Commodities 2010

8/9/2019 Commodities 2010

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Summer Training Report

On

Commodities Market

AT

UNICON INVESTMENT SOLUTIONS. HYDERABAD

Prepared By

Mr. DIXITH GANDHE

Roll No. 09PG017

Batch 2009-11

Under the Guidance of

Mr. Kiran Kumar (Business head) Prof. Dr.REKHA(Company Guide) (Faculty Guide)

In partial fulfillment of the Course-Industry Internship Programme (IIP) in Term

IV of the Post Graduate Programme in Management (Batch: Aug. 2009 2011)

Bangalore

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Post Graduate Programme

Post Graduate Programme in Management: Aug.2009 2011

Term IV: Industry Internship Programme (IIP)

Declaration

This is to declare that the Report entitled . has beenmade for the partial fulfillment of the Course: Industry Internship Programme (IIP) inTerm IV (Batch: Aug. 2009-2011) by me at UNICON INVESTMENT SOLUTIONS(organization) under the guidance of Dr. Rekha.

I confirm that this Report truly represents my work undertaken as a part of my IndustryInternship Programme (IIP). This work is not a replication of work done previously byany other person. I also confirm that the contents of the report and the views containedtherein have been discussed and deliberated with the Faculty Guide.

Signature of the Student :

Name of the Student (in Capital Letters) :

Registration No :

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Post Graduate Programme in Management

Certificate

This is to certify that Mr. / Ms. ___________________ Regn. No. _______ has

completed the Report entitled ___________________________________________

under my guidance for the partial fulfillment of the Course: Industry InternshipProgramme (IIP) in Term IV of the Post Graduate Programme in Management (Batch:

Aug. 2009 2011).

Signature of Faculty Guide:

Name of the Faculty Guide:

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ACKNOWLEDGEMENT

I would like to express my deep sense of gratitude to the faculty at Alliance Business

School, particularly Dr.Rekha , Senior Professor- Finance to guide me through my

internship program.

I would like to express heartfelt thankfulness to my industry mentor, Mr Kiran Kumar

who has given me his precious time and expertise people to help me keep learning duringmy internship.

A special mention ofMr. Suresh, Mr. Abishek, for having made a positive difference

towards the whole learning process and giving me the best of the information and

training.

Dixith Gandhe

Place: hyderabad

Date:

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TABLE OF CONTENTS

Pg.no

1. EXECUTIVE SUMMARY 6

2. INTRODUCTION 8

2.1. INDUSTRY OVERVIEW 13

2.2. COMPANY OVERVIEW 20

3. PROJECT PROFILE 26

4. OBJECTIVE OF STUDY 28

5. OBSERVATIONS 41

6. ANALYSIS 50

7. FINDINGS 64

8. RECOMMENDATIONS AND CONCLUSION 67

9. LEARNING OUTCOME 70

10. BIBILOGRAPHY

11.ANEXURE

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EXECUTIVE SUMMARY

Our endeavour is to find out the status of commodity Derivatives as they stand in theoverall economical, social and demographic picture of our system. The impact ineconomical system is very much clear and beyond any dispute as Commodities arethemselves economical propositions.

But commodities are also subject matter of our social fabrication. Any society containstwo set of people: Traders and farmers. Commodities have a huge impact on lives of bothset of people. Their business practices and strategies are rapidly changing and commoditymarket is very much influencing it. We have studied that impact. It is noteworthy that thenew world economic order is of convergence. All sectors, economies and trades are being

interrelated. Whether we like it or not, our businesses are no more ours. Total worldeconomy is involved into it. The same applies to commodities. Whether one participatesinto it or keeps himself aloof, he, in no ways can escape its effects.

However, it has to be kept in mind that as an asset class and even as a tool of riskminimization (for Traders, Farmers and businesses); it is a very new and nascentproposition in India. Even though Commodity futures havetheir long history in thiscountry, periodical bans and derogatory government policies have hindered theirprospects to develop as a tool for hedgers (risk minimization), leave alone thematter of theirdevelopment as an investment avenue. Their primary goal of true pricediscovery is also much waited.

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2 INTRODUCTION

CLASSIFICATION OF MARKETS

The vast geographical extent of India and her huge population is aptly

complemented by the size of her market. The broadest classification of the Indian Market

can be made in terms of the commodity market and the bond market.

The commodity market in India comprises of all palpable markets that we come

across in our daily lives. Such markets are social institutions that facilitate exchange of

goods for money. The cost of goods is estimated in terms of domestic currency. Indian

Commodity Market can be subdivided into the following two categories:

Wholesale Market

Retail Market

The traditional wholesale market in India dealt with the whole sellers who bought

goods from the farmers and manufacturers and then sold them to the retailers aftermaking a profit in the process. It was the retailers who finally sold the goods to the

consumers. With the passage of time the importance of whole sellers began to fade out

for the following reasons:

o The whole sellers in most situations, acted as mere parasites that did not add any

value to the product but raised its price which was eventually bear by the

consumers.

o The improvement in transport facilities made the retailers to directly interact with

the producers and hence the need for whole sellers was not felt.

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In recent years, the extent of the retail market (both organized and unorganized)

has evolved in leaps and bounds. In fact, the success stories of the commodity market of

India in recent years has mainly centered on the growth generated by the Retail Sector.

Almost every commodity under the sun both agricultural and industrial is now being

provided at well distributed retail outlets throughout the country.

Moreover, the retail outlets belong to both the organized as well as the unorganized

sector. The unorganized retail outlets of the yesteryears consist of small shop owners

who are price takers where consumers face a highly competitive price structure. The

organized sector on the other hand is owned by various business houses like Pantaloons,

Reliance, Tata and others. Such markets are usually selling a wide range of articles such

as agricultural and manufactured, edible and inedible, perishable and durable. Modern

marketing strategies and other techniques of sales promotion enable such markets to

draw customers from every section of the society. However the growth of such markets

has still centered on the urban areas primarily due to infrastructural limitations.

The share of retail trade in the country's gross domestic product (GDP) was

between 810 per cent in 2007. It is currently around 12 per cent, and is likely to reach

22 per cent by 2010. A McKinsey report 'The rise of Indian Consumer Market', estimates

that the Indian consumer market is likely to grow four times by 2025. Commercial real

estate services company, CB Richard Ellis' findings state that India's retail market iscurrently valued at US$ 511 billion. India's overall retail sector is expected to rise to US$

833 billion by 2013 and to US$ 1.3 trillion by 2018, at a compound annual growth rate

(CAGR) of 10 per cent.

A Brief History of future Markets

In the 1840s, Chicago had become a commercial center with railroad and

telegraph lines connecting it with the East. Around this same time, the McCormick reaper

was invented which eventually lead to higher wheat production. Midwest farmers came

to Chicago to sell their wheat to dealers who, in turn, shipped it all over the country.

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Farmers brought their wheat to Chicago hoping to sell it at a good price. The city had few

storage facilities and no established procedures either for weighing the grain or for

grading it. In short, the farmers were often at the mercy of the dealer.

1848 saw the opening of a central place where farmers and dealers could meet to deal in

"spot" grain - that is, to exchange cash for immediate delivery of wheat.

The futures contract, as we know it today, evolved as farmers (sellers) and dealers

(buyers) began to commit to future exchanges of grain for cash. For instance, the farmer

would agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end

of June. The bargain suited both parties. The farmer knew how much he would be paid

for his wheat, and the dealer knew his costs in advance. The two parties may have

exchanged a written contract to this effect and even a small amount of money

representing a "guarantee."

Such contracts became common and were even used as collateral for bank loans. They

also began to change hands before the delivery date. If the dealer decided he didn't want

the wheat, he would sell the contract to someone who did. Or, the farmer who didn't want

to deliver his wheat might pass his obligation on to another farmer the price would go up

and down depending on what was happening in the wheat market. If bad weather hadcome, the people who had contracted to sell wheat would hold more valuable contracts

because the supply would be lower; if the harvest were bigger than expected, the seller's

contract would become less valuable. It wasn't long before people who had no intention

of ever buying or selling wheat began trading the contracts. They were speculators,

hoping to buy low and sell high or sell high and buy low.

THE FUTURES CONTRACT

Unlike a stock, which represents equity in a company and can be held for a long time, if

not indefinitely, futures contracts have finite lives. They are primarily used for hedging

commodity price-fluctuation risks or for taking advantage of price movements, rather

than for the buying or selling of the actual cash commodity. The word "contract" is used

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because a futures contract requires delivery of the commodity in a stated month in the

future unless the contract is liquidated before it expires.

The buyer of the futures contract (the party with a long position) agrees on a fixed

purchase price to buy the underlying commodity (wheat, gold or T-bills, for example)

from the seller at the expiration of the contract. The seller of the futures contract (the

party with a short position) agrees to sell the underlying commodity to the buyer at

expiration at the fixed sales price. As time passes, the contract's price changes relative to

the fixed price at which the trade was initiated. This creates profits or losses for the

trader.

In most cases, deliverynever takes place. Instead, both the buyer and the seller, acting

independently of each other, usually liquidate their longand short positions before the

contract expires; the buyer sells futures and the seller buys futures.

Arbitrageurs in the futures markets are constantly watching the relationship between cash

and futures in order to exploit such mispricing. If, for example, an arbitrageur realized

that gold futures in a certain month were overpriced in relation to the cash gold market

and/or interest rates, he would immediately sell those contracts knowing that he could

lock in a risk-free profit. Traders on the floor of the exchange would notice the heavyselling activity and react by quickly pushing down the futures price, thus bringing it back

into line with thecash market. For this reason, such opportunities are rare and fleeting.

Most arbitrage strategies are carried out by traders from large dealer firms. They monitor

prices in the cash and futures markets from "upstairs" where they have electronic screens

and direct phone lines to place orders on the exchange floor.

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http://futures.tradingcharts.com/glossary/j-o.html#longhttp://futures.tradingcharts.com/glossary/d-i.html#deliveryhttp://futures.tradingcharts.com/glossary/d-i.html#deliveryhttp://futures.tradingcharts.com/glossary/j-o.html#longhttp://futures.tradingcharts.com/glossary/j-o.html#longhttp://futures.tradingcharts.com/glossary/s-z.html#shorthttp://futures.tradingcharts.com/glossary/s-z.html#shorthttp://futures.tradingcharts.com/glossary/a-c.html#arbitragehttp://futures.tradingcharts.com/glossary/a-c.html#arbitragehttp://futures.tradingcharts.com/glossary/a-c.html#cash%20markethttp://futures.tradingcharts.com/glossary/a-c.html#cash%20markethttp://futures.tradingcharts.com/glossary/j-o.html#longhttp://futures.tradingcharts.com/glossary/d-i.html#deliveryhttp://futures.tradingcharts.com/glossary/j-o.html#longhttp://futures.tradingcharts.com/glossary/s-z.html#shorthttp://futures.tradingcharts.com/glossary/a-c.html#arbitragehttp://futures.tradingcharts.com/glossary/a-c.html#cash%20market


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2.1 INDUSTRY OVERVIEW:

Stock Broking Sector in India

The Indian broking industry is one of the oldest trading industries that has been around

even before the establishment of the BSE in 1875. Despite passing through a number of

changes in the post liberalization period, the industry has found its way towards

sustainable growth. In this section our purpose will be of gaining a deeper understanding

about the role of the Indian stock broking industry in the countrys economy.

SEBI and its role :

The Securities and Exchange Board of India (SEBI) is the regulatory authority in India

established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for

establishment of Securities and Exchange Board of India (SEBI) with statutory powers

for (a) protecting the interests of investors in securities (b) promoting the development of

the securities market and (c ) regulating the securities market. Its regulatory jurisdiction

extends over corporates in the issuance of capital and transfer of securities, in addition to

all intermediaries and persons associated with securities market. SEBI has been obligated

to perform the aforesaid functions by such measures as it thinks fit. In particular, it has

powers for:

Regulating the business in stock exchanges and any other securities markets

Registering and regulating the working of stock brokers, subbrokers etc.

Promoting and regulating self-regulatory organizations

Prohibiting fraudulent and unfair trade practice.

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Calling for information from, undertaking inspection, conducting inquiries and

audits of the stock exchanges, intermediaries, self- regulatory organizations,

mutual funds and other persons associated with the securities market.

Broking houses in India

India is a country having a big list of Broking Houses. The Equity Broking Industry in

India has several unique features like it is more than a century old, dynamic, forward

looking, and good service providers, well conversant, highly innovative and even

adaptable. The regulations and reforms been laid down in the Equity Market has resulted

in rapid growth and development. Basically, the growth in the equity market is largely

due to the effective intermediaries.

The Broking Houses not only act as an intermediate link for the Equity Market but also

for the Commodity Market, Foreign Currency Exchange Market, and many more. The

Broking Houses has also made an impact on the Foreign Investors to invest in India to

certain extent.

In the last decade, the Indian brokerage industry has undergone a dramatic

transformation. From being made of close groups, the broking industry today is one of

the most transparent and compliance oriented businesses. Long settlement cycles and

large scale bad deliveries are a thing of the past with the advent of T+2 settlement cycle

and dematerialization. Large and fixed commissions have been replaced by wafer thin

margins, with competition driving down the brokerage fee, in some cases, to a few basis

points.

There have also been major changes in the way business is conducted. Technology has

emerged as the key driver of business and investment advice has become research based.

At the same time, adherence to regulation and compliance has vastly increased. The

scope of services have enhanced from being equity and commodity products to a wide

range of financial services. Investor protection has assumed significance,.

Major Players in the industry

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Religare Securities , ICICI Direct, India Info line Security Pvt. Ltd HDFC

Securities ,India bulls ,Kotak Securities,Reliance Money ,Share khan

Securities,Motilal Oswal,Anand Rathi Securities,Unicon securities pvt ltd

Comparison of major players

Brokerage Equity

Name of Firm

Intraday

(In Paisa)

Delivery

(In Paisa)

Sub-

Broker

DMAT

in Rs.

Margin

Money

Angel Broking Ltd. 5 50 75 760 5000

Reliance Money 5 50 35 950 0

Sharekhan

Securities 5 25 50 850 10000

Motilal Oswal

Securities 3 30 40 650 5000

India Infoline 3 25 15 805 5000

ICICI Direct 7.5 75 0 499 5000

Kotak Securities 3 30 0 300 5000

India Bulls 3 30 0 888 0

Anand Rathi

Securities 3 20 25 736 0

Religare Securities 2 25 80 750 5000

Hem Securities 1.5 20 40 660 7000

Comparison of major players in the industry :

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Services

Mutual

Insurance

PMS

Backoffice

E-Brokin

g

Investme

nt

M-Connect

Funding

Personal

Software

Religare

SecuritiesYes Yes Yes Yes Yes Yes Yes No Yes Yes

ICICI Direct No Yes Yes Yes Yes Yes No Yes Yes Yes

India Infoline

Security Pvt. Ltd.Yes No Yes Yes Yes Yes No No Yes Yes

HDFC Securities Yes No Yes Yes Yes Yes No Yes Yes Yes

Indiabulls Yes Yes No Yes Yes Yes No No Yes Yes

Kotak Securities Yes Yes Yes Yes Yes Yes No No Yes Yes

Reliance Money Yes Yes No Yes Yes Yes No No Yes Yes

Sharekhan

SecuritiesNo No Yes Yes Yes Yes No No Yes Yes

Motilal Oswal No Yes No Yes Yes Yes No No Yes Yes

Anand Rathi

SecuritiesNo Yes Yes Yes Yes Yes No No No Yes

Hem Securities Yes Yes Yes Yes Yes Yes No No No Yes

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Comparison of services provided by major players:

Services

Mutual

Insurance

PMS

Backoffice

E-Broking

Investment

M-Connect

Funding

Personal

Software

Unicon Investment

solutionsyes yes yes yes yes yes yes yes No yes

ICICI Direct No Yes Yes Yes Yes Yes No Yes Yes Yes

India Infoline

Security Pvt. Ltd.Yes No Yes Yes Yes Yes No No Yes Yes

Indiabulls Yes Yes No Yes Yes Yes No No Yes Yes

Kotak Securities Yes Yes Yes Yes Yes Yes No No Yes Yes

Reliance Money Yes Yes No Yes Yes Yes No No Yes Yes

Anand Rathi

SecuritiesNo Yes Yes Yes Yes Yes No No No Yes

In fact, the size of the commodities markets in India is also quite significant. Of the

country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and

dependent) industries constitute about 58 per cent. Currently, the various commodities

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across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion).

With the introduction of futures trading, the size of the commodities market grows many

folds here on.

The history of organized commodity derivatives in India goes back to the nineteenth

century when Cotton Trade Association started futures trading in 1875, about a

decade after they started in Chicago. Over the time datives market developed in

several commodities in India. Following Cotton, derivatives trading started in

oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912),Wheat in

Hapur (1913) and Bullion in Bombay (1920).

However many feared that derivatives fuelled unnecessary speculation and weredetrimental to the healthy functioning of the market for the underlying commodities,

resulting in to banning of commodity options trading and cash settlement of commodities

futures after independence in 1952.

The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated

contracts in Commodities all over the India. The act prohibited options trading in Goods

along with cash settlement of forward trades, rendering a crushing blow to the

commodity derivatives market. Under the act only those associations/exchanges, which

are granted reorganization from the Government, are allowed to organize forward trading

in regulated commodities. The act envisages three tire regulations: (i) Exchange which

organizes forward trading in commodities can regulate trading on day-to-day basis; (ii)

Forward Markets Commission provides regulatory oversight under the powers delegated

to it by the central Government. (iii) The Central Government- Department of Consumer

Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate

regulatory authority.

The commodities future market remained dismantled and remained dormant for about

four decades until the new millennium when the Government, in a complete change in a

policy, started actively encouraging commodity market. After Liberalization and

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Globalization in 1990, the Government set up a committee (1993) to examine the role of

futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing

futures trading in 17 commodity groups. It also recommended strengthening Forward

Markets Commission, and certain amendments to Forward Contracts (Regulation) Act

1952, particularly allowing option trading in goods and registration of brokers with

Forward Markets Commission.

The Government accepted most of these recommendations and futures trading was

permitted in all recommended commodities. It is timely decision since internationally the

commodity cycle is on upswing and the next decade being touched as the decade of

Commodities.

The Commodity Trading Market of established itself in India as a dominant market form

much before the 1970s. In fact, in the last phase of 1970s, the commodity trading market

of India started to loose its' vibrancy. This happened because, from the late 1970s,

numerous regulations and restrictions started to be introduced in the commodity market

of India and these restrictions were acting as obstacles in the path of smooth functioning

In the recent years, many restrictions, which were negatively affecting commodity

trading market, have been removed. So, now the commodity trading market of India has

again started to grow in a fast pace. Commodity market is an important constituent of the

financial markets of any country. It is the market where a wide range of products, viz.,

precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee

etc. are traded. It is important to develop a vibrant, active and liquid commodity market.

This would help investors hedge their commodity risk, take speculative positions in

commodities and exploit arbitrage opportunities in the market.

India is arguably the largest bullion market in the world. It has been until now, the

undisputed single-largest Gold bullion consumer, with its own final demand outweighing

the next largest market China by almost 57 percent. But it seems now, that the Chinese

Gold buyers have caught up during 2008 as Chinese demand is surging rapidly (up by 15

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percent year-on-year). Indian demand fell as Indian Gold sales collapsed by about 65

percent in the year 2008. In spite of being the largest consumer of gold, India plays no

major role globally in influencing this precious metal's pricing, output or quality issues.

Indias total gold holdings are between 10,000 tonnes and 15,000 tonnes of which the

Reserve Bank of India has only around 400 tonnes. India has the largest number of gold

Jewellery shops in the world.

2.2. COMPANY OVERVIEW

UNICON is a financial services company which has emerged as a one-stop investment

solutions provider. It was founded in 2004 by two visionary and hard working

entrepreneurs, Mr. Gajendra Nagpal and Mr. Ram M. Gupta, who possess expertise in

the field of Finance. The company is headquartered in New Delhi, and has its corporate

office in Mumbai with regional offices in Kolkata, Chennai, Hyderabad and Noida.

UNICON is a professionally managed company led by a team with outstanding

managerial acumen and cumulative experience of more than 400 man years in the

financial markets The Company is supported by more than 4500 Uniconians and has a

team of over 900 business offices in 235 cities across India.With a customer base of over 200,000 the Unicon Group has an eye for the intricate

financial needs of its clients and caters to both their short term and long term

financial needs through a comprehensive bouquet of investment services. It has been

founded with the aim of providing world class investing experience to the investing

community. These services range from offline & online trading in equity, commodities

and currency derivatives to debt markets to corporate finance and portfolio management

services. The company has a sizable presence in the distribution of 3rd party financial

products like mutual funds, insurance products and property broking. It also provides

expert Advisory on Life Insurance, General Insurance, Mutual Funds and IPOs. The

distribution network is backed by in-house back office support to provide prompt and

efficient customer service

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The Equity broking arm UNICON Securities Pvt. Ltd offers personalized premium

services on the NSE, BSE & Derivatives market. The Commodity broking arm Unicon

Commodities Pvt. Ltd offers services in Commodity trading on NCDEX and MCX. The

UNICON group also has a PCG division providing investments solutions for High Net

worth Individuals. The Corporate Advisory Services arm Unicon Capital Services (P)

Ltd offers entire gamut of Investment Banking services to corporate.

UNICON can boast of some of the most respected names in the private equity space like

Sequoia Capitals, Nexus India Capital and Subhkam Ventures as its shareholders.

UNICON Edge:

Among the Top 20 Equity Brokers in India.

Professional promoter pedigree

Dynamic management team

Diverse and versatile business model

Vast distribution network and reach

Strong Brand Recognition within a short span

Robust & strong IT backbone

Advisory team from top management institutes like FMS & IIM

CORPORATE MILESTONES:

Milestone 1 (2004): UNICON Started as Franchisee of Fortis Securities and

Pioneered the concept of National Business Partner.

Milestone 2 (2005): UNICON acquired the NSE, BSE ticket.

Milestone 3 (2006): UNICON raised its first round of Private Equity by Subhkam

ventures, Commodities business was launched, and Rolled out its Third Party

Distribution Wing.

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Milestone 4 (2007): UNICON became one of the top five Life Insurance

distributors in the country and Started Property Broking Business.

Milestone 5 (2008): UNICON acquired its PMS license, Raised 2nd Round of

Private Equity of 120 cr. From Sequoia Capital & Nexus, Completed entire

bouquet of financial products, and Launched Fixed Income Group.

Milestone 6 (2009); UNICON started Retail Wealth Management, Rolled out its

research wings, and Acquired category 1 Merchant Banking License.

OFFERINGS:

Equity:

20

th

largest broking house of India in term of trading terminal (Source: Dun andBradstreet, 2009).

Rapid growth in client base Trading Member of NSE, BSE & F&O

Depository Participant with CDSL of Capital Market.

Equity Clients rose from 5582 in 2006 to 94386 in 2009.

Commodity:

Started operation in March 2006.

Rapid Growth in client base.

Trading & clearing member for NCDEX, MCX & NMCE.

Current Market share is approx 1%.

Average turnover of 250 Cr per day.

Commodity clients rose from 101 in 2006 to 22272 in 2009.

Distribution:

Preferred distributor for many Insurance and Real Estate companies.

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Dedicated workforce of more than 2000 employees.

Distribution arm awarded the fastest growing business partner of the year by

ICICI Prudential Life Insurance in 2008-09.

Distribution arm declared Number 1 partner Pan India by Reliance Life Insurance

in 2008-09.

Insurance customers rose from 4650 in 2007 to 80000 in 2009.

In depth analysis of the IPO issues.

We distribute more than 5000 Schemes from 35 mutual funds.

We not only search for the ideal combination of products and services, but also

provide our clients with the possibility of fine tuning every aspect that is specific

to them.

Started Life Insurance business in 2006.

First broking house to achieve more than 100 Cr. Target in the first year.

More than 3000 General Insurance advisors across India.

UNICON offers all products of General Insurance under one umbrella.

UNICON team evaluates the clients business environment and studies the risk

profile and suggests the most cost effective, integrated insurance package.

We have highly experienced & professional teams in both Retail and Commercial

streams.

We offer a total solution to our clients inclusive of market research, marketing

strategy, sales or leasing of the property.

Fixed Income:

The Fixed Income Group undertakes following activities:

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Dealing in money market instruments viz. CP, CD and T-Bills.

Retailing of government securities and Bonds.

Securitization of receivable portfolio-Pass through certificates.

Raising of resources both by way of Debt and Equity (IPO/FPO)

Arranges for Private placement of Bonds.

Investment Banking:

Private Equity (PE) Syndication:

We specialize in the syndication of the private equity for the Indian companies in

high-growth markets on their capitalization/re-capitalization strategies, which helps

them to achieve their growth targets.

Our team of professionals ensures complete confidentiality, strong focus on

implementation and quick turnaround time. Access to key decision makers at PE

funds gives us an edge in optimal structuring and efficient closure of transactions. We

service our clients through various stages of the PE deal namely collateral

preparation, investor short listing, commercial term sheet, due diligence and final

closure.

Mergers & Acquisitions (M&A) Advisory:

We provide both buy-side and sell-side advisory services as part of our M&A

advisory offering. We advise clients during the entire transaction process right

from target identification to deal closure. We have an experienced and highly

qualified team with more than 40+ man-years of experience which specializes in

identification and short listing of potential targets, strategic planning of an

acquisition and arranging capital for the transaction, if needed.

Debt Syndication Our offerings include:

o Project Finance / Term Loans for Expansion - Arranging Long-term loans

for setting up new projects from Financial Institutions and Banks.

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o External Commercial Borrowings (ECBs) - Arranging LIBOR-linked

loans. Foreign Currency Convertible Bonds (FCCB)-Arranging FCCB

Loans.

o Working Capital Facilities - Arranging fund-based and non-fund based

limits for clients from Banks at competitive rates. Trade Finance -

Arrangement of trade finance (Buyer's / Suppliers Credit).

o Inter-Corporate Deposits Borrowing and Placement.

Currency Derivatives:

Currently in India, futures contracts of 4 currencies are traded against the Indian Rupee

(INR). US Dollar Indian Rupee (USD INR) currency futures were the first to be

introduced in Aug 2008 and have seen a 1500% burst in volume growth in this period.

On Feb 1, 2010 the trading of Euro () Rupee (EUR INR), Pound Sterling () Rupee

(GBP INR) and Yen () Rupee (YEN INR) was introduced in India. As in the case of

USD INR, trading happens on 2 exchanges NSE and MCX-SX.

Unicon offers clients the opportunity to trade these products, either in online or offline

mode as per their needs. The products provide ample liquidity to function both as a

speculative tool and as a hedging instrument for exporters and importers. The attractive

features of the product are as follows:

Unlike currency forwards offered by banks, currency futures trading does not

have to be backed by an underlying merchant transaction exposure

Tight bid ask spreads; usually 0.25 paisa wide

Margin requirements less than 5% to take exposure on a lot size of $1000, 1000,

1000 and 1,00,000 respectively

New asset class for diversification for all resident individuals

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Commodity traders can hedge against unfavourable movements since gold, crude

etc.

For exporters and importers, no credit line required from their Banker as is the

case with forwards

Ideal tool for those with smaller exposures, as in the case of travel needs,

educational payments etc.

Unicon Advantage

Online & Offline trading facility on all the bourses

Exclusive daily commentary and research reports by our Currency analyst team

Regular updates on Dollar INR movement with calls to buy and sell

Special consultancy to Exporters, Importers & Corporate for their Forex

transactions

Receive education on the product through seminars/con-calls organized by

Unicon

Your Cash Margin with Unicon Securities can be used for either segment

Equity or Currency.

Other awaited products

Currency options are also expected to be added to the basket of products soon.

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3) PROJECT PROFILE:

Firstly, my prime job here in Unicon Investment Solutions Ltd is, that is to do analyzing

the commodity market in MCX,NCDEX add up clients in the company for investing in

equity and commodity market. They gave some fundamental knowledge about the

company and its policies, strengths etc which helps for me in convincing the people to

join the company. I will be given a chance to sit along with the advisory team to provide

service. This provides me understanding in clients behaviour towards fluctuating

markets and also the sensitivity of markets to the behaviour of the investors.

Secondly, we were asked to observe a scripts consistently and find the reasons for the

changes in its share price, and how This again provides good learning of different factors

affecting share and commodity market. I have chosen GOLD in the commodity market

for my analysis, and observing the factors affecting that market , strategies involving in

trading in commodity market to reduce risk, observing long hedge and short hedging and

observing profits.

Thirdly, a group of two each among the batch here were asked to choose a sector to

perform fundamental and technical analysis and draft a report. We have to choose the

industry and see the future outlook ,past performance .It provides a way to deal with

clients and to predict whether the share prices for a particular sector will enhance/wane.

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OBJECTIVES OF THE STUDY

The basic purpose of undergoing this project was:

I. To study the working of commodities market in detail.

II. To know the application of various technical & statistical tools.

III. To be able to foresee the future prospects.

SCOPE

As the project report is fully based on personal learning & observation it can be

used to have detailed knowledge about the working of Commodity Market. Also the

report can be used for decision making by a customer whether to go for Commodity

futures Trading or not?

METHODOLOGY:

The primary data is based on the questionnaire collected from the people of Hyderabad in

different places about the equity and commodity market.

The secondary data reveals investing in equity and commodity are inversely related and

investing in commodity market is very risky. And also about the commodity market, and

what are the factors affecting that in real world scenario, volumes traded in the market

And the interaction of the clients to know how they will trade and the strategies followed

by them to get a maximum return on their investment, also done analysis of the sector

when to buy/sell the shares in the market with the help of trend analysis and other

techniques such as moving averages

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LIMITATIONS

I. The study is based on historical data.

II. An attempt has been made to predict the future of market which may not come

true.

The commodity market in India is in its infantry stage

COMMODITY

A commodity may be defined as an article, a product or material that is bought and sold.

It can be classified as every kind of movable property, except Actionable Claims, Money

& Securities. Commodities actually offer immense potential to become a separate asset

class for market-savvy investors, arbitrageurs and speculators. Retail investors, who

claim to understand the equity markets, may find commodities an unfathomable market.

But in fact commodities are easy to understand as far as fundamentals of demand and

supply are concerned. Retail investors should understand the risks and advantages of

trading in commodity futures before taking a leap. Historically, pricing in commodity

futures has been less volatile compared with equity, thus providing an efficient portfolio

diversification option.

A cash commodity must meet three basic conditions to be successfully traded in the

futures market:

I. It has to be standardized and, for agricultural and industrial commodities, must

be in a basic, raw, unprocessed state. There are futures contracts on wheat, but

not on flour. Wheat is wheat (although different types of wheat have different

futures contracts).

The miller who needs wheat futures contract to help him avoid losing money on

his flour transactions with customers wouldn't need flour futures. A given

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amount of wheat yields a given amount of flour and the cost of converting wheat

to flour is fairly fixed & hence predictable.

II. Perishable commodities must have an adequate shelf life, because delivery on a

futures contract is deferred.

III. The cash commodity's price must fluctuate enough to create uncertainty, which

means both risk and potential profit.

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STRUCTURE OF COMMODITY MARKET

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Ministry of

Consumer Affairs

FMC (Forwards

Market Commission)

CommodityExchange

National Exchange Regional Exchange

NCDEX MCX NMCE NBOT20 other regional

exchanges

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DIFFERENT SEGMENTS IN COMMODITIES MARKET

Commodities

Ecosystem

MCX

Quality

Certificatio

n AgenciesHedger

(Exporters /Millers

Industry)

Producers

(Farmers/Co

-

operatives/In

stitutional)

Traders

(speculators)

arbitrageurs/

client)

Consumers

(Retail/

Institutional)

Transporter

s/Supportagencies

Clearing

Bank

Warehouses

GLOBAL COMMODITIES

MARKET

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SPOT MARKET


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The commodities market exits in two distinct forms namely the Over the Counter (OTC)

market and the Exchange based market. Also, as in equities, there exists the spot and the

derivatives segment. The spot markets are essentially over the counter markets and the

participation is restricted to people who are involved with that commodity say the farmer,

processor, wholesaler etc. Derivative trading takes place through exchange-based

markets with standardized contracts, settlements etc.

REGULATORS

Each exchange is normally regulated by a national governmental (or semi-governmental)

regulatory agency:

Country Regulatory agency

AustraliaAustralian Securities and Investments

Commission

Chinese mainlandChina Securities Regulatory

Commission

Hong Kong Securities and Futures Commission

India

Securities and Exchange Board of

India and Forward Markets

Commission (FMC)

PakistanSecurities and Exchange Commission

of Pakistan

Singapore Monetary Authority of Singapore

UK Financial Services Authority

USACommodity Futures Trading

Commission

Malaysia Securities Commission

LEADING COMMODITY MARKETS OF INDIA

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The government has now allowed national commodity exchanges, similar to the BSE &

NSE, to come up and let them deal in commodity derivatives in an electronic trading

environment. These exchanges are expected to offer a nation-wide anonymous, order

driven; screen based trading system for trading. The Forward Markets Commission

(FMC) will regulate these exchanges. Consequently four commodity exchanges have

been approved to commence business in this regard. They are:

S.NO. Commodity Market in India

1Multi Commodity Exchange (MCX),

Mumbai

2 National Commodity and DerivativesExchange Ltd (NCDEX), Mumbai

3National Board of Trade (NBOT),

Indore

4National Multi Commodity Exchange

(NMCE), Ahmadabad

BENEFITS TO INDUSTRY FROM FUTURES TRADING

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Hedging the price risk associated with futures contractual commitments.

Spaced out purchases possible rather than large cash purchases and its storage.

Efficient price discovery prevents seasonal price volatility.

Greater flexibility, certainty and transparency in procuring commodities would

aid bank lending.

Facilitate informed lending.

Hedged positions of producers and processors would reduce the risk of default

faced by banks. * Lending for agricultural sector would go up with greater

transparency in pricing and storage.

Commodity Exchanges to act as distribution network to retail agri-finance from

Banks to rural households.

Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER

Access to a huge potential market much greater than the securities and cash

market in commodities.

Robust, scalable, state-of-art technology deployment.

Member can trade in multiple commodities from a single point, on real time basis.

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Traders would be trained to be Rural Advisors and Commodity Specialists and

through them multiple rural needs would be met, like bank credit, information

dissemination, etc.

WHY COMMODITY FUTURES?

One answer that is heard in the financial sector is "we need commodity futures

markets so that we will have volumes, brokerage fees, and something to trade''. We have

to look at futures market in a bigger perspective -- what is the role for commodity futures

in India's economy?

In India agriculture has traditionally been an area with heavy government intervention.

Government intervenes by trying to maintain buffer stocks, they try to fix prices, and

they have import-export restrictions and a host of other interventions. Many economists

think that we could have major benefits from liberalization of the agricultural sector.

In this case, the question arises about who will maintain the buffer stock, how will we

smoothen the price fluctuations, how will farmers not be vulnerable that tomorrow the

price will crash when the crop comes out, how will farmers get signals that in the futurethere will be a great need for wheat or rice. In all these aspects the futures market has a

very big role to play.

If we think there will be a shortage of wheat tomorrow, the futures prices will go up

today, and it will carry signals back to the farmer making sowing decisions today. In this

fashion, a system of futures markets will improve cropping patterns.

Next, if I am growing wheat and am worried that by the time the harvest comes out

prices will go down, then I can sell my wheat on the futures market. I can sell my wheat

at a price, which is fixed today, which eliminates my risk from price fluctuations. These

days, agriculture requires investments -- farmers spend money on fertilizers, high

yielding varieties, etc. They are worried when making these investments that by the time

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the crop comes out prices might have dropped, resulting in losses. Thus a farmer would

like to lock in his future price and not be exposed to fluctuations in prices.

The third is the role about storage. Today we have the Food Corporation of India, which

is doing a huge job of storage, and it is a system, which -- in my opinion -- does not

work. Futures market will produce their own kind of smoothing between the present and

the future. If the future price is high and the present price is low, an arbitrager will buy

today and sell in the future. The converse is also true, thus if the future price is low the

arbitrageur will buy in the futures market. These activities produce their own "optimal"

buffer stocks, smooth prices. They also work very effectively when there is trade in

agricultural commodities; arbitrageurs on the futures market will use imports and exports

to smooth Indian prices using foreign spot markets.

In totality, commodity futures markets are a part and parcel of a program for agricultural

liberalization. Many agriculture economists understand the need of liberalization in the

sector. Futures markets are an instrument for achieving that liberalization

The NCDEX System

Every market transaction consists of three components i.e. trading, clearing andsettlement. A brief overview of how transactions happen on the NCDEXs market.

TRADING

The trading system on the NCDEX provides a fully automated screen based

trading for futures on commodities on a nationwide basis as well as online monitoring

and surveillance mechanism. It supports an order driven market and provides complete

transparency of trading operations. Order matching is essential on the basis of

commodity, its price, time and quantity.

All quantity fields are in units and price in rupees. The exchange specifies the unit

of trading and the delivery unit for futures contracts on various commodities. The

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exchange notifies the regular lot size and tick size for each of the contracts traded from

time to time. When any order enters the trading system, it is an active order. It tries to

finds a match on the other side of the book. If it finds a match, a trade is generated. If it

does not find a match, the order becomes passive and gets queued in the respective

outstanding order book in the system. Time stamping is done for each trade and provides

the possibility for a complete audit trail if required. NCDEX trades commodity futures

contracts having one month, two month and three month expiry cycles. All contracts

expire on the 20th of the expiry month. Thus a January expiration contract would expire

on the 20th of January and a February expiry contract would cease trading on the 20th of

February. If the 20th of the expiry month is a trading holiday, the contracts shall expire

on the previous trading day. New contracts will be introduced on the trading day

following the expiry of the near month contract.

CLEARING

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing

of trades executed on the NCDEX. The settlement guarantee fund is maintained and

managed by NCDEX. Only clearing members including professional clearing members

(PCMs) only are entitled to clear and settle contracts through the clearing house. AtNCDEX, after the trading hours on the expiry date, based on the available information,

the matching for deliveries takes place firstly, on the basis of locations and then

randomly, keeping in view the factors such as available capacity of the vault/warehouse,

commodities already deposited and dematerialized and offered for delivery etc. Matching

done by this process is binding on the clearing members. After completion of the

matching process, clearing members are informed of the deliverable/ receivable positions

and the unmatched positions. Unmatched positions have to be settled in cash. The cash

settlement is only for the incremental gain/loss as determined on the basis of final

settlement price.

SETTLEMENT

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Futures contracts have two types of settlements, the MTM settlement which

happens on a continuous basis at the end of each day, and the final settlement which

happens on the last trading day of the futures contract. On the NCDEX, daily MTM

settlement and the final MTM settlement in respect of admitted deals in futures contracts

are cash settled by debiting/crediting the clearing accounts of clearing members (CM)

with the respective clearing bank. All positions of a CM, brought forward, created during

the day or closed out during the day, are market to market at the daily settlement price or

the final settlement price at the close of trading hours on a day. On the date of expiry, the

final settlement price is the spot price on the expiry day. The responsibility of settlement

is on a trading cum clearing member for all trades done on his own account and his

clients trades.

A professional clearing member is responsible for settling all the

participants trades, which he has confirmed to the exchange. On the expiry date of a

futures contract, members submit delivery information through delivery request window

on the trader workstations provided by NCDEX for all open positions for a commodity

for all constituents individually. NCDEX on receipt of such information matches the

information and arrives at delivery position for a member for a commodity. The seller

intending to make delivery takes the commodities to the designated warehouse.

These commodities have to be examined by the exchange specified . The

commodities have to meet the contract specifications with allowed variances. If the

commodities meet the specifications, the warehouse accepts them. Warehouse then

ensures that the receipts get updated in the depository system giving a credit in the

depositors electronic account. The seller the gives the invoice to his clearing member,

who would courier the same to the buyers clearing member. On an appointed date, the

buyer goes to the warehouse and takes physical possession of the commodities.

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OBSERVATIONS:

Characteristics of commodity markets

In commodity futures market, the calculation of profit and loss will be slightly different

than on a normal stock exchange. The main concepts in commodity market are:

1) Margins.

In the futures market, margin refers to the initial deposit of good faith made into an

account in order to enter into a futures contract. This margin is referred to as good faith

because it is this money that is used to debit any losses.

When you open a futures account, the futures exchange will state a minimum amount of

money that you must deposit into your account. This original deposit of money is called

the initial margin. When your contract is liquidated, you will be refunded the initial

margin plus or minus any gains or losses that occur over the span of the futures contract.

In other words, the amount in your margin account changes daily as the market fluctuates

in relation to your futures contract. The minimum-level margin is determined by the

futures exchange and is usually 5% to 10% of the futures contract. These predetermined

initial margin amounts are continuously under review: at times of high market volatility,

initial margin requirements can be raised.

The initial margin is the minimum amount required to enter into a new futures contract,but the maintenance marginis the lowest amount an account can reach before needing to

be replenished. For example, if your margin account drops to a certain level because of a

series of daily losses, brokers are required to make a margin call and request that you

make an additional deposit into your account to bring the margin back up to the initial

amount.

E.g. - Let's say that you had to deposit an initial margin of $1,000 on a contract and the

maintenance margin level is $500. A series of losses dropped the value of your account

to $400. This would then prompt the broker to make a margin call to you, requesting a

deposit of at least an additional $600 to bring the account back up to the initial margin

level of $1,000.

Word to the wise: when a margin call is made, the funds usually have to be delivered

immediately. If they are not, the commodity brokerage can have the right to liquidate

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your Commodity position completely in order to make up for any losses it may have

incurred on your behalf.

2) Leverage

Leverage refers to having control over large cash amounts of a commodity with

comparatively small levels of capital. In other words, with a relatively small amount of

cash, you can enter into a futures contract that is worth much more than you initially have

to pay (deposit into your margin account). It is said that in the futures market, more than

any other form of investment, price changes are highly leveraged, meaning a small

change in a futures price can translate into a huge gain or loss.

Futures positions are highly leveraged because the initial margins that are set by the

exchanges are relatively small compared to the cash value of the contracts in question

(which is part of the reason why the futures market is useful but also very risky). The

smaller the margin in relation to the cash value of the futures contract, the higher the

leverage. So for an initial margin of $5,000, you may be able to enter into a long position

in a futures contract for 30,000 pounds of coffee valued at $50,000, which would be

considered highly leveraged investments.

You already know that the futures market can be extremely risky, and therefore not for

the faint of heart. This should become more obvious once you understand the arithmeticof leverage. Highly leveraged investments can produce two results: great profits or even

greater losses.

Due to leverage, if the price of the futures contract moves up even slightly, the profit gain

will be large in comparison to the initial margin. However, if the price just inches

downwards, that same high leverage will yield huge losses in comparison to the initial

margin deposit. For example, say that in anticipation of a rise in stock prices across the

board, you buy a futures contract with a margin deposit of $10,000, for an index

currently standing at 1300. The value of the contract is worth $250 times the index (e.g.

$250 x 1300 = $325,000), meaning that for every point gain or loss, $250 will be gained

or lost.

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If after a couple of months, the index realized a gain of 5%, this would mean the index

gained 65 points to stand at 1365. In terms of money, this would mean that you as an

investor earned a profit of $16,250 (65 points x $250); a profit of 162%!

On the other hand, if the index declined 5%, it would result in a monetary loss of $16,250

a huge amount compared to the initial margin deposit made to obtain the contract. This

means you still have to pay $6,250 out of your pocket to cover your losses. The fact that

a small change of 5% to the index could result in such a large profit or loss to the investor

(sometimes even more than the initial investment made) is the risky arithmetic of

leverage. Consequently, while the value of a commodity or a financial instrument may

not exhibit very much price volatility, the same percentage gains and losses are much

more dramatic in futures contracts due to low margins and high leverage.

3) Pricing and Limits

Contracts in the Commodity futures market are a result of competitive price discovery.

Prices are quoted as they would be in the cash market: in dollars and cents or per unit

(gold ounces, bushels, barrels, index points, percentages and so on).

Prices on futures contracts, however, have a minimum amount that they can move. These

minimums are established by the futures exchanges and are known as ticks. For example,the minimum sum that a bushel of grain can move upwards or downwards in a day is a

quarter of one U.S. cent. For futures investors, it's important to understand how the

minimum price

movement for each commodity will affect the size of the contract in question. If you had

a grain contract for 3,000 bushels, a minimum of $7.50 (0.25 cents x 3,000) could be

gained or lost on that particular contract in one day.

Futures prices also have a price change limit that determines the prices between which

the contracts can trade on a daily basis. The price change limit is added to and subtracted

from the previous day's close, and the results remain the upper and lower price boundary

for the day.

Say that the price change limit on silver per ounce is $0.25. Yesterday, the price per

ounce closed at $5. Today's upper price boundary for silver would be $5.25 and the lower

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boundary would be $4.75. If at any moment during the day the price of futures contracts

for silver reaches either boundary, the exchange shuts down all trading of silver futures

for the day. The next day, the new boundaries are again calculated by adding and

subtracting $0.25 to the previous day's close. Each day the silver ounce could increase or

decrease by $0.25 until an equilibrium price is found. Because trading shuts down if

prices reach their daily limits, there may be occasions when it is NOT possible to

liquidate an existing futures position at will.

The exchange can revise this price limit if it feels it's necessary. It's not uncommon for

the exchange to abolish daily price limits in the month that the contract expires (delivery

or spot month). This is because trading is often volatile during this month, as sellers and

buyers try to obtain the best price possible before the expiration of the contract.

In order to avoid any unfair advantages, the CTFC and the Commodity futures exchanges

impose limits on the total amount of contracts or units of a commodity in which any

single person can invest. These are known as position limits and they ensure that no one

person can control the market price for a particular commodity.

Strategies for trading in commodity market.

Futures contracts try to predict what the value of an index or commodity will be at somedate in the future. Speculators in the futures market can use different strategies to take

advantage of rising and declining prices. The most common strategies are known as

going long, going short and spreads.

1) Going Long

When an investor goes long, that is, enters a contract by agreeing to buy and receive

delivery of the underlying at a set price, it means that he or she is trying to profit from an

anticipated future price increase.

For example, let's say that, with an initial margin of $2,000 in June, Joe the speculator

buys one September contract of gold at $350 per ounce, for a total of 1,000 ounces or

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$350,000. By buying in June, Joe is going long, with the expectation that the price of

gold will rise by the time the contract expires in September.

By August, the price of gold increases by $2 to $352 per ounce and Joe decides to sell the

contract in order to realize a profit. The 1,000 ounce contract would now be worth

$352,000 and the profit would be $2,000. Given the very high leverage (remember the

initial margin was $2,000), by going long, Joe made a 100% profit!

Of course, the opposite would be true if the price of gold per ounce had fallen by $2. The

speculator would have realized a 100% loss. It's also important to remember that

throughout the time the contract was held by Joe, the margin may have dropped below

the maintenance margin level. He would have thus had to respond to several margin

calls, resulting in an even bigger loss or smaller profit.

2) Going Short:

A speculator who goes short, that is, enters into a futures contract by agreeing to sell and

deliver the underlying at a set price, is looking to make a profit from declining price

levels. By selling high now, the contract can be repurchased in the future at a lower price,

thus generating a profit for the speculator.

Let's say that Sara did some research and came to the conclusion that the price of Crude

Oil was going to decline over the next six months. She could sell a contract today, in

November, at the current higher price, and buy it back within the next six months after

the price has declined. This strategy is called going short and is used when speculators

take advantage of a declining market.

Suppose that, with an initial margin deposit of $3,000, Sara sold one May crude oil

contract (one contract is equivalent to 1,000 barrels) at $25 per barrel, for a total value of

$25,000.

By March, the price of oil had reached $20 per barrel and Sara felt it was time to cash in

on her profits. As such, she bought back the contract which was valued at $20,000. By

going short, Sara made a profit of $5,000! But again, if Sara's research had not been

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thorough, and she had made a different decision, her strategy could have ended in a big

loss.

3) Spreads

As going long and going short, are positions that basically involve the buying or selling

of a contract now in order to take advantage of rising or declining prices in the future.

Another common strategy used by commodity traders is called spreads. Spreads involve

taking advantage of the price difference between two different contracts of the same

commodity. Spreading is considered to be one of the most conservative forms of trading

in the futures market because it is much safer than the trading of long / short (naked)

futures contracts.

There are many different types of spreads, including:

Calendar spread:

This involves the simultaneous purchase and sale of two futures of the same type, having

the same price, but different delivery dates.

Inter-Market spread:

Here the investor, with contracts of the same month, goes long in one market and shortin another market. For example, the investor may take Short June Wheat and Long June

Pork Bellies.

Inter-Exchange spread:

This is any type of spread in which each position is created in different futures

exchanges. For example, the investor may create a position in the Chicago Board of

Trade, CBOT and the London International Financial Futures and Options Exchange,

LIFFE.

Trade in commodity market:

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You can invest in the futures market in a number of different ways, but before taking the

plunge, you must be sure of the amount of risk you're willing to take. As a futures

trader, you should have a solid understanding of how the market works and contracts

function. You'll also need to determine how much time, attention, and research you can

dedicate to the investment. Talk to your broker and ask questions before opening a

futures account.

Unlike traditional equity traders, futures traders are advised to only use funds that have

been earmarked as risk capital. Once you've made the initial decision to enter the market,

the next question should be, how? Here are three different approaches to consider:

Self Directed

Full Service

Commodity pool

1) Self Directed:As an investor, you can trade your own account, without the aid or advice of a

Commodity broker. This involves the most risk because you become responsible for

managing funds, ordering trades, maintaining margins, acquiring research, and coming

up with your own analysis of how the market will move in relation to the commodity in

which you've invested. It requires time and complete attention to the market.

2) Full Service:

Another way to participate in the market is by opening a managed account, similar to an

equity account. Your broker would have the power to trade on your behalf, following

conditions agreed upon when the account was opened. This method could lessen your

financial risk, because a professional broker would be assisting you, or making informed

decisions on your behalf. However, you would still be responsible for any losses incurred

and margin calls.

3) Commodity Pool

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A third way to enter the market, and one that offers the smallest risk, is to join a

commodity pool. Like a mutual fund, the commodity pool is a group of commodities

which can be invested in. No one person has an individual account; funds are combined

with others and traded as one. The profits and losses are directly proportionate to the

amount of money invested. By entering a commodity pool, you also gain the opportunity

to invest in diverse types of commodities. You are also not subject to margin calls.

However, it is essential that the pool be managed by a skilled broker, for the risks of the

futures market are still present in the commodity pool

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ANALYSIS

OPPORTUNITIES IN COMMODITY TRADING

Speculation: Commercial speculation, i.e. speculation by buyers and sellers of

commodities, has been used since the 19th century to enable commodity traders and

processors to protect themselves against short-term price volatility. Buyers are protected

against sudden price increases, sellers against sudden price falls. For commodity buyers

and sellers, commercial speculation is a form of price insurance. Non-commercial

speculation takes place not to protect against or hedge price risk, but to benefit by an-

ticipating and betting long for prices to go up or short for prices to go down. Non-

commercial speculators provide capital to enable the ongoing function of the market as

commercial speculators liquidate their contract positions by paying for the contracted

commodity or selling the contract to offset the risk of other contract positions held. Non-

commercial speculation is an investment, but one that can overlap with the interests of

agriculture when appropriately regulated.

However, todays speculation has become excessive relative to the value of the

commodity as determined by supply and demand and other fundamental factors. For

example, according to the FAO, as of April 2008 corn volatility was 30 percent andsoybean volatility 40 percent beyond what could be accounted for by market

fundamentals.11 Price volatility has become so extreme that by July some commercial or

traditional speculators could no longer afford to use the market to hedge risks effec-

tively.12 Prices are particularly vulnerable to being moved by big speculative bets

when a commoditys supply and demand relationship is tight due to production

failures, high demand and/or lack of supply management mechanisms.

The futures contract is the fundamental building block from which other speculative

instruments are built. The contract obligates parties to buy or sell a specified quantity of a

commodity at a specified price at an agreed date in the near future, usually one to three

months from the contract date for agricultural commodities. An options contract does not

oblige the parties and costs less to execute but provides less price protection. Futures and

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options contracts enable those who buy and sell commodities to manage short-term price

risks and to discover the price at which those contracts settle as the due date for

fulfilling the contract approaches.

According to UNCTAD, futures contracts and other commodity derivatives are not

capable of mitigating the causes of commodity price volatility, such as failure to

manage structural oversupply of commodities. Failure to regulate commodity derivatives

adequately has not only contributed to huge increases in food import bills and food

insecurity, but also to making futures and options contracts unavailable or too expensive

for many farmers and some agribusinesses to use to manage price risk.

In the U.S., futures contracts were useful and affordable as long as futures prices and

cash (spot) market prices converged as the date for the contracts execution approached.

Futures prices helped commodities traders to set a benchmark price in the cash market.

With convergence came some degree of contract predictability needed to calculate when

to buy or sell. Similarly, option contracts, in which buyers have the right but not the

obligation15 to buy or sell a commodity at a specified price at a specified time, relied on

price convergence to provide some contract predictability.

As prices have become more volatile and convergence less predictable since 2006, thefutures market has lost its price discovery and risk management functions for many

market participants.16 According to the FAO, as of March 2008, volatility in wheat

prices reached 60 percent beyond what could be explained by supply and demand

factors.17 Non-commercial commodities speculation was a factor, though not the only

one, that impeded price convergence and induced extreme market volatility, testified the

National Grain and Feed Association (NGFA) to Congress. However, the NGFA and

other groups cautioned against over-regulating the commodities markets, lest there be too

little capital in the market to enable commercial speculators to hedge their risks with

futures contracts.

Hedging: Hedging in the futures market is a two-step process. Depending upon the

hedger's cash market situation, he will either buy or sell futures as his first position. For

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instance, if he is going to buy a commodity in the cash market at a later time, his first

step is to buy futures contracts. Or if he is going to sell a cash commodity at a later

time, his first step in the hedging process is to sell futures contracts.

The second step in the process occurs when the cash market transaction takes place. At

this time the futures position is no longer needed for price protection and should

therefore be offset (closed out). If the hedger was initially long (long hedge), he would

offset his position by selling the contract back. If he was initially short (short hedge), he

would buy back the futures contract. Both the opening and closing positions must be for

the same commodity, number of contracts, and delivery month.

Basic Commodity Hedging Strategy

We'll assume we are talking about an orange juice producer first. This guy has to sell his

orange juice in six months. The problem is that any price drop in the orange juice market

would have a negative effect on what he can get for his crop once it's harvested.

He can get around a large part of that risk by establishing a basic short commodity

hedging strategy in the orange juice futures market. This gives him some protection, sort

of like an insurance policy against large price fluctuations.

How to Put on a Short Hedge in Commodity Futures

Let's say the current price for orange juice in the cash market on May 1st is 90 cents per

pound *fictional.* The OJ grower feels that's a fair price to cover his costs and make a

profit. He also knows that he will have about 15,000 pounds of OJ to bring to the market

at harvest in six months. What he does is sell his crop now using the futures market to

protect that 90 cent sale price in the future.

He goes into the futures market and sells 1 contract *15,000 lbs of OJ* at the current

market price of $1 per pound. Now lets fast forward 1 month into the future and see how

this protects his profit margins.

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On June 1st the futures price of OJ had dropped to 70 cents per pound and the cash or

current price for OJ drops to 65 cents per pound because there looks to be a bumper crop

of OJ this year.

It doesn't look good as The OJ producer needed to get 90 cents a pound to cover his costs

and make a profit. Looks like he won't be buying his kid the GI Joe with the "Kung Fu"

grip because he'll be getting $3750 less for his OJ crop.

The decimal point has been omitted and the calculation looks like this:

9000 - 6500 = 2500 X 1.50 = $3750 loss per contract. But wait

What about the OJ contract he sold in the futures market? Remember he sold 1 contractat $1 per pound? If he were to buy that contract back right now he would only have to

pay 70 cents a pound. He has a profit of $4500 for the futures contract.

The decimal point has been omitted and the calculation looks like this

10000 - 7000 = 3000 X 1.50 = $4500 profit per contract.

Now let's analyze what the hedge has done to partially protect the OJ grower's price risk.

The $3750 cash loss is offset by the $4500 profit in the futures market, leaving him with

a theoretical profit on the hedging strategy of $750. Not a bad deal.

Note that the cash price and the futures price didn't fluctuate in tandem. The reason is

that the cash price is influenced by factors such as storage and transportation costs. They

will most likely, but not always follow the same trend higher or lower, but rarely at the

same rate.

Let's go another month into the future. On July 1st another report shows that the first

report overestimated the OJ supply and the price has risen to $1.20 a pound and the cash

price of OJ has gone up to $1.05 because of the simple economics of supply and demand.

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The grower can now get $2250 more for his for his OJ. The calculation looks like this:

10500 - 9000 = 1500 X $1.50 = $2250 more profitbut hold the phone. He shouldn't run

out and buy his wife that new BMW he promised her just yet. Let's see what happened

with the futures contract hedge.

It will cost him $1.20 per pound to buy back the futures contract he sold at $1. That gives

him a loss of $3000 for his futures hedge. The calculation looks like this: 10000 - 12000

= 2000 X $1.50 = $3000 loss.

Now let's see how the commodity futures hedge has limited his potential profit margin.

The $2250 gain on the cash price of the OJ crop is offset by the $3000 loss he currently

has on his commodity futures hedge. The net result of liquidating the hedge right now

would be a loss of $750.

This example shows the importance of maintaining the hedge (regardless of price

fluctuations) until the crop is ready for delivery. The cash price and the futures price will

converge and become almost equal at the expiration month of the futures contract except

for costs such as carrying charges (also known as "the basis").

By liquidating the futures contract and breaking the protection of the hedge before

expiration, the grower then becomes at risk to price fluctuations. He also loses money on

the costs associated with the futures portion of the hedge itself.

How to Put on a Long Hedge in Commodity Futures

The counterpart to the grower and producer is the supplier or processor. In our example

here, the processor will need to buy OJ and process it for consumption or other uses.

Since the processor must make a future purchase, she wants to protect herself from price

increases at the time of delivery.

She will use the futures market as an insurance policy against price risk by putting on a

"Long Hedge" in the futures market by buying futures now, thus locking in her price plus

the cost of placing the long hedge in commodity futures.

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We can look at the price variations and how they affect the processor by simply inverting

all the figures from our short hedge example. A rise in the futures price would be a gain

for the processor while a fall in the futures price would be a loss.

A rise in the cash price would be a loss to the processor while a fall in the cash price

would equal a gain. The risk of future price increases is transferred to the futures market

because of the hedge.

There you have it. A basic commodity hedging strategy and how producers and suppliers

use the futures markets to protect price variations and profits. This strategy is used in all

commodity markets from financials to livestock, agricultural products and even precious

metals.

Hedging is generally not considered risky if it is based on covering short-term

requirements. However, if the hedging party places a wrong bet, then they may miss out

on potential savings. For instance, if a copper manufacturer has a capacity of 200 tonne

and decides to sell 300 tonne on the futures exchange the remaining 100 tonne is

considered as speculation in the market. If prices fall then he stands to benefit, however if

prices go up the 200 tonne he produces can be delivered on the exchange but he would

have to incur losses on the additional 100 tonne.

Arbitrage:

Arbitrage refers to the opportunity of taking advantage between the price difference

between two different markets for that same stock or commodity.

In simple terms one can understand by an example of a commodity selling in one market

at price x and the same commodity selling in another market at price x + y. Now this y is

the difference between the two markets is the arbitrage available to the trader. The tradeis carried simultaneously at both the markets so theoretically there is no risk. (This

arbitrage should not be confused with the word arbitration, as arbitration is referred to

solving of dispute between two or more parties.)

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The person who conducts and takes advantage of arbitrage in stocks, commodities,

interest rate bonds, derivative products, forex is know as an arbitrageur.

Arbitrage opportunities exist between different markets because there are different kind

of players in the market, some might be speculators, others jobbers, some market-

markets, and some might be arbitrageurs.

The simultaneous purchase and sale of something at different prices sounds like a purely

hypothetical transaction that shouldn't ever exist. But various flavors of arbitrage or near-

arbitrage do exist, offering profits that are attractive compared to the risk borne by the

arbitrageur.

Before the NSE came into existence, the price of the same stock varied across exchanges.

Therefore, it was easy to make money by buying at one exchange and selling at a higher

price on another. But nowadays, with real-time transfer of information, the difference

between the prices of the same stock on different exchanges is minuscule. Thats why

people play more in derivatives and arbitrage between the price differences in the cash

and the futures markets. In the Indian context arbitrage is largely concentrated in stock

futures; index arbitrage is not very popular as yet.

In the bull market, investors are willing to pay a slight premium to the underlying cash

price in the futures market as they expect the stock to rise in the short term and are

willing to pay the premium (discounts do also happen at times of dividend and

bearishness in the stocks).

BENEFITS OF ARBITRAGE:

Security

Greater Flexibility

Higher Returns,

Risk Free Investment

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GOLD IN INDIA COMMODITY MARKET:

Importance and Uses:

Gold has mainly three types of uses: Jewellery Demand, Investment Demand and

Industrial uses.

Jewellery Demand- Jewellery consistently accounts for around three-quarters of gold

demand. In terms of retail value, the USA is the largest market for gold jewellery,

whereas India is the largest consumer in volume terms, accounting for 25% of demand in

2007.

Investment demand- Investment demand in gold has increased considerably in recent

years. Since 2003, investment has representing the strongest source of growth in demand,

with an increase in value terms to the end of 2007 of around 280%.

Industrial Demand- Industrial and dental uses account for around 13% of gold demand

(an annual average of over 425 tonnes from 2003 to 2007 inclusive.

Major Gold Mines in India

There is a huge mismatch between demand and primary supply in India, the balance

being made up by imports. The only major gold mine currently in production is the Hutti

mine, owned by Hutti Gold Mines Company Limited, which produces around 3 tons ofgold a year. Hindustan Copper also produces some gold as a by-product

.

State 2005-06 2006-07 2007-08

Karnataka 2.846 2.334 2.831

Jharkhand 0.201 0.154 0.027

Gujarat 6.710 10.335 9.135

Total 9.757 12.823 11.993

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As given in the above table, gold production in India is ruling lower in recent years.

Karnataka was the leading producer of this precious metal with the output ranging from 2

to 3 tons per annum during 2005-06 and 2007-08. Jharkhand also produces small

quantity of gold.

Gold Demand in India

Gold, the ultimate safe haven in troubled times, remained the hot commodity throughout

the year. It scaled new heights in the global markets and in India, which is the largest

buyer of the metal.

Year (IN TONNES) World (IN TONNES) % share of WorldDemand

2004 617.7 2961.5 20.86

2005 721.6 3091.9 23.34

2006 721.9 2681.9 26.92

2007 769.2 2810.9 27.36

2008 660.2 2906.8 22.71

Source: GFMS

Indian demand for Gold accounts for on an avg. 25% share of world gold demand. In

2008, demand for gold has decreased in India because of high price amid global financial

crisis.

CHINESE COMMODITY MARKET (GOLD)

Introduction

Gold plays a vital role in Chinese culture. The Chinese have a strong affinity to gold

when compared with Western countries. Gold has been present in Chinese history since

the time of the Han Dynasty and even today is regarded as a sign of prosperity, an

ornament, a currency and an

Documents

Commodities 2010