Commodities Market Group6

8/6/2019 Commodities Market Group6

1/47

Commodity market


2/47

Flow of Presentation What do we mean by Commodity Market?

Global classification of commodities.

Commodities not traded in commodity market

How Commodities is an alternate asset class?

Scope of commodities market.

How to Trade in Commodities?

Various commodity Exchanges. Commodity trading

Risk factors involved

Conclusion


3/47

Commodities

A commodity is anything for which there is

demand, but which is supplied without

qualitative differentiation across a markets.

Key Learning here was the difference between

commodity and a brand.


4/47

Globalclassification ofcommodities


5/47

Non-tradable commodities

1) Rare Metals2) Agricultural Products

3) Minerals and other materials

Commodities not traded in commodity

market


6/47

Rare metals - Germanium, Cadmium,

Cobalt, Chromium, Magnesium,

Manganese, Molybdenum, Silicon,Rhodium, Selenium, Titanium, Vanadium,

Niobium, Lithium, Indium, Gallium,

Tantalum, Tellurium, and Beryllium.


7/47

Agricultural products - Fresh Flowers, Cut

Flowers, Melons, Lemons, Tung Oil, Gum

Arabic, Pine Oil, Milk, Tomatoes, Grapes,Eggs, Potatoes, and Figs.


8/47

Asphalt,Aggregate,Arsenic, Borax, Boron,

Gypsum,Asbestos, Chlorine, Fluoride,Cement, Sulfuric Acid, Carbon Dioxide,

Fluorspar, Bromine, Titanium Dioxide.


9/47

Commodities An Alternate Asset Class

Traditional choice of asset allocation includes

stocks, bonds and real estate.

Now portfolio has shifted to alternative assets,like hedge funds, private equity, derivatives

and commodities.

Traded on spot and forward markets.

Positively correlated with inflation.

Independent risk and return profile.


10/47

Portfolio Diversification

Low or negative co-relation allows commodities

to reduce overall risk.

Hedge against inflation. An improved risk/return profile in strategic asset

allocation.


11/47

Lets assume your total portfolio is $250,000

and you invest 80% in stocks and bonds($200,000) and 20% in managed Commodities

($50,000). Lets assume at the end of the year

you realize a 5% return on your stocks and

bonds and a 25% return on Commodities. Theresult would be as follows:


12/47

Now lets assume you earn 10% on the 80% of

your portfolio invested in stocks and bonds, butlose 25% in managed futures. The results would

be as follows:


13/47

B

y investing only 20% of your portfolio infutures, if you were to earn 25%, it wouldoutperform 80% of your portfolio invested instocks and bonds if the stocks and bonds

earned 5%. You can also see that a 25% loss in futures

would still leave you with a net profit of$7,500 if your stock and bond allocation

returned 10%.


14/47

SCOPE OF COMMODITY MARKET

Allowing mutual funds and FIIs to participatein the commodity market

Widening the definition of commodities to

include also commodity indices and weatherderivatives

Changes in the Banking Regulation Act

allowing banks to operate in the commodityexchanges

Allow set-offs on trading losses in the

derivatives market.


15/47

FUTURE PLANS

NCDEX constantly plans to widen the menu ofproducts available for trading to include:-

Other agricultural products,

Base metals,

plastics,

energy products

indices (including weather)


16/47

WAY AHEAD

Commodity exchanges in India are expected tocontribute significantly in strengthening Indian

economy to face the challenges of

globalization.

Indian markets are poised to witness further

developments in the areas of electronic

warehouse receipts (equivalent of

dematerialized shares), which would facilitate

seamless nationwide spot market for

commodities.


17/47

Theimage cannotbe displayed.Your computer may nothaveenough memory toopen theimage,or the imagemay havebeen corrupted. Restartyour computer,and then open thefileagain.If thered x stillappears,you may havetodeletethe imageand then insertit again.

Amendments to Essential Commodities Actand implementation of Value-Added-tax

Options contracts in commodities.

Their may see increased interest from theinternational players in the Indian commoditymarkets once national exchanges becomeoperational.


18/47

Commodity derivatives as an industry is poised to take-off which may provide the

numerous investors in this country with

another opportunity to invest and diversify

their portfolio. Finally their may be greater

convergence of markets equity, commodities,

Forex and debt which could enhance the

business opportunities for those havespecialized in the above markets.


19/47

COMMODITY MARKET

Commodity market is a place where trading incommodities takes place. These are the marketswhere raw and primary products are exchanged.

These raw commodities are traded on regulatedcommodity exchanges, in which they are boughtand sold in standardized contracts. It is similar to

an equity market, but instead of buying or sellingshares one buys or sells commodities.


20/47

HOW TO TRADE IN COMMODITIES

COMMODITY FUTURE

A standardized agreement to buy (or sell) an assetin the future, at a price agreed today


21/47

COMMODITY EXCHANGE TRADED

FUNDS (ETFs)

Commodity ETFs generally are index funds and track

commodities indices.


22/47

COMMODITY STOCKS

Stocks which belongs to commodity related sector

like metals, energy, agriculture etc.


23/47

COMMODITY MUTUAL FUNDS

Mutual funds which invest in stocks belonging to

commodity sectors or fund of funds which invest in

other commodity funds etc.


24/47

COMMODITY EXCHANGE

An entity, usually an incorporated non-profitassociation, that determines and enforces rules and

procedures for the trading of commodities andrelated investments, such as commodity futures.

Commodities exchange also refers to the physical

center where trading takes place


25/47

CONT.

18 existing commodity exchanges in India offeringdomestic contracts in 8 commodities and 2exchanges that have permission to conduct tradingin international (USD denominated) contracts.


26/47

CONT.

The two most important commodity exchanges inIndia are;

1)Multi-Commodity Exchange of India Limited(MCX),

2)National Multi-Commodity & Derivatives Exchangeof India Limited (NCDEX)


27/47

20 Other Regional20 Other RegionalExchangesExchangesNMCENMCE

CommodityCommodity ExchangesExchanges

MCXMCX

Structure of Indian Commodity Futures Exchanges

NationalNationalexchangesexchanges

RegionalRegionalexchangesexchanges

FMCFMC

NBOTNBOTNCDEXNCDEX


28/47

National Commodity & Derivatives ExchangeLimited (NCDEX) is an online commodity

exchange. It has commenced its operations on

December 15, 2003.

LIC, NABARD & NSE are Promoter Shareholder.

NCDEX is regulated by Forward Markets

Commission.

NCDEX


29/47

NCDEX currently facilitates trading of 57, commodities including :

Agri-based commodities

Bullion

Energy

Ferrous metals

Non-ferrous metals

Plastics


30/47

Institution Share Domain Expertise

NABARD 15 % Apex bank for agricultural lending

ICICI Bank 8 % Largest private sector bank in India. Listed on NYSE

NSE 15 % Largest stock exchange in India. Highest volume in single stock futures in world.

LIC 15 % Largest life insurance company in India

CRISIL 12% Indias first & largest credit rating agency. Now a Standard & Poor company

IFFCO12% Largest farmer cooperative with affiliation of 36,000 cooperatives

PNB8% Large public sector bank with strong rural reach specially in North India

Canara Bank 8% Large public sector bank with strong rural reach specially in South India

Goldman

Sachs7% Global Expertise in commodity markets


31/47

Multi Commodity Exchange of India Limited (MCX),is an independent and de-mutulised exchange with a

permanent recognition from Government of India.

Key shareholders ofMCX are Financial Technologies

(India) Ltd., State Bank of India, Union Bank of India,

Bank of India and Canara Bank.

MCX started offering trade in November 2003 and has

built strategic alliances with Bombay BullionAssociation, Bombay Metal Exchange, Solvent

Extractors Association of India, Pulses Importers

Association and Shetkari Sanghatana.

MCX


32/47

NMCE

National Multi Commodity Exchange of IndiaLimited (NMCE) is the first de-mutualized,Electronic Multi-Commodity Exchange in India.

On 25th July, 2001, it was granted approval by theGovernment to organize trading in the edible oilcomplex.

It has operationalized from November 26, 2002.

It is being supported by Central WarehousingCorporation Ltd., Gujarat State Agricultural

Marketing Board and Neptune Overseas Limited.


33/47

SPOT TRADING

Spot trading is any transaction where deliveryeither takes place immediately, or with a minimum

lag between the trade and delivery due to technical

constraints. Spot trading normally involves visualinspection of the commodity or a sample of the

commodity, and is carried out in markets such as

wholesale markets. Commodity markets, on the

other hand, require the existence of agreedstandards so that trades can be made without

visual inspection.


34/47

FORWARD CONTRACT

A

forwardcontra

ct or simply a forward is anagreement between two parties to buy or sell an

asset at a certain future time for a certain price

agreed. It costs nothing to enter a forward contract.

The party agreeing to buy the underlying asset in thefuture assumes a long position, and the party

agreeing to sell the asset in the future assumes a

short position. The price agreed upon is called thedelivery price, which is equal to the forward pricing

at the time the contract is entered into.


35/47

Futures contract, in refers to a standardized

contract to buy or sell a specified commodityof standardized quality at a certain date in the

future, at a market determined price (the

futures price). The price is determined by the instantaneous

equilibrium between the forces of supply and

demand among competing buy and sell orders

on the exchange at the time of the purchase

or sale of the contract.


36/47

Features ofFuture ..

Futures are used for hedging, particularly in abear market.

Futures are exchange-traded derivatives.

The particular asset as well as the quantity are

specified in the futures contract.

The currency in which the contract is to be

executed is also specified in future contracts.


37/47

Futures have lower transaction costs than other

debt instruments.

Future contracts have high liquidity, since buyers

and sellers of futures contracts can be found

easily.

Futures are highly standardized.

Settlement - The delivery month and the last

trading date are also mentioned in the contract.


38/47

Forward Vs. FuturesWhile futures and forward contracts are both

contracts to deliver an asset on a future date at aprearranged price, they are different in different

respects:

Futures are margined, while forwards are not.

Forward contracts are private agreements.

Futures contracts have clearing houses.

For forward contracts, settlement of the

contract occurs at the end of the contract.

Futures contracts are marked-to market daily,

which means that daily changes are settled day

by day until the end of the contract.


39/47

Futures contracts are quite frequently employed

by speculators. On the other hand, forward

contracts are mostly used by hedgers.

Futures are exchange-traded, while forwards are

traded over-the-counter.

Thus futures are standardized and face an

exchange, while forwards are customized and

face a non-exchange counterparty.


40/47

KEY PLAYERS IN THE COMMODITY

MARKET

SPECULATOR

HEDGER

BROKER

The Major Actors in commodity market


41/47

FORWARD MARKETS COMMISSION

Forward Markets Commission (FMC) isheadquartered at Mumbai.

It is a regulatory authority which is overseen by

the Ministry of Consumer Affairs, Food and PublicDistribution, Govt. of India.

It was set up in 1953 under the Forward Contracts

(Regulation) Act, 1952.

The Act provides that the Commission shall consist

of not less than two but not exceeding four

members appointed by the Central Government.


42/47

OBJECTIVES OFFMC

To create competitive conditions so that no

unscrupulous participants could use these

leveraged contracts for manipulating prices.

To ensure that the market has appropriate risk

management system.

To ensure fairness and transparency in

trading, clearing, settlement and management

of the exchange so as to protect and promote

the interest of various stakeholders.


43/47

FUNCTIONS OF THE FMC

FMC advises the central government to eithergrant recognition or to withdraw the recognition of

any association.

It keeps the forward market under strongobservation and takes action wherever necessary.

To make recommendations generally with respect

to improving the organization and working of

forward markets.


44/47

To undertake the inspection of the accountsand other documents of any recognizedassociation or registered association or anymember of such association whenever it

considerers it necessary. To collect and publish the information relating

to trading conditions in respect of goodsincluding information relating to demand,supply and prices.


45/47

Risk factors involved

Changing demandsupply dynamics.

Climatic factors.

Industry related factors.

Geopolitical consideration.


46/47

Conclusion

Commodities are the distinct class of assets

that are largely independent of equity and

bond returns.

Long term fundamentals of commodity

companies appears bright given the supply

demand mismatch , emphasis on

infrastructure development in manydeveloping economies


47/47

SUBMITTED BY

Abhinav Kansal

Deepak Jain

Arpit Khandelwal

Apeksha Khandelwal

Saumyadeep Dalal

Aastha Mittal

Ankit Mehta

Divya Jolly

Amit Goel

Documents

Commodities Market Group6