FD - Group 11

Financial Derivatives
Group Assignment : Understanding Exchange Traded

Derivatives
Commodity Future on
MCX – Gold
Details: Group 11
Member Role No. Contribution
Akshita Luthra 22PGDMBFS Contract Specifications, Hedging
Ankur Dhawan 22PGDMBFS Regression Analysis, Variables Comparison
Ayushmann Singh 22PGDMBFS Risk Management

Bhavna Meghani 22PGDMBFS History of Gold Futures, Volume
Pranjal Kala 22PGDMBFS39 Underlying Assets, Settlement
Table of Contents Page No.
1) History of Gold Futures
2) Underlying Assets
3) Volume Traded
4) Contract Specifications
5) Trading
6) Settlement
7) Risk Management
Objectives
Description/Status/Links
Include all helpful information and files for the new task owner
History of Gold Futures
In India, gold is significant on more than simply an economic level. For the majority of Indians, gold has
typically been seen as the safest and best choice to park one's wealth because they lack a savings
product that might prevent their cash from being eroded against rampant inflation. A desire for gold is
ingrained in the social, cultural, and economic ethos of the country because it offers economic
security.
Being one of the biggest markets for gold, still there are only households who believe in maintaining
exposure just to physical gold. Investors are not willing to take risk of investing in futures of gold even
though demand for gold will never go down, it has immense value during economic downturn and
central banks across the globe own loads of gold bullions.
Now, gold futures can be traded on commodity exchange platform of MCX, it is a regulated electronic
platform where sellers and buyers transact on derivative contracts in an organized way. It is a contract
between two parties to buy and sell at a pre-decided future date as well as rate.
Gold Futures were first time traded in 1920, along with silver then called Bombay. However, future
trading was disallowed during World War 2 and commodity market trading remained dormant for
almost four decades. Post that future trading was allowed in all commodities by Government of India
since April, 2003. Among the national exchanges, MCX share in gold commodity trading was around
98% in FY 2014-2015.
Underlying Assets
On MCX (Multi Commodity Exchange) in India, gold is traded in four different units:
1. Gold Mini (100 grams)

2. Gold (1 kilogram)
3. Gold Guinea (8 grams)
4. Gold Petal (1 gram)
Each of these units has its own contract specifications, such as minimum and maximum order sizes, tick
sizes, and delivery unit sizes. These contracts are settled in cash or through physical delivery of the
underlying asset.
For all these trading units, the Trading periods are Monday through Fridays and Trading sessions are
Monday to Friday: 9.00 a.m. to 11.30 / 11.55 p.m
Volume
Contract Specifications
Contract Specifications of MCX futures (Gold)

Specification Gold Gold Mini Gold Guinea Gold Petal
Contracts February , April, January, February, March, April, May, June, July, August,
Available June September, October, November, December
Delivery Unit 1 kg 100 grams 8 grams and in 1gram
multiples thereof
Tick Size 1/10 grams 1/10 grams 1/8 grams 1/1 gram
Quotation/ Base 10 grams 10 grams 8 grams 1gram
Value
Trading Period 9.00 a.m. to 11.30 / 11.55 p.m
Maximum Order 10 Kg
Size
Initial Margin Minimum 6% or based on SPAN whichever is higher
Extreme Loss Minimum 1%
Margin
Daily Price Limit The base price limit will be 3%. Whenever the base daily price limit is breached,
the relaxation will be allowed up to 6% without any cooling off period in the trade.
In case the daily price limit of 6% is also breached, then after a cooling off period
of 15 minutes, the daily price limit will be relaxed up to 9%
Delivery Centre Ahmedabad Mumbai

Quality 995 purity 999 purity
Specifications
Trading
Settlements
Risk Management
Futures trading on MCX (Multi Commodity Exchange of India Ltd) involves various risks that traders should
be aware of.
Risks involved in futures trading on MCX include
Price risk Futures trading is subject to price fluctuations, and any adverse price movement can
result in losses.
Liquidity risk If a trader is not able to sell or buy a futures contract due to low trading volume or lack
of buyers or sellers, they may incur losses.
Counterparty risk Futures contracts involve two parties, and there is a risk that the counterparty may
default on the contract.
Margin risk Futures trading requires traders to maintain a margin, which is a percentage of the
contract value. If the margin requirements are not met, the trader's position may be
liquidated, resulting in losses.
Measures taken by MCX for Risk Management
Daily price limits MCX sets daily price limits to restrict price movements and prevent excessive volatility.
Circuit breakers MCX has circuit breakers in place to halt trading in the event of a sharp price movement,
giving traders time to reassess their positions.
Margining system MCX uses a margining system to ensure that traders have sufficient funds to meet their
obligations.
Position limits MCX imposes position limits on traders to prevent them from taking excessively large
positions.
Clearing and MCX has a robust clearing and settlement system that ensures timely settlement of
settlement trades and minimizes counterparty risk.
Online Monitoring Commodity exchanges have implemented an online monitoring and surveillance system
that allows members' exposure to be tracked in real time and notified through alerts.
Offline Surveillance Inspections and investigations are examples of offline surveillance activities used to
Activity check members’ degree of compliance with the exchanges’ rules, bye-laws, and
regulations.
Overall, MCX has taken several measures to manage the risks involved in futures trading and ensure a safe and
efficient trading environment for its participants.
Let's say a trader wants to trade futures contracts for gold on MCX. They expect the price of gold to increase in the
coming months and want to take a long position in a gold futures contract.
However, there are risks involved in this trade. For example, if the price of gold decreases instead of increasing, the
trader may incur losses. There is also a risk that the counterparty may default on the contract, or the trader may not
have sufficient funds to meet margin requirements.
To manage these risks, MCX has put in place various risk management measures. For example, MCX sets daily price
limits to restrict price movements and prevent excessive volatility. If the price of gold exceeds the daily limit, trading is
halted temporarily to give traders time to reassess their positions.
MCX also has circuit breakers in place to halt trading in the event of a sharp price movement. This gives traders time
to react and avoid large losses.
Furthermore, MCX uses a margining system to ensure that traders have sufficient funds to meet their obligations. If
the trader's margin falls below the required level, their position may be liquidated to avoid further losses.

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Financial Derivatives

Group Assignment : Understanding Exchange Traded

Member Role No. Contribution

Akshita Luthra 22PGDMBFS Contract Specifications, Hedging

Ankur Dhawan 22PGDMBFS Regression Analysis, Variables Comparison

Ayushmann Singh 22PGDMBFS Risk Management

Pranjal Kala 22PGDMBFS39 Underlying Assets, Settlement

Table of Contents Page No.

1) History of Gold Futures

1. Gold Mini (100 grams)

Contract Specifications of MCX futures (Gold)

Delivery Centre Ahmedabad Mumbai

Risks involved in futures trading on MCX include

Measures taken by MCX for Risk Management

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