to give/take delivery match on or before the expiry of the contract, then the delivery will be marked to the extent of matched quantity on expiry of the contract. If the intentions are not received, all open interest position of the Members get closed out at DDR (Due date rate).

Cash Settled: Contracts specified as Cash settled shall be settled by way of Funds settlement and no physical delivery settlement will take place for such contracts.

Structuring of Contracts – Focus on Precious metals

Precious metals broadly consist of gold and silver in the Indian context. Of course, they are further broken up into specific commodity contracts, based on size of the contract, like Gold, Gold Mini, Gold Guinea, Gold Petal, Silver, Silver Mini etc. Let us look at the structuring of the contracts of each of these sub-segments.

Description Characteristics
Name and Symbol Gold Futures (Gold)
Contract Listing Available as per the contract launch calendar
Trading Unit 1 KG
Quotation 10 grams
Max Order Size 10 KG
Minimum Tick Rs.1 per 10 grams
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position Individual clients (5MT for all gold contracts or 5% of MWPL) Member Level (50MT or 20% of MWPL)
Delivery Unit 1 KG
Delivery period margin Higher of (3% + 5-day 99%VAR Spot) and (25%)
Delivery Centre Designated clearing house facility at Ahmadabad

Most of the features for the mini and smaller gold contracts are the same and hence we shall not be covering the sub contracts individually. We shall only cover the gold and the silver broad contracts.

Description Characteristics
Name and Symbol Silver Futures (SILVER)
Contract Listing Available as per the contract launch calendar
Trading Unit 30 KG
Quotation 1 KG
Max Order Size 600 KG
Minimum Tick Rs.1 per KG
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position Individual clients (100MT for all silver contracts or 5% of MWPL) Member Level (1000 MT or 20% of MWPL)
Delivery Unit 30 KG
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Designated clearing house facility at Ahmedabad

Are options on gold and silver available? Yes there are options available on gold and silver with the following characteristics.

Underlying: Gold Futures and Silver Futures contract respectively. Options are based on futures price underlying and not on spot price.

Option Type: European calls and puts

Expiry Date: 3 business days prior to the first business day of tender period

Margins: Upfront premium margin for buyer and normal futures margining for seller

Mode of settlement: Long calls and short puts will devolve into long futures. Long Puts and short calls shall devolve into short futures.

Structuring of Contracts – Focus on Base metals

Base metals include a number of lower value metals with substantial industrial uses. These include aluminium, copper, zinc, nickel and each of the versions also a major contract and a mini contract. These are more synced with industrial demand cycles.

Description Characteristics
Name and Symbol Aluminium Futures (ALUMINIUM)
Contract Listing Available as per the contract launch calendar
Trading Unit 5 MT
Quotation 1 KG
Max Order Size 150 MT
Minimum Tick Rs.0.05 per KG
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position Individual clients (25,000 MT for all contracts or 5% of MWPL) Member Level (250,000 MT or 20% of MWPL)
Delivery Unit 5 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Ex-warehouse, Thane District, Maharashtra

Apart from aluminium, another important base metal is copper, details as under.

Description Characteristics
Name and Symbol Copper Futures (COPPER)
Contract Listing Available as per the contract launch calendar
Trading Unit 2.5 MT
Quotation 1 KG
Max Order Size 70 MT
Minimum Tick Rs.0.05 per KG
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position Individual clients (7,000 MT for all contracts or 5% of MWPL) Member Level (70,000 MT or 20% of MWPL)
Delivery Unit 2.5 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Ex-warehouse, Thane District, Maharashtra

Lead is another important base metal with extensive applications in batteries.

Description Characteristics
Name and Symbol Lead Futures (LEAD)
Contract Listing Available as per the contract launch calendar
Trading Unit 5 MT
Quotation 1 KG
Max Order Size 100 MT
Minimum Tick Rs.0.05 per KG
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position Individual clients (3,500 MT for all contracts or 5% of MWPL) Member Level (35,000 MT or 20% of MWPL)
Delivery Unit 10 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Within 20 KM outside Mumbai octroi limit

Nickel is a base metal with extensive applications in manufacture of stainless steel.

Description Characteristics
Name and Symbol Nickel Futures (NICKEL)
Contract Listing Available as per the contract launch calendar
Trading Unit 250 KG
Quotation 1 KG
Max Order Size 24 MT
Minimum Tick Rs.0.10 per KG
Initial Margin Minimum 5% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position Individual clients (1,000 MT for all contracts or 5% of MWPL) Member Level (10,000 MT or 20% of MWPL)
Delivery Unit 3 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Within 20 KM outside Mumbai octroi limit

The last of the major base metals on which futures is available is Zinc, which is known for its anti-corrosive properties make it useful in ships, automobiles and construction.

Description Characteristics
Name and Symbol Zinc Futures (ZINC)
Contract Listing Available as per the contract launch calendar
Trading Unit 5 MT
Quotation 1 KG
Max Order Size 100 MT
Minimum Tick Rs.0.05 per KG
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position Individual clients (7,000 MT for all contracts or 5% of MWPL) Member Level (70,000 MT or 20% of MWPL)
Delivery Unit 5 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Ex-warehouse at Thane District in Maharashtra

In all the base metals, futures and options contracts are available. Options are European in nature and devolve into futures on the option expiry date.

Structuring of Contracts - Focus on Energy Products

Globally, energy is a major trading product. Like in other markets, even in India, trading in crude oil and natural gas are among the most liquid contracts in the market. The need for hedging energy products arise from their volatile nature and the multifarious factors that have an impact on the price of these commodities. Broadly, there are two categories of energy products available in India viz. Crude oil and Natural Gas with mini variants too.

Description Characteristics
Name and Symbol Crude Oil Futures (CRUDEOIL)
Contract Listing Available as per the contract launch calendar
Trading Unit 100 Barrels (1 barrel is equal to approximately 159 litres)
Quotation 1 Barrel
Max Order Size 10,000 Barrels
Minimum Tick Rs.1.00 per Barrel
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position Individual clients (4,80,000 Barrels for all crude oil contracts or 5% of MWPL) Member Level (48,00,000 Barrels or 20% of MWPL)
Quality Specification Light Sweet Crude Oil confirming to the following quality specification:
Sulphur 0.42% by weight or less,
API Gravity: Between 37 degree – 42 degree
Settlement Mechanism Mandatorily cash settled

While crude oil continues to be the biggest source of energy, it has its downsides in the form of the environmental costs. An alternative is natural gas, which is environmentally friendlier and is extensively used across Western countries for winter heating.

Description Characteristics
Name and Symbol Natural Gas Futures (NATURALGAS)
Contract Listing Available as per the contract launch calendar
Trading Unit 1250 mmBtu (measured in British Thermal Units)
Quotation 1 mmBtu
Max Order Size 20,000 mmBtu
Minimum Tick Rs.0.10 per Barrel
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1.25% (ELM)
Max Open Position Individual clients (60,00,000 mmBtu for all natural gas contracts or 5% of MWPL) Member Level (6,00,00,000 Barrels or 20% of MWPL)
Quality Specification Natural Gas meeting the specifications set forth in the FERC approved tariff of Sabine Pipe Line Company
Settlement Mechanism Mandatorily cash settled

Structuring of Contracts - Focus on Agricultural Products

Agricultural products are not only volatile but price are generally regulated and demand supply situation is constantly monitor as they are politically subjects. Also the government endeavours to protect the interests of its farmers by ensuring that they get remunerative prices for their crop. While NCDEX clearly has the leadership position in trading agri product futures, MCX has also been building volumes in select products. Let us look at some of the details of products on MCX.

Description Characteristics
Name and Symbol Pepper Futures (PEPPER)
Contract Listing Available as per the contract launch calendar
Trading Unit 1 MT
Quotation 100 KG
Max Order Size 500 MT
Minimum Tick Rs.5.00 per KG
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position For individual clients: 360 MT
For a member collectively for all clients: 3,600 MT or 15% of the market wide open interest, whichever is higher.
Near Month Limits
For individual clients: 90 MT
Near month member level position limit shall be equivalent to the one fourth of the overall member level position limit
Delivery Unit 1 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Kochi (Ernakulum) and MCX designated warehouses up to radius of 100 km from Kochi municipal limits
Delivery logic Compulsory delivery only

Like Pepper, Cardamom is also extreme region specific and is vulnerable to the vagaries of the weather and the monsoons.

Description Characteristics
Name and Symbol Cardamom Futures (CARDAMOM)
Contract Listing Available as per the contract launch calendar
Trading Unit 100 KG (1 quintal)
Quotation 1 KG
Max Order Size 5000 KG
Minimum Tick Rs.0.10 per KG
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position For individual clients: 100 MT
For a member collectively for all clients: 1000 MT or 15% of the market wide open interest, whichever is higher.
Near Month Limits
For individual clients: 25 MT
Near month member level position limit shall be equivalent to the one fourth of the overall member level position limit.
Delivery Unit 100 KG
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (35%)
Delivery Centre At exchange designated warehouse at Vandanmedu in Idukki District in Kerala State
Delivery logic Compulsory delivery only

Castor seed is crushed to make oil which does not have edible applications but has extensive uses in chemicals, paints, varnishes and certain drug formulations.

Description Characteristics
Name and Symbol Castor Seed Futures (CASTORSEED)
Contract Listing Available as per the contract launch calendar
Trading Unit 10 MT
Quotation 100 KG
Max Order Size 500 MT
Minimum Tick Rs.1.00 per KG
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1.25% (ELM)
Max Open Position For individual clients: 15,000 MT
For a member collectively for all clients: 1,50,000 MT or 15% of the market wide open interest, whichever is higher.
Near Month Limits
For individual clients: 3,750 MT
Near month member level position limit shall be equivalent to the one fourth of the overall member level position limit.
Delivery Unit 10 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre At exchange designated warehouse at Deesa in Gujarat State and up to a radius of 100 KM from the municipal limits
Delivery logic Compulsory delivery only

Cotton is available in different grades with the Egyptian cotton considered to be of an extremely superior grade. Cotton is an important input for the textile industry.

Description Characteristics
Name and Symbol Cotton Futures (COTTON)
Contract Listing Available as per the contract launch calendar
Trading Unit 25 Bales (1 bale is equal to 170 KG)
Quotation 1 Bale
Max Order Size 1200 Bales
Minimum Tick Rs.10.00
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position For individual clients: 3,60,000 Bales
For a member collectively for all clients: 36,00,000 Bales or 15% of the market wide open interest, whichever is higher.
Near Month Limits
For individual clients: 90,000 Bales
Near month member level position limit shall be equivalent to the one fourth of the overall member level position limit.
Delivery Unit 100 Bales
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Basic Delivery Centre (Rajkot). Additional delivery centres (Yavatmal, Kadi and Adilabad)
Delivery logic Compulsory delivery only

Crude Palm oil is now emerging as an important and healthy alternative to traditional edible oil. The futures are a popular trade on Indian futures bourses.

Description Characteristics
Name and Symbol Crude Palm Oil (CPO)
Contract Listing Available as per the contract launch calendar
Trading Unit 10 MT
Quotation 10 KG
Max Order Size 200 MT
Minimum Tick Rs.0.10
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position For individual clients: 1,00,000 MT
For a member collectively for all clients: 10,00,000 MT or 15% of the market wide open interest, whichever is higher.
Near Month Limits
For individual clients: 20,000 MT
Near month member level position limit shall be equivalent to the one fourth of the overall member level position limit.
Delivery Unit 10 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Within the municipal limits of Kandla in Gujarat State
Delivery logic Both delivery and cash settlement options available

Mentha Oil is predominantly produced in India and has extensive applications in flavouring, essences, perfumes etc.

Description Characteristics
Name and Symbol Mentha Oil (MENTHAOIL)
Contract Listing Available as per the contract launch calendar
Trading Unit 360 KG (2 Drums)
Quotation 1 KG
Max Order Size 18,000 KG (100 Drums)
Minimum Tick Rs.0.10
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position For individual clients: 160 MT
For a member collectively for all clients: 1,600 MT or 15% of the market wide open interest, whichever is higher.
Near Month Limits
For individual clients: 40 MT
Near month member level position limit shall be equivalent to the one fourth of the overall member level position limit.
Delivery Unit 2,160 (12 Drums)
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Basic Delivery Centre (Chandausi). Additional centres (Barabanki)
Delivery logic Compulsory Delivery

Finally, Rubber has emerged as a key input for automobile and aeronautic industry. Kerala State is a leader in the production of rubber in India.

Description Characteristics
Name and Symbol Rubber Futures (RUBBER)
Contract Listing Available as per the contract launch calendar
Trading Unit 1 MT
Quotation 100 KG
Max Order Size 50 MT
Minimum Tick Rs.1.00
Initial Margin Minimum 4% or SPAN; whichever is higher
Extreme Loss Margin 1% (ELM)
Max Open Position For individual clients: 10,500 MT
For a member collectively for all clients: 1,05,000 MT or 15% of the market wide open interest, whichever is higher.
Near Month Limits
For individual clients: 2,625 MT
Near month member level position limit shall be equivalent to the one fourth of the overall member level position limit.
Delivery Unit 1 MT
Delivery period margin Higher of (3% + 5-day 99% VAR Spot) and (25%)
Delivery Centre Kochi (Ernakulum) and 100 KM within municipal limits
Delivery logic Compulsory Delivery
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