Gold Derivative Trading

Описание: Anissa Boulahya, Director of Corporate Affairs at AgaBullion, explains "gold derivative trading".

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A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc.

Gold derivatives are financial instruments which have their prices derived from physical gold. The gold derivative itself is a contract between buyer and seller who want to take exposure on the physical gold price.

Three most common examples of derivative instruments are Forwards, Futures and Options contracts.

A forward contract is a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date. Each contract can be tailored to a specific commodity, amount, and delivery date. Forward contracts do not trade on a centralized exchange and are considered over-the-counter (OTC) instruments. Seller has to physically deliver the gold to an agreed vaulting location and the Buyer has to make payment. Both parties have to ensure completing their responsibilities at the maturity of the contract execution date that was agreed. Non-performance is a default and penalties are stipulated in the contract.

However, there is no guarantee of performance which often results in recourse through legal proceedings.
A futures contract works in a similar way; however they differ from forward contracts in the sense that they have fixed terms of trading and are not customizable for specifications such as quantity, quality, dimensions, delivery point and so on. Unlike forwards, the futures contracts are traded on regulated electronic exchanges where the exchange would impose heavy penalties for any default. The exchange guarantees the performance for payment and delivery of the gold to fulfil one party’s defaulting action The exchange is assumes the counterparty risk. Defaulters are likely to be blacklisted and hence the risk of defaults are highly low when trading through exchanges.
Option contracts are also traded on electronic exchanges. They have the same standard terms of trading as futures contract. They differ from both forwards and futures contracts as an option holder to buy or sell an asset has the right to do so but not the obligation. In short, performance is not required and the option holder can choose to not execute the contract without any default penalties.
Since the value of the derivatives is linked to the value of the underlying asset, the contracts are primarily used for hedging risks, but also for speculative purposes.
All three contract types are used basis the risk appetite of the person. It does not necessarily mean exchange trading of futures and options contracts are safer than forwards as sometimes defaults do happen on exchanges, but the risk is very miniscule.