NISM Certifications · NISM-Series-XV: Research Analyst

Fundamental Analysis of Commodities: formula sheet

Full chapter guide

Key formulas

Futures profit or loss (long): Profit = (Selling price − Buying price) × Quantity; A buyer of futures gains when the price rises. A seller (short) gains when the price falls, so the sign reverses.
Futures profit or loss (short): Profit = (Selling price − Buying price) × Quantity; Here the short position sells first at the higher price and buys back later. Quantity equals lot size × number of lots.
Call option buyer payoff at expiry: Payoff = max(Spot − Strike, 0) − Premium; Maximum loss is the premium paid. Profit is unlimited in theory.
Put option buyer payoff at expiry: Payoff = max(Strike − Spot, 0) − Premium; Maximum loss is the premium paid.
Basis: Basis = Spot price − Futures price; Check the sign convention used in the question. Basis moves towards zero as expiry nears.
Total supply: Total supply = Opening stocks + Production + Imports; Supply available in the period, before any use.
Total demand (use): Total use = Domestic consumption + Exports; This total is the denominator of the stocks-to-use ratio.
Closing stocks: Closing stocks = Total supply − Total use; Positive means a surplus carried forward; a fall in stocks means use exceeded new supply.
Stocks-to-use ratio: Stocks-to-use ratio = Closing stocks ÷ Total use × 100; Total use = domestic consumption + exports. Expressed as a percentage. Lower means tighter market and upward price pressure; higher means comfortable supply.
Price direction rule: Supply ↓ or Demand ↑ → price ↑; Supply ↑ or Demand ↓ → price ↓; Holds when other factors are unchanged (ceteris paribus).
Rupee price of an imported commodity: Rupee price ≈ Dollar price × USD/INR rate (before duties and costs); If USD/INR rises (rupee weakens), the rupee price rises when the dollar price is unchanged.
Landed cost with import duty: Landed cost = Import price in ₹ + Import duty; Higher duty raises the domestic price. Lower duty reduces it.
Export ban rule: Export ban → higher domestic supply → lower domestic price; Global prices tend to rise as supply from that country leaves the market.
MSP rule: MSP acts as a floor for the price of notified crops; It supports farm-gate prices. It does not cap the market price.
Interest rate rule: Higher rates → higher cost of carry → pressure on commodity prices; A tendency, not a certainty. Check what the question states.
Production: Production = Area sown (harvested) × Yield per hectare; A fall in either acreage or yield lowers output. Higher acreage can be offset by lower yield.
Total supply: Total supply = Opening stock + Production + Imports; Opening stock is the carry-in from the previous season.
Ending stock: Ending stock = Total supply − (Domestic consumption + Exports); A falling stocks-to-use ratio is generally price-supportive; a rising one is price-negative.
Stocks-to-use ratio: Stocks-to-use = Ending stock ÷ Total use × 100; Lower ratio means a tighter market and higher price risk.
Crop seasons: Kharif: sown June-July, harvested Oct-Nov. Rabi: sown Oct-Dec, harvested Mar-Apr; Approximate windows; exact timing varies by crop and region.
Base metals main driver: Industrial demand (esp. China) + inventories + supply costs; Falling warehouse stocks with firm demand is price-supportive; rising stocks with weak demand is negative.
Gold main drivers: Lower real interest rates + weaker US dollar + higher risk or inflation fear → gold tends to rise; Tendency, not a rule that always holds. Real rate = nominal rate − inflation (approximate).
Silver driver mix: Silver = precious-metal drivers + industrial demand drivers; Usually more volatile than gold.
Crude oil drivers: Price ↑ when supply cuts (OPEC and allies, disruption) or demand growth rises; Price ↓ when supply rises or demand slows; Inventory builds are bearish; inventory draws are bullish.
Natural gas drivers: Weather-driven demand + storage levels + LNG supply; Seasonal and regional; not tied to crude oil one-for-one.
Rupee price of an imported commodity: Domestic price ≈ international price (in ₹ terms, at the exchange rate) + duties and costs; A weaker rupee raises the rupee price even if the dollar price is unchanged.
Cost of carry pricing (simple interest): F = S + financing + storage + insurance − convenience yield; All items are for the period until futures expiry. F is futures price, S is spot price.
Cost of carry pricing (continuous compounding): F = S × e^((r + u − y) × t); r is interest rate, u is storage cost as a rate, y is convenience yield rate, t is time in years. Use only if the question gives this form.
Financing cost (simple): Financing cost = S × r × t; t in years, for example 3 months = 0.25.
Basis: Basis = Spot price − Futures price; Check the question's definition. Some sources use futures minus spot.
Contango: Futures price > Spot price (basis negative); Normal when carry costs are positive and convenience yield is small.
Backwardation: Futures price < Spot price (basis positive); Often seen when supply is tight and convenience yield is high.
Convergence: Basis → 0 at expiry; Futures and spot prices come together on the delivery date.

Quick revision

Commodity prices are driven mainly by supply, demand and stock levels.
Fundamental analysis looks at economic drivers; technical analysis looks at price and volume patterns.
Weather, sowing area and yield drive agricultural supply.
Agricultural supply is seasonal, so prices often show seasonal patterns.
Industrial activity is a major demand driver for base metals.
Geopolitical events and supply decisions by producers strongly affect energy prices.
A weaker rupee tends to raise the rupee price of imported commodities.
Government policies such as export bans, import duties and support prices can shift prices.
Cost of carry is the cost of holding the physical commodity, such as storage, insurance and financing.
Basis is the difference between the spot price and the futures price.
Futures prices tend to be linked to spot prices plus the cost of carry.
Read each option for direction words like increase, decrease and unchanged before you answer.

Common mistakes

Saying a futures buyer has only a right to buy. Fix: Futures bind both parties. Only the option buyer holds a right without obligation.
Treating futures as customised contracts. Fix: Exchange-traded futures are standardised in quantity, quality and expiry. Only price is negotiated.
Dividing closing stocks by production instead of total use. Fix: The ratio is closing stocks ÷ total use (consumption + exports). Write the formula before you calculate.
Treating a rise in stocks as always bullish for price. Fix: Higher stocks mean more supply cushion, which is bearish for price, other things equal.
Saying an export ban raises domestic prices. Fix: A ban keeps more supply inside India, so domestic prices fall. The scarcity is in the global market.
Treating MSP as a maximum price. Fix: MSP is a floor. Market prices can be above it.
Treating total rainfall as the only monsoon factor. Fix: Remember timing and regional distribution matter too. A normal total can still hurt a crop if a dry spell hits a critical stage.
Mixing up kharif and rabi crops. Fix: Link kharif to monsoon sowing (paddy, cotton, soybean, maize) and rabi to winter sowing (wheat, mustard, chana).
Saying gold rises when interest rates rise. Fix: Gold pays no yield. Higher real rates raise the cost of holding it, so they are usually negative for gold.
Treating silver exactly like gold. Fix: Silver also has large industrial demand. It responds to growth news and is usually more volatile.

Exam tips

Expect definition questions: spot, futures, options, hedger, speculator. Learn each in one line.
Watch for questions that swap rights and obligations of option buyers and sellers.
Know that SEBI regulates commodity derivatives and exchanges provide the trading platform.
Do the arithmetic fully and check the sign. Negative marking makes careless slips costly.
Learn the classification of common commodities: agricultural, base metals, precious metals and energy.
Memorise the denominator: stocks-to-use uses total use (consumption + exports), not production.
Questions often give a balance sheet and ask for closing stocks first. Do that step explicitly.
When two options differ only in direction, apply the supply-down or demand-up equals price-up rule.