What It Means
A commodity futures contract is an agreement to buy or sell a fixed quantity of a physical commodity, such as gold, crude oil, or copper, at a price fixed today for delivery or settlement on a future date. It works on the same margin and mark-to-market principles as a stock index future, just with a commodity as the underlying instead of Nifty or a company's shares.
How It Works
Every commodity future trades in a lot size fixed by the exchange (one lot of MCX Crude Oil, for instance, represents 100 barrels), and you only need to put up a margin, not the full contract value, to hold a position. What happens at expiry depends on the commodity: bullion and energy contracts like gold and crude oil are cash-settled based on the average of global reference prices, while base metals such as copper, zinc, and aluminium move to compulsory physical delivery if you're still holding at expiry.
Example
One lot of MCX Crude Oil Mini (10 barrels) at ₹6,500 a barrel represents a notional value of ₹65,000, but the margin to hold it typically runs a few thousand rupees. A ₹100 move in crude oil price changes the position's value by ₹1,000, whether you're long or short.