In previous editions of classroom, ET has dwelt on the basics of gold futures. Today, we wade the reader through silver futures traded on commodity exchanges like MCX.
1. What are silver futures contracts?
Contracts that facilitate hedging and/or speculation by allowing a trader to buy or sell the underlying commodity at a fixed price on a future date.
2. How many contracts are available for trading?
Five contracts are launched as per the launch calendar. Currently, five have been launched for 2020 – March, May, July, September and December. The liquid contracts are those for March and May next year.
3. What are the contract specifications?
The contracts are launched on the 16th day of the launch month and expiry is on the 5th of the expiry month. If the 16th is a holiday, the launch is on the following day, and if the 5th is a holiday, the expiry is on the preceding day. Trading is on from Mon-Fri, 9 am -11:30 pm/11:50 pm daylight saving.
One contract is of 30 kg. The maximum order size is 600 kg. The margin is 5 per cent plus additional or special margin in case of excessive volatility. The maximum allowable position limit for an individual client is 100 metric tonnes or 5 per cent of market-wide position limits, whichever is higher. Delivery of LBMA (London Bullion Market Association)-approved silver bars of 99.99 per cent purity is from Ahmedabad.
4. An illustration:
Assume you want to buy a silver March 2020 contract trading at Rs 45,419 per kilo intraday Monday. A lot (30 kg) will be worth Rs 13,62,570. Assume you have to put up a 5 per cent margin to trade; you will require Rs 68,128 (broker might take extra depending on volatility). That gives a trader 20 times leverage. The seller bets the price will fall by or before expiry on March 5, while the buyer thinks it will rise.
Now assume on Friday, the contract jumps to Rs 46,000, the seller’s account is debited to Rs 581 a kg while the buyer’s trading account is credited with Rs 581. On contract level, the gain is Rs 17,430, or a gross return of 26 per cent on the margin to trade. For the seller, the loss is equally great as futures is a zero sum game.
5. Is futures trading risky?
Yes. Profits and losses can be huge, unless a strict stop loss is placed.
6. How does one trade?
Your broker should have a unified licence to trade equity and commodity segments and should be registered with exchanges like MCX to offer broking.
Source: Economic Times
