Gold Derivatives

Derivatives
• Def- “ A derivative can be defined as
financial instrument whose value
depends on (or derives from) the
values of other, more basic,
underlying variables”
• Equivalently the value of derivative
changes when there is a change in
the price of an underlying related
asset(variable).
•
• EG- the underlying assests can be
equities (shares), debt (bonds, T-
bills, and notes), currencies, and
even indices of these various
assets, such as the Nifty 50 Index.
•
 Importance of Gold
• Gold is unique as it is both a commodity
and 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, and
this helps to stabilize gold price.
• No true consumption of gold in the
economic sense as the stock of gold
remains constant while ownership
ØDemand for gold is widely spread around the world.
ØEast Asia, the Indian sub-continent and the Middle
East accounted for 70% of world demand in 2008.

Ø55% 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.
Factors affecting gold prices
• The dumping of gold into the market by several
nations' central banks (whether through leasing or
outright sales) has artificially increased supply, and
therefore lowered the price.
The desire for gold as jewelry affects demand. The
gold market in India is closely watched, since Indian
brides are often dripping with gold, when they walk
down the aisle. If there is strong buying in India,
during the autumn "wedding season," prices can
increase.
The desire for gold as a "hedge" against inflation
affects demand. With the USA printing money like
mad, inflation expectations are beginning to grow.
As this trend continues, look for the price to
increase.
Top 25 OFFICIAL GOLD HOLDINGS
DECEMBER 2009
 Investors
• Essentially, there are three broad
categories of gold investors:
• 1. Those who wish to hedge
uncertainty and possible financial
disaster
• 2. Those who wish to simply make a
profit.
• 3. Those who wish to combine
hedging with potential profit
•
 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. 
There are two different positions one
can take in the markets.
• A long (buy) position.
•  A short (sell) position.
• The great majority of futures
contracts are offset prior to
the delivery date.
• Example, this occurs when an
investor with a long position
initiates a short position in the
same contract, effectively
eliminating the original long
position
 Advantages of Futures
Contracts 
• Because they trade at 
centralized exchanges, trading futures
contracts offers more financial
leverage, flexibility and financial
integrity than trading the commodities
 themselves.
• Financial leverage is the ability to trade
and manage a high market value
product with a fraction of the total
value.
• Trading futures contracts is done with
performance margin.
• It requires considerably less capital than
 Example
• One futures contract for gold controls
100 troy ounces, or one brick of gold.
• The dollar value of this contract is 100
times the market price for one ounce
of gold.
• If the market is trading at $600/ounce,
the value of the contract is $60,000
($600 x 100 ounces). Based on
exchange margin rules, the margin
required to control one contract is only
$4,050. So for $4,050, one can control
$60,000 worth of gold.
• As an investor, this gives you the ability
 Comparison
US MARKET INDIAN MARKET
Gold is traded in dollars and cents Gold is traded in Rupees and
per ounce.
There are a few different gold paisas
Variousper 10 contracts
gold gms are traded
contracts traded on U.S. exchanges:
one
Oneat COMEX  and two
Gold future on eCBOT
contract is. in
OneMCXGold&NCDEX. Eg gold,
Future contract is
generally 100 troy ounce. goldguinea
generally , goldhni , goldm in
1kg.
when gold is trading at 600/ounce, cost of gold is Rs 6000 per 10
the contract has a value of $60,000 MCX & GldPurahm
grams, with , of Rs 6
an investment
(600 x 100 ounces). A trader that is lakh, one can buy
gld100AHM 1kg of gold. Now,
in NCDEX.
long at 600 and sells at 610 will suppose, three months hence, when
make $1,000 (610 – 600 = $10 profit, the going price of gold is Rs 6,500
10 x 100 ounces = $1,000). per 10 grams, the person decides to
Conversely, a trader who is long at sell the gold. The gross profit made
600 and sells at 590 will lose by the person is Rs 500 for every
$1,000. 10 grams and hence, for 1 kg, it
stands at Rs 50,000. 
 Conclusion
• No Doubt Future contract trading
gives high returns but whether you
are a hedger or a speculator,
remember that trading involves
substantial risk and is not suitable
to everyone. Although there can be
significant profits for those who get
involved in trading futures on
gold, remember that futures
trading is best left to traders who
have the expertise needed to
• Harsh Sachdev - roll 48