Copper Futures: Meaning, Benefits and Risks￼
Adding commodity derivatives contracts to your portfolio is a great way to ensure diversification as well as reducemitigate risks that come with direct investments. There are several types of agreements that you can select in this regard, among which copper futures are an excellent example.
Find out why you should consider investing in copper futures by reading this blog.
What Are Copper Futures?
Copper futures are exchange traded derivative agreements between two parties to purchase or sell copper at a predetermined strike price and date. These contracts give both the buyers and sellers the right as well as the obligation to honour their part of the bargain when the rights are exercised.
Unlike other derivatives contracts, trading copper futures is much more sophisticated as traders need to actively manage their positions. In case the underlying asset’s price falls, they have to pay additional margin amounts in order to keep their positions open.
How Do Copper Futures Work?
You can trade in copper futures on the Multi Commodity Exchange of India Limited (MCX). They are a type of bet between the contract buyer and seller on the future price of the underlying asset.
These assets have minimal margin requirements allowing you to make large bets. However, the facility to opt for large positions also increases its risk factor, which you must be aware of.
Upon expiry, the buyer must either go for physical delivery or roll the position forward to the next month.
Copper futures are a great investment vehicle for speculators. They can make a prediction of the underlying asset’s price movements and opt for short or long positions accordingly. Moreover, they also have the facility to close the contract via cash. To do so, they simply settle the difference between the contract buying price and the spot value upon expiration.
These contracts can also be used by copper consumers and producers for hedging against market volatility. The consumers can lock in their buying price by going for long positions and the producers can fix their selling price by opting for short positions.
Factors Affecting Copper Futures Prices
As these futures contracts have copper as their underlying asset, any factor that affects this metal’s price will also have an effect on these financial assets’ values. Here are some of the factors that can influence copper futures prices:
- US Dollar Value
Globally, the valuation of copper is in US dollars. Additionally, like several other metals, it has an inversely proportional relationship with this currency. Thus, if USD value depreciates, copper value will rise and with the rise in dollar value, copper prices will fall.
This is because in India when USD falls, investors will have to spend less to purchase the commodity. Thus, it will lead to high demands for the commodity and in turn will appreciate its value. The reverse happens when the US dollar rises. Investors have to pay more money to purchase copper, leading to reduced demand and a fall in its market price.
- Specific Events Relating to the Commodity
There are certain commodity specific events that can affect the price of copper. Instances like discoveries of new copper mines, restructuring of old buildings, construction of new factories, etc., can increase its demand and thus its price.
However, events like closing of copper production facilities, strikes, supply disruptions, natural disasters, etc., can reduce supply and as a result its market value.
- Government Trade Policies
Updates in the international trading policies by the Indian Government like adding or removing taxes, quotas, penalties, etc., can have a significant impact on the material flow. Based on it, the value of copper can rise or fall.
Benefits of Trading Copper Futures Contracts
These are some of the benefits of trading in copper futures:
- Copper is a metal that is exclusively used in the electronics industry. Thus, with the growth of this sector, the demand for copper, along with its price, also appreciates.
- The Environmental Protection Agency has approved the usage of copper alloys as antimicrobial agents. Thus, there is also a huge demand for this metal in the medical industry.
Risks Associated With Trading Copper Futures Contracts
Here are some of the risks associated with trading in copper futures:
- National or international events that can affect supply flow can have a huge impact on copper value.
- Copper prices are volatile, so investing in bigger lot of shares can lead to huge losses in case the market does not move your way.
Given the expansion of the infrastructural sector around the world, the growth in demand for copper will rise at a sustained pace. However, before making an investment, it is advisable that you conduct a technical analysis of the market to determine its underlying trends. This will help you predict future price movements and make an informed decision.
Frequently Asked Questions
How can I keep track of copper prices?
There are several reliable websites and apps via which you can track the spot, opening and closing prices of copper. Moreover, you can also keep your eyes on the news for events that can influence this asset’s value.
How can I start trading in copper futures?
To trade in copper futures, you need to open a commodity trading account and a Demat account on your preferred brokerage platform. Then, you can select from a range of copper futures contracts and place your buy orders.
What are the alternatives to copper futures investment?
Apart from investing in copper futures, you can also consider investing in physical copper, exchange traded funds (ETFs) and contract for differences (CFDs). However, please remember that these investments come with a completely different risk profile and you must consider them before taking any decision.
Do I need a Demat account for trading copper futures?
Yes, to trade in copper futures, you will need a Demat account. This is because it serves as a repository for the derivatives contracts that you purchase.