This document explains commodities as raw materials or agricultural products that can be traded in markets, highlighting both physical and cash settlement methods. Physical delivery refers to the actual transfer of the commodity upon contract expiration, while cash settlement involves net cash compensation instead. The text also discusses the advantages and disadvantages of physical delivery, including its monitoring benefits and higher costs compared to cash settlement.

1. Physical Delivery of
Commodities
BY: LAKSHMISHA C R
R18MB120
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2. What is a commodity?
 A raw material or primary agricultural product that can be bought and sold, such
as copper or coffee.
 Most commodities are raw materials, basic resources, agricultural,
or mining products, such as iron ore, sugar, or grains like rice and wheat.
Commodities can also be mass-produced unspecialized products such
as chemicals and computer memory.
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3. What are commodity markets?
 A commodity market is a physical or virtual marketplace for buying, selling,
and trading raw or primary products.
 There are hard commodities, which are generally natural resources, and
soft commodities, which are livestock or agricultural goods.
 Investors can gain exposure to commodities by investing in companies that
have exposure to commodities or investing in commodities directly via
futures contracts.
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4. Physical delivery of commodities:
 Physical delivery is a term in an options or futures contract which requires
the actual underlying asset to be delivered upon the specified delivery
date, rather than being traded out with offsetting contracts.
 With a physical delivery, the underlying asset of the option or derivatives
contract is physically delivered on a predetermined delivery date.
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5. Differences between cash settlement and physical
delivery of commodities
Physical Delivery Cash Settlement
In case of physical delivery, the holder of
the contract will either have to take the
commodity from the exchange or produce
the commodity.
However, cash settlement does not
involve any delivery of asset, but just net
cash is settled on contract expiration.
At the end of the contract the holder of the
position will either have to deliver the
physical commodity if short or take delivery
if long.
At the end of the contract the holder of the
position is simply debited or credited the
difference between their entry price and
the final settlement.
If a trader wants to deliver or take delivery
of a commodity, they will coordinate with
their broker, the clearing firm and the
exchange in order to do so.
While traders who are in Cash Settled
contracts are not a risk for delivery, they
should understand when the contracts
come off the board.
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6. Process of physical delivery:
This trade can be broken down in the following steps for
granular understanding:
 One would have to be holding a Future contract with a long position for a
Commodity Futures contract with physical delivery post the First Notice Day.
 First Notice Day is notification has to be given to the exchange that the holder
desires to deliver or take receive delivery of the underlying commodity of the
contract.
 Once the exchange is communicated with the intent, a delivery intention is
initiated and a delivery notice is issued to confirm the commencement of the
transaction.
 The holder will be responsible for all the transaction costs till the possession of
the commodity.
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7. Advantages:
 it is not subject to manipulation by either of the parties since entire activity is
being monitored by the broker and the clearing exchange.
 This refers to a derivatives contract requiring the actual underlying asset to be
delivered on the specified delivery date, rather than being traded out net cash
position or offsetting of contracts.
Disadvantages:
 A major drawback of physical settlement is that in comparison to cash
settlement it is a very expensive method since the physical delivery will incur
additional costs to maintain the same for a long period of time till it reaches the
doorstep of the buyer.
 Additionally, physical settlement does not factor in futuristic change or market
fluctuations.
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8. Commodity trading exchanges in India 8