National Commodity And Derivatives Exchange Of India (NCDEX)

Commodity MarketsMade by:

Prateek JainRadhika SethiDivya KaushikKanika AgarwalRavi Mohan Jangra

Classification based on Underlying AssetCommoditiesCurrenciesInterest RatesEquity SharesIndicesCredit: eg: credit default swapsWeather

INTRODUCTION

Commodity market is an important constituent of the financial markets of any country.In India, trading in commodity futures has been in existence from the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875.Regulatory BodyThe commodity futures traded in commodity exchanges are regulated by the Government under the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The regulator for the commodities trading is the Forward Markets Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs Food and Public Distribution.Forward Markets Commission (FMC):- It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952. Commission consists of minimum two and maximum four members appointed by Central Govt. Out of these members there is one nominated chairman

ParticipantsHedgersArbitragersInvestorsGain from price differentialsIndividualsActively Managed FundsProducerUserImporterExporterParticipants in commodity Derivative Market

NCDEXMCXPromotersICICI Bank,LIC,NABARD,NSE,PNB,CRISIL,Canara Bank,IFFCOFinancial Technologies (India) Ltd., SBI, HDFC Bank, Union Bank of India, B O I, BOB, Canara Bank, Corp. Bank and more.Expiry20th of contract month for most of the commodities or as specifiedDifferent for each commodityActively traded commoditiesPulses,Sugar, Wheat,Spices, SteelGold, Silver, Crude Oil ,Natural gas

How to make minimum profits on mcx.example;:if gold price has increased by 12 rs, then you come up with minimum profits.Trading unit=1 kilogram=1000grams ,brokerage=.03%Quotation/base value=10 grams.Lot size =1000grams/10grams=100.Bought price=18400,sold price=18412,Minimum price=12Profit=(18412-18400) * 100)-(18400*100*.0003)+ (18412*100*.0003)=95.64

Calculation of commodity prices on MCX/NCDEX.MCX / NCDEX commodities like gold , silver , aluminum , copper etc prices are dependent on their corresponding international prices , USD to INR rate conversion and supply/demand etc.Example:When US dollar to INR conversion is at 50INR and crude oil price is 80$ in international market , mcx price will be 4000 INR.

Cost involved The commodities market has two basic types of trades physical commodities and non-physical financial contracts. Physical commodities that underlie a futures contract or are traded in the physical market are known as actuals. Since non-physical financial contracts, such as swaps, can involve extra liquidity risk, traders should know the difference between the two different types of assets before trading them. Initial MarginMargin is a necessary component of futures trading, as it wouldnt be very cost effective to purchase entire contracts in cash. Initial margin refers to the amount of money that must be put up to buy or sell a futures contract as a percentage.

Cost involved in cost of carry:Insurance cost Warehouse costFinance costContango:Contango is the opposite of backwardation and occurs when near month future contracts are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time.For non-perishable commodities that have a cost of carry, contango is normal, as the commodity holder must pay for these costs above and beyond the cost of the commodity itself. Example: Natural Gas.

Risks faced by Commodity Users and ProducersCommodity enterprises faces two types of Risks

PRICE RISKQUANTITY RISK(eg from weather)

HEDGING REDUCES PRICE RISK

Price Volatility- Prices of commodities volatile due to

- Demand Supply mismatch

- Erratic Monsoon

- Import Export restrictions

- Spoilage during storage

- Substitute demand etc.

12% Rise13% Fall

23.66 % Rise

Major International Exchanges

COMMEX

Agricultural: corn, soybean, oats, wheat etcMetals :gold,silverPrecious Metals and EnergyGoldman Sachs Commodity IndexFertilizer.Dairy,etc Gold,Silver

Base Metals,Plastics

Shanghai Future ExchangeThe Shanghai Futures Exchange (SHFE) is one of the largestcommodities marketsin China. The exchange lists contracts in steel, copper, aluminum, natural rubber, fuel oil, zinc and gold.TheShanghai Futures Exchange(SHFE) was formed from the amalgamation of theShanghai Metal Exchange,Shanghai Foodstuffs Commodity Exchange, and the Shanghai Commodity Exchangein December 1999. It is anon-profit-seekingincorporatedbodyregulatedby theChina Securities Regulatory Commission.It currently trades futures contracts in copper, aluminium, zinc, naturalrubber,fuel oil, andgold.

Benefits of commodity Future Markets.

Price Discovery:-Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism.Price Risk Management: - Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc.

Import- Export competitiveness: - The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers.

CONCLUSIONIndia is one of the top producers of a large number of commodities, and also has a long history of trading in commodities and related derivatives. The commodities derivatives market has seen ups and downs, but seem to have finally arrived now. The market has made enormous progress in terms of technology, transparency and the trading activity. Interestingly, this has happened only after the Government protection was removed from a number of commodities, and market forces were allowed to play their role. This should act as a major lesson for the policy makers in developing countries, that pricing and price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms.

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DatePrice / QtlWheat

Sheet16/7/047027807027687/7/047757787707748/7/047767777627699/7/0476476976076510/7/0476877276777012/7/0477277476877007/13/200477377977277607/14/200477678077677807/15/200477878877878507/16/200478879278478807/17/200478378978378807/19/200479279778979407/20/200479681579580907/21/200481181980781807/22/200482185282083807/23/200483984383283507/24/200483784183584007/26/200484385484184607/27/200484684883283907/28/200483783883183407/29/200483283482282607/30/200482482481282107/31/20048188208138172/8/048128148038083/8/048058158058114/8/048108208098185/8/0481782481481912.36842105266/8/048168208138167/8/048178208148189/8/0481982081681910/8/0481982581982511/8/0482582981482312/8/0482082481681808/13/200481982181681908/14/200481682081681908/16/200481882281681808/17/200481781981681808/18/200481781781181308/19/200481481481081308/20/200481281981281608/21/200481881881481608/23/200481681681281208/24/200481381480180508/25/200480580579579908/26/200479880279579808/27/200479679879179308/28/200479379779179308/30/200479279378078508/31/20047847857767791/9/047807807677712/9/047697807677733/9/047767777717774/9/047757797737776/9/047807807747767/9/047777787747758/9/047767777717779/9/0477578677277310/9/0477477577177311/9/0477177276776809/13/200476576676276409/14/200476376475675809/15/200475775775375509/16/200475575775375609/17/200475675975275309/20/2004752752744745

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DatePrice / QtlWheat

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Chart116191597159815961590158215851590158915971594160316011598159516021621163416401636163916461655164616511658168017041695169316851672166916851686169416891686168616811698180618271822186818541859190719411968196019581942187618351831184418461827182018261829185318581852185718611836183618431857186018571843

DatePrice / QtlSugar M-30 (NCDEX)

Sheet107/27/2004165017101650169707/28/2004170317461703171907/29/2004173617511719173007/30/2004171817261715172107/31/200417241730172017282/8/0417221740171317233/8/0417211724171717224/8/0417241733172417295/8/0417301738172917346/8/0417271740172717377/8/0417411749174117449/8/04174717471735174210/8/04174917491738174311/8/04174317441730173512/8/04173117381725173208/13/2004173417381732173608/14/2004173717401737174008/16/2004174117471741174508/17/2004174417451739174208/18/2004174317451741174408/19/2004174517501745174808/20/2004174917491741174508/21/2004174717471743174608/23/2004174217431740174208/24/2004174017401735173808/25/2004173617411735173808/27/2004173617421736174008/28/2004174017411737174008/30/2004174017401736173808/31/200417361736173017333751/9/0417301730172417260.23659305992/9/0417251727171717243/9/0417181719170217094/9/0417091715170517156/9/0417101717170317127/9/0417191719171217158/9/0417121722171217209/9/04172017221714171710/9/04171517151706171211/9/04171217171711171509/13/2004171217161685169909/14/2004167616891676168609/15/2004168216901676168309/16/2004167716821672167809/17/2004167516891675168209/20/2004167616801666167209/21/2004167316741668167209/22/2004166716691658166309/23/2004166216631653166009/24/2004165516651653166109/25/2004166316721660166909/27/2004166516781665167409/28/2004166616721664166909/29/2004166816731666167009/30/200416701691167016811/10/0416831683167016764/10/0416781678167116755/10/0416741677167316756/10/0416751676167216757/10/0416731673166216648/10/0416651669166016659/10/04166316651661166311/10/04166316631657166112/10/04165916601648165510/13/2004164916591646165110/14/2004165416561650165210/15/2004165016501646164810/16/2004164716481646164810/18/2004164616491635164310/19/2004163516361626163110/20/2004163016311612162410/21/2004165416621654165810/23/2004165616571646164910/25/2004164916491636164310/26/2004163616381621162810/27/2004162616301621162610/28/2004162616291622162610/29/2004162716301624162710/30/200416281630162416251/11/0416211630161516192/11/0416211621157515973/11/0415951602159315984/11/0415961601159315965/11/0415931598158615906/11/0415851587157615828/11/0415831588158015859/11/04158615991586159010/11/04158715921587158911/11/04159316001593159712/11/04159515971594159411/15/2004160216071598160311/16/2004160016031598160111/17/2004160116051593159811/18/2004159316011590159511/19/2004160016031596160211/20/2004162016231616162111/22/2004162316361622163411/23/2004165116511632164011/24/2004162516401625163611/25/2004163016431629163911/26/2004165216541640164611/27/2004164716601645165511/29/2004166016601640164611/30/200416481655164716511/12/0416591665165016582/12/0416671688166516803/12/0416951715169117044/12/0417101716168916956/12/0416951710168116937/12/0416911695168116858/12/0416821683166516729/12/04166616761662166910/12/04167116881671168511/12/04168316881683168612/13/2004169417021691169412/14/2004168516951685168912/15/2004169016901683168612/16/2004168416881682168612/17/2004168216871677168112/20/2004169117061689169812/21/2004177418141770180612/22/2004180918381805182712/23/2004183118351808182212/24/2004182418731819186812/27/2004187419001851185412/28/2004185318731853185912/29/2004186619101846190712/30/2004190519581900194112/31/200419461972194319681/1/0519691972195619603/1/0519661980195319584/1/0519581958190819425/1/0519371937187018766/1/0518681868178818357/1/0518171836180118318/1/05183018451824184410/1/05184018641840184611/1/05184518451821182712/1/05182518291813182001/13/2005181918331814182601/14/2005182218291822182901/15/2005183118601831185301/17/2005185818741845185801/18/2005185318551842185201/19/2005185118721847185701/20/2005184918831849186101/21/2005184618471829183601/22/2005183618391830183601/24/2005183018491826184301/25/2005184218581840185701/27/2005186118721855186001/28/2005186318721855185701/31/20051846185018331843

Sheet1

DatePrice / QtlSugar M-30 (NCDEX)