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: What is the difference between spot market and futures market?

In a spot market commodities are physically bought or sold usually on a negotiable basis resulting in delivery. While in the futures markets, commodities can be bought or sold irrespective of the physical possession of underlying commodity. The futures market trades in standardised contractual agreements of the underlying asset with specific quality, quantity and mode of delivery whose settlement is guaranteed by regulated commodity exchanges.

What is meant by hedging?

Hedging means taking a position in the futures or option market that is opposite to a position in the physical market. It reduces or limits risks associated with unpredictable changes in price. The objective behind this mechanism is to offset a loss in one market with a gain in another.

Who is a speculator?

A speculator is one who enters the market to profit from the future price movements. He does not have any physical exposure. Speculators accept the risk that hedgers seek to avoid, giving the required liquidity to the market.

What is meant by arbitrage in commodity markets?

Arbitrage is making purchases and sales simultaneously in two different markets to profit from the price differences prevailing in those markets. The factors driving arbitrage are the real or perceived differences in the equilibrium price as determined by supply and demand at various locations.

What is meant by warehouse receipt?

Warehouse receipts are title documents issued by warehouses to depositors against the commodities deposited in the warehouses. These documents are transferred by endorsement or delivery. The original depositor or the holder in due course can claim the commodities from the warehouse by producing the warehouse receipt.