gold derivatives

8/14/2019 Gold Derivatives

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Gold DerivativesGold Derivatives


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Derivatives Def- A derivative can be defined as

financial instrument whose valuedepends on (or derives from) thevalues of other, more basic,underlying variables

Equivalently the value of derivativechanges when there is a change inthe price of an underlying relatedasset(variable).


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EG- the underlying assests can beequities (shares), debt (bonds, T-bills, and notes), currencies, andeven indices of these variousassets, such as the Nifty 50 Index.


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Importance of Gold

Gold is unique as it is both a commodityand a monetary asset. Its stability and high value makes it

virtually indestructible always

recovered and recycled. Gold mine production is relatively

inelastic, recycled gold (or scrap)ensures there is a potential source of easily traded supply when needed, andthis helps to stabilize gold price.

No true consumption of gold in theeconomic sense as the stock of goldremains constant while ownership


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.Demand for gold is widely spread around the world , -East Asia the Indian sub continent and the Middle

% .East accounted for 70 of world demand in 2008

%55 of demand is attributable to just five countries- , , , ,India Italy Turkey USA and China each market driven

-by a different set of socio economic and cultural.factors


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Top 25 OFFICIAL GOLD HOLDINGSDECEMBER 2009


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Investors

Essentially, there are three broadcategories of gold investors:

1. Those who wish to hedgeuncertainty and possible financialdisaster

2. Those who wish to simply make aprofit.

3. Those who wish to combinehedging with potential profit


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Trading Gold In Future A Gold futures contract is a legally

binding agreement for delivery of gold in the future at an agreed

upon price. The contracts are standardized by a

futures exchange as to quantity,

quality, time and place of delivery,Only the price is variable.


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There are two different positions onecan take in the markets.

A long (buy) position. A short (sell) position. The great majority of futures

contracts are offset prior tothe delivery date. Example, this occurs when an

investor with a long positioninitiates a short position in thesame contract, effectivelyeliminating the original longposition

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Advantages of FuturesContracts

Because they trade atcentralized exchanges , trading futurescontracts offers more financialleverage , flexibility and financialintegrity than trading the commoditiesthemselves.

Financial leverage is the ability to tradeand manage a high market value

product with a fraction of the totalvalue. Trading futures contracts is done with

performance margin . It requires considerably less capital than
http://www.investopedia.com/terms/c/centralizedmarket.asphttp://www.investopedia.com/terms/l/leverage.asphttp://www.investopedia.com/terms/c/commodity.asphttp://www.investopedia.com/terms/m/margin.asphttp://www.investopedia.com/terms/m/margin.asphttp://www.investopedia.com/terms/c/commodity.asphttp://www.investopedia.com/terms/l/leverage.asphttp://www.investopedia.com/terms/c/centralizedmarket.asp


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ComparisonUS MARKET INDIAN MARKET

Gold is traded in dollars and cents.per ounce Gold is traded in Rupees and paisas per 10 gmsThere are a few different gold

. . :contracts traded on U S exchanges one at COMEX .and two on eCBOT

Various gold contracts are tradedin MCX &NCDEX. Eg gold,goldguinea , goldhni , goldm in

MCX & GldPurahm ,gld100AHM in NCDEX.

One Gold future contract isgenerally 100 troy ounce.

One Gold Future contract isgenerally 1kg./ ,when gold is trading at 600 ounce

,the contract has a value of $60 000( ).600 x 100 ounces A trader that is long at 600 and sells at 610 will

, ( = ,make $1 000 610 600 $10 profit= , ).10 x 100 ounces $1 000

,Conversely a trader who is long at 600 and sells at 590 will lose

, .$1 000

cost of gold is Rs 6000 per 10

,grams with an investment of Rs 6, . ,lakh one can buy 1kg of gold Now, ,suppose three months hence when

,the going price of gold is Rs 6 500,per 10 grams the person decides to.sell the gold The gross profit made

by the person is Rs 500 for every

, ,10 grams and hence for 1 kg it, .stands at Rs 50 000
http://www.investopedia.com/terms/c/comex.asphttp://www.investopedia.com/terms/c/comex.asp


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Conclusion No Doubt Future contract trading

gives high returns but whether youare a hedger or a speculator,remember that trading involvessubstantial risk and is not suitableto everyone. Although there can be

significant profits for those who getinvolved in trading futures ongold, remember that futurestrading is best left to traders whohave the expertise needed to


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Harsh Sachdev - roll 48

gold derivatives

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