Derivatives

All you need to know about MCX metal index futures

?Bavadharini KS | Updated on November 01, 2020 Published on November 01, 2020

MCX, one of the largest commodities exchanges in the country, launched an industry-first metal index futures contract — MCX Metldex — on October 19. The contract aims to encourage retail investor participation in commodities trading and facilitate portfolio diversification for them. MCX had launched the MCX bullion index futures contract (Bulldex) in August 2020.

Since then, the contract has clocked an average daily turnover of around ₹200 crore.

Similar to the bullion index contract, MCX base metal index futures contracts are cash-settled. You, as an investor or trader, don’t have to worry about the need to take physical delivery of the goods.

This was one of the issues that have kept retail participation at bay in the commodities market. Mutual fund houses can also build new products for their investors through index futures contracts as they are cash-settled. Keep in mind though that like any other commodities contracts, index futures contracts, too, involve high risks and are subject to volatility.

Here is what you should know about the metal index futures.

Contract specifications

Since it’s launch on October 19, Meltdex has gained by about 3 per cent. The underlying index for Meltdex is the MCX iCOMDEX Base Metal Index, which constitutes different metal contracts with varying weightage — zinc (33.06 per cent weight), copper (29.81), nickel (14.77), lead (12.88) and aluminium (9.48). The weights of the underlying are revised every year.

The value of the index fluctuates based on these underlying commodities’ price movements.

Sriram Iyer, Senior Research Analyst, Reliance Securities, says: “The price movement of the underlying base metal index depends on the price of each base metal futures contract. So, for instance, for every 10 paise movement of zinc, the index movement will be close to 2.48 points. And, for every 10 paise movement of lead, the index movement will be around 0.67 points. The overall movement in the index will be roughly around 4.50 points if all metals move 10 paise.”

Currently, MCX Meltdex has three contracts available for trading, expiring in November and December this year, and January 2021. These contracts are available for trading from Monday to Friday between 9 am and 11:30/11:55 pm based on the US daylight savings time period.

Most of the contract features are similar to that of bullion index futures contracts. The minimum price movement (tick size) is ₹1 and the minimum trading unit is one lot, which is 50 multiplied by the MCX iCOMDEX Base Metal Index value. The maximum order size is 80 lots. Investors who want to trade on Meltdex futures will have to pay an initial margin of 5 per cent or based on the value at risk over a three-day horizon, whichever is higher.

You may also have to pay an extreme loss margin of 1 per cent in case of higher volatility in prices.

Pros and cons

One of the significant benefits of Meltdex futures contracts is that they are cash-settled. This offers a much-needed relief for traders/investors who need to take physical delivery as base metal contracts are generally of large quantities. For instance, zinc contracts involve a minimum delivery of five tonnes.

Another important benefit is on the margin front. If you, as an investor/trader, are looking to hedge in the commodities market, you will have to pay initial margin, extreme loss margin and additional margin, which are generally high.

For instance, the margin requirements (on an average) of a futures contract of a base metal is around 10 per cent.

But for a base metal index futures contract, the margin requirements work out to be around 7 per cent.

That is, if you want to trade in one lot of base metal index futures, the margin amount will work out to roughly ₹42,200. But for a zinc futures contract, the margin amount may work out to be over ₹1 lakh.

On the downside, futures contracts are generally complicated to understand. So, if you are planning to diversify into commodities, it is important to have knowledge not only on the workings of commodities derivatives but also on the metals industry and the factors that influence metal prices, to avoid losses.

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Published on November 01, 2020
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