NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities

Introduction to Commodity Markets and Derivatives in India

Updated 11 October 2026 · Fact-checked

A commodity market trades raw or primary goods such as crops, metals and energy. Spot trades settle now at the spot price. Futures and options are derivatives whose value comes from the commodity price. In India, SEBI regulates commodity derivatives, which trade on recognised exchanges. Know the types, the participants and how contracts work.

Understand Introduction to Commodity Markets and Derivatives

A commodity is a basic good that is interchangeable with other units of the same grade. One tonne of a given grade of copper is much like another. Because units are alike, they can be traded in standard lots.

Commodities are usually grouped into a few types:
- Agricultural: crops and farm produce such as wheat, soybean, cotton and spices. Supply depends on weather and seasons.
- Metals: base metals such as copper, aluminium and zinc, and precious metals such as gold and silver.
- Energy: crude oil, natural gas and similar products.

A spot market is where a commodity is bought and sold for immediate or near-immediate delivery at the spot price. A derivatives market trades contracts whose value is derived from the commodity's price. The main contracts are futures and options.

A futures contract is an agreement to buy or sell a standard quantity of a commodity of a specified quality at a fixed price on a future date. It is traded on an exchange and is standardised. The exchange fixes lot size, quality, expiry and delivery terms. Only the price is decided by trading. Buyers and sellers post margin, and positions are marked to market daily.

An option contract gives the buyer a right, but not an obligation, to buy (call) or sell (put) at a fixed strike price on or before expiry. The buyer pays a premium. The seller (writer) takes the obligation if the buyer exercises.

Participants include hedgers (producers, traders and users who lock in prices to reduce risk), speculators (who take price risk for profit) and arbitrageurs (who exploit price gaps between markets). Commodity derivatives trade on exchanges recognised and supervised by SEBI, which regulates the commodity derivatives market in India. Exchanges provide the trading platform, set contract specifications and run risk management. A clearing corporation guarantees settlement. Futures can settle by physical delivery or in cash, depending on the contract terms.

Key formulas to remember

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.

How to solve Introduction to Commodity Markets and Derivatives questions

Most questions on this topic test a definition, a classification or a simple payoff. Use this method.

1Read the question and decide whether it asks about types, institutions, contract features or a calculation.
2For classification questions, place the commodity in agricultural, metals (base or precious) or energy.
3For institution questions, link the role: SEBI as regulator, exchange as trading platform, clearing corporation as settlement guarantor.
4For contract questions, separate futures (obligation for both sides) from options (right for the buyer, obligation for the seller).
5For calculations, write long or short, entry price, exit price and total quantity (lot size × lots).
6Apply the payoff rule and check the sign. A loss must be negative.
7Compare each option against your answer and reject those with reversed rights or obligations.

Quickest way: Right versus obligation check

When to use it: Use it on any question comparing futures, options, buyers and sellers.

Futures: both buyer and seller have an obligation.
Option buyer: has a right and pays a premium. Loss is limited to the premium.
Option seller: receives the premium and has an obligation if exercised.
Spot means immediate delivery. Futures means delivery or settlement at a future date.
For payoffs, price up helps longs and price down helps shorts.

Common mistakes in Introduction to Commodity Markets and Derivatives

Saying a futures buyer has only a right to buy.
Students mix up futures and call options.
Fix: Futures bind both parties. Only the option buyer holds a right without obligation.
Treating futures as customised contracts.
Forward contracts are customised, and the two get blended.
Fix: Exchange-traded futures are standardised in quantity, quality and expiry. Only price is negotiated.
Forgetting to multiply by lot size.
Students stop at the per-unit price change.
Fix: Always compute price change × lot size × number of lots.
Ignoring the premium in option payoffs.
Students focus on the intrinsic value at expiry.
Fix: Subtract the premium paid from the buyer's payoff.
Placing gold or silver under base metals.
All are called metals.
Fix: Gold and silver are precious metals. Copper, aluminium and zinc are base metals.

Worked examples

Example 1

A trader buys 2 lots of a commodity futures contract at ₹6,000 per unit. Each lot is 50 units. At exit the price is ₹6,120 per unit. Find the profit or loss.

Show the solution

The trader is long, so a price rise is a gain.
Price change = 6,120 − 6,000 = ₹120 per unit.
Total quantity = 2 × 50 = 100 units.
Profit = 120 × 100 = ₹12,000.

Answer: Profit of ₹12,000.

Example 2

An investor buys a commodity call option with strike ₹70,000 and pays a premium of ₹1,500 per unit. At expiry the spot price is ₹71,000. What is the net payoff per unit?

Show the solution

Intrinsic value = max(71,000 − 70,000, 0) = ₹1,000.
Net payoff = intrinsic value − premium.
Net payoff = 1,000 − 1,500 = −₹500.

Answer: A net loss of ₹500 per unit. The option is in the money but the premium is not recovered.

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.

Practice questions from Fundamental Analysis of Commodities

Introduction to Commodity Markets and Derivatives in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Introduction to Commodity Markets and Derivatives: frequently asked questions

What is the difference between spot and futures commodity markets?

The spot market deals in immediate delivery at the current price. The futures market trades standard contracts for a fixed price and a future date. Futures are used for hedging and speculation.

Who regulates commodity derivatives in India?

SEBI regulates commodity derivatives and the exchanges on which they trade. Exchanges set contract terms and run risk management. A clearing corporation guarantees settlement.

What are the main types of commodities?

They are agricultural, metals and energy. Metals split into base metals and precious metals. Each type has different supply and demand drivers.

Why do hedgers use commodity futures?

Producers, traders and users lock in a price today to reduce the risk of adverse price moves. This makes their costs or revenues more predictable.