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A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In spot market, commodities are bought and sold for immediate delivery, whereas in derivatives market
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Commodity Markets defined• Commodity: Any tangible item that can be bought and sold.
• SPOT MARKET-Mandis
• FUTURES MARKET-Exchanges
Inflation adjusted returns in the developed markets
• Returns greater than bonds and almost equivalent to stocks
• Risk is lower than investing in stocks
U.K.U.S.
U.S.
Major International Exchanges
COMMEX
Agricultural: corn, soybean, oats, wheat etcMetals :gold,silver
Precious Metals and Energy
Goldman Sachs Commodity IndexFertilizer.Dairy,etc
Gold,Silver
Base Metals,Plastics
Indian Scenario• More than 100 years old market
• Regional exchanges- Bombay Cottons Exchange- India Pepper and Spice Trade
Association- National Board of Trade etc.
• Year 2003- Landmark year
- Organized Trading at National Level
Premier Exchanges
• Organized National level exchanges• Professionally managed • Demutualised setup
T he Commodities
G oldS ilver
P recious Meta ls
S tee lC opperN icke l
Tin
Base M eta ls
C erea lsPulses
Spices e tc
Agricu lture
C rude O il
Energy
Soya O ilC astor Seeds
Mustard O il
O ils and O il Seeds
C ottonSugar
Softs
More than 70 commodities listed in a short span of 2 years
Record Volume seen in many commodities
NCDEX MCX
Promoters
ICICI Bank,LIC,
NABARD,NSE,PNB,CRISIL,
Canara Bank,IFFCO
Financial Technologies (India) Ltd., SBI, HDFC
Bank, Union Bank of India, B O I, BOB, Canara Bank,
Corp. Bank and more.
Expiry 20th of contract month for most of the commodities or
as specified
15th or 5th of the contract month,as specified for the
particular commodity
Actively traded
commoditiesAgro- commodities,Mild
Steel ingotsGold,Silver,Crude Oil
Average volumes of commodities traded
Commodity Exchange Avg.volume per day
Gold MCX 5,42,800 kgs
Silver MCX 10,55,730 kgs
Crude MCX 5,03,700 bbl
Refined Soya Oil NCDEX 21,000 MT
Soybean, Guar seed NCDEX 12,000 MT
Mild Steel Ingots NCDEX 6,100 MT
Spices(jeera,turmeric,chilly,pepper) NCDEX 1,800 MT
Chana,Urad,Wheat NCDEX 30,000 MT
Sugar M NCDEX 10,500 MT
Guar gum NCDEX 1,37,000 MT
Medium staple cotton NCDEX 1,500 bales
Regulation
Brokers/Traders
Exchanges
Forwards M arket C om m ision
M in istry O f C onsum er A ffa irs
The Potential-AGRO ECONOMY• Constitutes 22% of GDP
• Provides food to 1Billion people
• Sustains 65% of the population : helps alleviate poverty
• Produces 51 major Crops
• Provides Raw Material to Industries
• Contributes to 1/6th of the export earnings.
Participants
Hedgers Arbitragers Investors
Gain from price
differentials
Individuals
Actively Managed FundsProducer
User
Importer
Exporter
The Commodity Hedger
• Risks faced by Commodity Users and Producers
• Price Volatility
• Types of Hedges
• Corporates currently benefitting from the market
Risks faced by Commodity Users and Producers
Commodity enterprises faces two types of Risks
• PRICE RISK• QUANTITY 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.
Wheat
730
750
770
790
810
830
850
870
6/7/20
04
9/7/20
04
07/13/
2004
07/16/
2004
07/20/
2004
07/23/
2004
07/27/
2004
07/30/
2004
3/8/20
04
6/8/20
04
10/8/2
004
08/13/
2004
08/17/
2004
08/20/
2004
08/24/
2004
08/27/
2004
08/31/
2004
3/9/20
04
7/9/20
04
10/9/2
004
09/14/
2004
09/17/
2004
Date
Price
/ Q
tl
12% 12% RiseRise
13% 13% FallFall
Sugar M-30 (NCDEX)
1550
1600
1650
1700
1750
1800
1850
1900
1950
2000
11/01/2004 11/16/2004 11/30/2004 12/14/2004 12/30/2004 01/13/2005 01/28/2005Date
Pric
e / Q
tl
23.66 % Rise
Types of HedgesLong hedge
Hedge against increase in cotton prices(e.g. Textile
companies)
Short hedge
Hedge against decrease in prices(e.g.Steel ,Rubber,Oil
producers)
Commodity – Tool of HedgingWheat
Physical Stock 200 Tons @ 750/qtl
Price down to 680/qtl
Loss of Rs. 70/qtl
200 tons sold in Futures @ 800/qtl
Settlement at 680qtl
Profit of Rs. 120qtl
Profit of Rs 50 qtl
Corporates currently benefitting from the market
Portfolio DiversificationCorrelation Coefficient in the Indian Markets
GOLD SILVER STOCKS BONDS
GOLD 1 0.89 0.206 0.741
SILVER 1 -0.099 0.146
STOCKS 1 0.112
BONDS 1
• Diversification reduces risk
• Downside risk is limited -Residual Value
Types of Arbitrage
• Calendar Spread Arbitrage
• Inter exchange Spread Arbitrage
• International Spread Arbitrage
• Spot Future Arbitrage
Calendar Spread Arbitrage• Exploiting the convergence of price between two contract.
• Example -
Chana 20 Dec05 1900 1901
Chana 20 Jan05 1954 1955Spread between the two contract months is 53
On expiry -
Chana 20 Dec05 1910 1911
Chana 20 Jan05 1912 1913
Spread between the two contract months is 2
International Spread Arbitrage• Prices in India are derived from International prices.
• Exploiting the mismatch in parity
NYMEX Crude 60.35
INR 46.23
Fair Value (Rs.) 2790
MCX Crude (Rs.) 2820
Difference 30
Spot – Future arbitrage• Steps in Arbitrage Process
•1) Spot Purchase and spontaneous future sale
•2) Goods warehoused within 4 to 5 days and payment to
• Supplier towards spot purchase
•3) Goods certified in next 5 days
•4) Goods dematerlization in next 2 days
•5) Delivery on the expiry of Future Contract
•6) Release of Client fund along with his profit.
Obligation of Client
No taxation obligation (Sales Tax etc.) is being done on part of client. We have our sales tax registration at every state in name of Navratan Comdex Pvt Ltd. So whatever are the taxation formalities, we will complete on behalf of client.
Risk Parameter
No risk is involved in spot future arbitrage since profit in the arbitrage sauda is locked at its initiation itself. There might be a slight diversion of Annualized Approximate Return due to uncontrolled upward move of commodity prices since we have to call MTM Loss Money for the time prices come down again. But the absolute amount of profit will not be changed anyhow.
Formalities
If a client wants to do arbitrage, client has to open a Trading Account and a Demat Account with us. Trading Account is required to initiate futures sauda and Demat Account is necessary to get demat goods in client account. Except this no other obligation is due on client part.
Investment
Client has to pay his purchase cost of goods along with all expenses (warehousing charges, spot commission, our commission, we will incur on his behalf. The client will pay further, specified margin for the future sale sauda.
Milestones achieved• NCDEX unveils India's first agriculture index.
• NCDEX peak daily turnover of 4271cr.
• MCX clocks record volume in Crude Oil contracts. Peak Daily Volume of 9,26,500 Barrels
• MCX registered 602kgs of physical deliveries of GOLD february contract
Sample Contract SpecificationSpecifications GOLD SUGAR
Trading unit 1 kg 10MT
Quotation/Base Value
Rs/10gms Rs/100kg
Market Price Rs 7760 Rs 1800
Lot Value Rs 776000 Rs 180000
Total Margin * 5% 10%
Delivery unit 1 kg 10 MT
* Margin is changed from time to time depending upon volatility ,time to expiry etc.
Client Registration Form (CRF) • Individual / HUF
Documents Required• Photo with signature across.• Name , Address, Tel. No.• Birth Date & Occupation.• Bank A/c details• IT PAN No. or 49A / Form 60• Introducer’s Name &
Signature• Signature of Client• Manager (Person in charge)
Signature
• Non –Individual --Company/ Firms/ Trust
Documents Required• Certified true copy of Board Resolution• Certified true copy of Audited Final A/cs
for the latest year.• Copy of IT Return, if possible• Certified true copy of MOA/ AOA /
Partnership Deed / Trust Deed• Details of 2 key persons
* Photo with signature across* Name, Address, Tel. No.* Birth Date & Designation* Copy of any one of the specified documents* Signature of key person.
The Edge• Early movers in the commodities business• Integrated wealth management solutions across
global financial markets• Propriety Global economic and investment strategy
research• Sophisticated asset allocation and risk modeling
processes• Seasoned team of professionals• Local strength –Underpinned by network of national
offices• Multiple dealing terminals for better Client servicing