1. What is a Derivative Contract?

2. What is a Spot Market?

3. What is a Futures Market/Futures Contract?

4. Who is a Dealer?

5. What is a Dealers Market?

6. Who is speculator?

7. Who is market maker?

8. What is hedging?

9. How are futures prices determined?

10. Why do we need speculators in futures market?

11. What is the difference between a speculator and gambler?

12. What is a Brokerage/Commission House?

13. What is Commission/Brokerage and who is a Broker?

14. What are the benefits from Commodity Trading?

15. How professionals predict prices in futures?

16. How is it possible to sell, when one doesn�t own commodity?

17. What is Market opening?

18. What is BID and ASK?

19. What is a Spread?

20. What is Opening Price, Last Traded Price and Settlement Price

21. What is Mark-to-market and Settlement

22. What is a Break-Even point?

23. What is an Order and Order No.?

24. What is a Limit Order, What is Market Order, Stop Loss Order, Pending Order, Executed Order?
25. What is a Trade and Trade No.?

26. What is a Lot/Contract?

27. What is Open Position/Open Contract?

28. What is Liquidation?

29. What is Equity?

30. What is Variation Margin (V.M.) Call Margin?

31. What are Over-the-Counter Markets?

1. A derivative contract is an enforceable agreement whose value is derived from the value of an underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or, indices of commodities, stocks etc. Four most common examples of derivative instruments are forwards, futures, options and swaps/spreads. (Up)

2. Spot Markets are markets that involve the immediate delivery of a security or instrument. (Up)

3. Futures are exchange � traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price. Futures contracts are used generally for protecting against risk of adverse price fluctuation (hedging). As the terms of the contracts are standardized, these are generally not used for merchandizing propose. (Up)

4. An entity that stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). Individual or firm acting as a principal in a securities transaction. Principals are market makers in securities, and thus trade for their own account and risk. (Up)

5. Where traders specializing in particular commodities buy and sell assets for their own accounts. (Up)

6. A trader, who trades or takes position without having exposure in the physical market, with the sole intention of earning profit is a speculator. (Up)

7. A market maker is a trader, who simultaneously quotes both bid and offer price for a same commodity throughout the trading session. (Up)

8. Hedging is a mechanism by which the participants in the physical/cash markets can cover their price risk. Theoretically, the relationship between the futures and cash prices is determined by cost of carry. The two prices therefore move in tandem. This enables the participants in the physical/cash markets to cover their price risk by taking opposite position in the futures market. (Up)

9. Futures prices evolve from the interaction of bids and offers emanating from all the buyers and sellers � which converge in the trading floor or the trading engine. The bid and offer prices are based on the expectations of prices on the maturity date. (Up)

10. Participants in physical markets use futures market for price discovery and price risk management. In fact, in the absence of futures market, they would be compelled to speculate on prices. Futures market helps them to avoid speculation by entering into hedge contracts. It is however extremely unlikely for every hedger to find a hedger counterparty with matching requirements. The hedgers intend to shift price risk, which they can, only if there are participants willing to accept the risk. Speculators are such participants who are willing to take risk of hedgers in the expectation of making profit. Speculators provide liquidity to the market, therefore, it is difficult to imagine a futures market functioning without speculators. (Up)

11. Speculators are not gamblers, since they do not create risk, but merely accept the risk, which already exists in the market. The speculators are the persons who try to assimilate all the possible price-sensitive information, on the basis of which they can expect to make profit. The speculators therefore contribute in improving the efficiency of price discovery function of the futures market. (Up)

12. A firm that buys and sells futures contracts for customer accounts. (Up)

13. Commission / Brokerage is the fee paid to a brokerage house to execute a trade, based on number of contracts traded. A Broker is an individual who is paid a commission for executing customer orders. (Up)

14. Forward/Futures trading performs two important functions, namely, price discovery and price risk management with reference to the given commodity. It is useful to all segments of the economy. It enables the �Consumer� in getting an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts. It is very useful to the �exporter� as it provides an advance indication of the price likely to prevail and thereby helps him in quoting a realistic price and secure export contract in a competitive market. It ensures balance in supply and demand position throughout the year and leads to integrated price structure throughout the country. It also helps in removing risk of price uncertainty, encourages competition and acts as a price barometer to farmers and other functionaries in the economy. (Up)

15. Two methods generally used for predicting futures prices are fundamental analysis and technical analysis. The fundamental analysis is concerned with basic supply and demand information, such as, weather patterns, carryover supplies, relevant policies of the Government and agricultural reports. Technical analysis includes analysis of movement of prices in the past. Many participants use fundamental analysis to determine the direction of the market, and technical analysis to time their entry and exit. (Up)

16. One doesn�t need to have the physical commodity or own a contract for the commodity to enter into a sale contract in futures market. It is simply agreeing to sell the physical commodity at a later date or selling short. It is possible to repurchase the contract before the maturity, thereby dispensing with delivery of goods. (Up)

17. The start of formal trading on an exchange. (Up)

18. Bid (also called the Buy Price) is the price at which an investor accepts to buy a contract. Ask (also called the Offer price) is the price at which an investor accepts to sell a contract. (Up)

19. The gap between bid and ask prices of a commodity. (Up)

20. Opening Price: The range of prices at which the first bids and offers are made or the first transactions are completed on an exchange.
Last Traded Price: The last reported price at which a contract was traded in the market. Settlement Price: The settlement price is the price at which all the outstanding trades are settled, i.e, profits or losses, if any, are paid. In other words, a figure determined by the closing range that is used to calculate gains, losses, margin calls in the client�s account. (Up)

21. Mark to Market is an arrangement whereby the profits or losses on a contract are settled each day based on the settlement price of the contract. Payment made for a trade is called settlement. (Up)

22. Refers to the price at which a transaction produces neither a gain nor a loss. (Up)

23. Instruction to a broker/dealer to buy/sell commodities is an order. Identity assigned to an order by the trading system is the Order No. (Up)

24. Limit Order: An order to buy a contract at or below a specified price, or to sell a contract at or above a specified price. The user specifies a price, and the order can be executed only if the market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse unexpected price changes.
Market Order: Order to buy or sell a stated amount of a contract at the most advantageous price. Stop Loss Order: An order to buy or sell at the market when a definite price is reached, either above (on a buy) or below (on a sell) the price that prevailed when the order was given.
Pending Order: An order to buy or sell entered into the trading system for which a match could not be found till a given point of time.
Executed Order: An order to buy or sell entered into the trading system which resulted in a trade/transaction. (Up)

25. Trade is an oral (or electronic) transaction involving one party buying a security from another party. Once a trade is consummated, it is considered "done" or final. Trade No. is the identity assigned to a trade by the trading system. (Up)

26. Also called as contract. A term of reference describing as unit of trading for a commodity. (Up)

27. Contracts that have been bought or sold without completion of the transaction by subsequent sale or purchase. (Up)

28. Any transaction that offsets or closes out a long or short position. (Up)

29. In a brokerage account, equity equals the value of the account's derivative contracts minus any debit balance in a margin account. (Up)

30. The amount of money (normally in terms of percentage of the contract value) required to take a long/short position in the market. A demand for additional funds because of adverse price movement. (Up)

31. Over-the-Counter: Over-the-Counter is an alternative-trading platform linked to a network of dealers who do not physically meet but instead communicate through a network of phones and computers. Trades are usually transacted between financial institutions that can also act as market makers for the commonly traded instruments. All transactions over the telephone are recorded, in case of future disputes that may arise. The buyer and seller to suit their requirements can customize the contracts traded in these markets. Hence, terms of the contract need not be specified as in the case of an exchange.

There are 3 types of OTC Markets

• Traditional Dealer Market: In this, the dealers act as market makers by maintaining ‘bid’ and ‘offer’ quotes. The dealers communicate the quotes and the execution prices are negotiated upon over the telephone and sometimes through an electronic bulletin board. It is a bilateral trading as only the two ends of a phone observe prices at a given point of time.

• Electronic Broking Market: This is similar to the electronic trading platforms used by exchanges. These are considered to be Over-the-Counter since the contracts are less standardized. The EBM neither sets the contract design not clears the derivative transactions.

• Proprietary Trading Platform Markets: this is a combination of the first two in which a dealer sets up his own proprietary electronic trading platform. The dealer quotes the Bids and Asks exclusively for the market participants to observe his quotes only and not each other’s. In this form of trading the dealer acts the counter party to every trade so that half of the credit risk in the market is his. (Up)