Parm(Project).Doc 22

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At

MANOHAR CHAWDHARI AND ASSOCIATION

(CHARTED ACCOUNTED), BANGLORE

Submitted in partial fulfillment of the requirements of

Master of Business Administration

Submitted to:

Punjab Technical UniversityJalandhar

Submitted By:

PARMJEET KUMAR SINGH

Registration No- 9212400130

Under the guidance of

Prof. Amit Kanjilal

#70, 2nd Main Road, 3rd Cross, Kanaka Nagar, Nagawara,BANGALORE 560 032

2009 11

Analysis of

Indian Commodity Market


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DECLARATION

I hereby declared that this project titled Analysis of Indian Commodity Market is

submitted to the Punjab Technical University as a partial requirement for the award of

Degree ofMaster of Business Administration, during the year2009-2011.

It is the record of an original & independent study carried out by me, under the able

guidance and supervision ofProf. Amit Kanjilal ofInternational Institute of Business

Studies, Bangalore. This project report has not been submitted earlier by me or by

anybody else for the award of any other degree in any University in India or abroad.

Date: Signature

Place: (Parmjeet Kumar Singh)


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ACKNOWLEDGEMENT

I take this opportunity to extend my sincere gratitude to the respondents who gave all the

support and had been cooperative in providing all the valuable required information

without which I would not have completed my report.

I would also like to thank Prof. Amit Kanjilal internal guide for the constant guidance,

encouragement and motivation they extended throughout the study.

I also thank my parents and friends for their co-operation, support and

encouragement extended throughout the study.

Date:Place: Parmjeet Kumar Singh


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EXECUTIVE SUMMARY

Different web based literature has been studied to understand which are the major players

of commodity markets in the world? And what is their way of operation? Which are the

major commodity exchanges in India? What is their modus operandi?

While we were surveying various web site we came to know the whole commodity

market and the exchange takes place in this market is broadly classify into two principle

categories that is agriculture and non agriculture commodity market.

The first session deals with the significance of commodity market. As commodity market

is the place where 2 parties agree to buy and sell a specified and standardized quantity of

a commodity at a certain time of future at a price agreed upon at the time of agreement

agreed upon irrespective of availing future price.

Following the significance of commodity market is the history of the commodity market.

The root of commodity market is traced from Japan where Japanese merchants used to

store rice in ware houses and later on they have issued Rice tickets . And as the time

passes rice tickets are started to accepted as a currency.

Patterns of exchange that was prevailing in the market which was auction and the pattern

that is currently prevailing in the market which is future is discussed. Major international

and national players are described.Various national and international markets and their features in brief are described. The

perspective of commodity market in which active and passive mode of commodity

market, volatility, liquidity of commodity market and their relation with economy are

discussed.

Benefits of future commodity markets to agriculturists, farmers are discussed in brief

along with price discovery, price risk management, import-export competitiveness,

improved product quality-market transparency etc. are discussed. The attractive features

of commodity market, various instruments those are available in the market are listed.


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Chapter 1

Introduction to Commodity Market

INTRODUCTION

Organized futures markets in India are now 134 years old, with the first such

organization the Bombay Cotton Trade Association Ltd. been set up in 1875. While

India was gradually becoming the largest consumer of gold in the world, a position it still

enjoys, futures markets in bullion were inevitable and began to emerge in Mumbai in

1920.

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. India Commodity

Market can be subdivided into the following two categories:

Wholesale Market

Retail Market

Considering the present growth rate, the total valuation of the Indian Retail Market is

estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely

to become four times by 2010 than what it was in 2009.

MARKET A market is conventionally defined as a place where buyers and sellers meet

to exchange goods or services for a consideration. This consideration is usually money.

In an Information Technology-enabled environment, buyers and sellers from different

locations can transact business in an electronic marketplace. Hence the physical

marketplace is not necessary for the exchange of goods or services for a consideration.

COMMODITY A commodity is a product that has commercial value, which can be

produced, bought, sold, and consumed. Commodities are basically the products of the


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primary sector of an economy. The primary sector of an economy is concerned with

agriculture and extraction of raw materials such as metals, energy (crude oil, natural gas),

etc., which serve as basic inputs for the secondary sector of the economy.

COMMODITY EXCHANGE

A commodity exchange is an association, a company, or any other body corporate

organizing futures trading in commodities for which license has been granted by

regulating authority.

COMMODITY FUTURES

A Commodity futures is an agreement between two parties to buy or sell a specified and

standardized quantity of a commodity at a certain time in future at a price agreed upon at

the time of entering into the contract on the commodity futures exchange. The need for a

futures market arises mainly due to the hedging function that it can perform. Commodity

markets, like any other financial instrument, involve risk associated with frequent price

volatility. The loss due to price volatility can be attributed to the following reasons:

Consumer Preferences: - In the short-term, their influence on price volatility is small

since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their

inventory in advance.

Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations

in prices. This can especially noticed in agricultural commodities where the weather

plays a major role in affecting the fortunes of people involved in this industry. The

futures market has evolved to neutralize such risks through a mechanism; namely

hedging.

Commodity Future is a very important instrument in hedging risks, which arises in the

spot market. Speculators and hedgers use Commodity Futures to reduce the risks.

The spot prices so determined, may not be profitable to the person who is dealing with

that particular commodity. With the help of Futures, he can reduce this risk, by entering

into a contract to sell a particular commodity at a future date, at a pre-determined price.


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But, by doing so he still is not free from risk. The contract so entered into may lose its

value due to external factors. So, there is a very important and genuine need to effective

management of the contract through various risk management techniques.

The objectives of Commodity futures: -

Hedging with the objective of transferring risk related to the possession of

physical assets through any adverse moments in price. Liquidity and Price

discovery to ensure base minimum volume in trading of a commodity through

market information and demand supply factors that facilitates a regular and

authentic price discovery mechanism.

Maintaining buffer stock and better allocation of resources as it augments

reduction in inventory requirement and thus the exposure to risks related with

price fluctuation declines. Resources can thus be diversified for investments.

Flexibility, certainty and transparency in purchasing commodities facilitate bank

financing. Predictability in prices of commodity would lead to stability, which in

turn would eliminate the risks associated with running the business of trading

commodities. This would make funding easier and less stringent for banks to

commodity market players.


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Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic price discovery and

an efficient price risk management. The beneficiaries include those who trade in the

commodities being offered in the exchange as well as those who have nothing to do with

futures trading. It is because of price discovery and risk management through the

existence of futures exchanges that a lot of businesses and services are able to function

smoothly.

1. 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.

2. 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.

3. 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.

4. Predictable Pricing: - The demand for certain commodities is highly price

elastic. The manufacturers have to ensure that the prices should be stable in order

to protect their market share with the free entry of imports. Futures contracts will

enable predictability in domestic prices.


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5. 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

6. Credit accessibility: - The absence of proper risk management tools would

attract the marketing and processing of commodities to high-risk exposure making

it risky business activity to fund.

Improved product quality: - The existence of warehouses for facilitating delivery with

grading facilities along with other related benefits provides a very strong reason to

upgrade and enhance the quality of the commodity to grade that is acceptable by the

exchange.

Statement of the problem

Commodity Future is a very important instrument in hedging risks, which arises in the

spot market. Speculators and hedgers use Commodity Futures to reduce the risks.

The spot prices so determined, may not be profitable to the person who is dealing with

that particular commodity. With the help of Futures he can reduce this risk, by entering

into a contract to sell a particular commodity at a future date, at a pre-determined price.

But, by doing so he still is not free from risk. The contract so entered into may lose its

value due to external factors. So, there is a very important and genuine need to effective

management of the contract through various risk management techniques.

By using the various tools, a sound investment can be made and benefit from the price

movement. But the problem lies in the fact that there are various other investment

opportunities for an investor. And also another factor that little price movements can

result in huge losses. So, why should anyone trade in commodity future.


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COMMODITY MARKETS OF WORLD

Some of the exchanges of the world are:

S. No. Global Commodity Exchanges

1 New York Mercantile Exchange (NYMEX)

2 London Metal Exchange (LME)

3 Chicago Board of Trade (CBOT)

4 New York Board of Trade (NYBOT)

5 Kansas Board of Trade

6 Winnipeg Commodity Exchange, Manitoba

7 Dalian Commodity Exchange, China

8 Bursa Malaysia Derivatives exchange

9 Singapore Commodity Exchange (SICOM)

10 Chicago Mercantile Exchange (CME), US

11 London Metal Exchange

12 Tokyo Commodity Exchange (TOCOM)

13 Shanghai Futures Exchange

14 Sydney Futures Exchange

15 London International Financial Futures and Options Exchange (LIFFE)

16 Dubai Gold & Commodity Exchange (DGCX)

17 Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and the

New York Mercantile Exchange (NYMEX))


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OBJECTIVES OF THE STUDY

The objective of this study is mainly to prove that commodity futures can be used as a

risk reduction instrument and also as an investment opportunity. In order to do so, the

following are the sub-objectives.

1. To study the Indian commodity Market with International commodity market

2. To study the growth of commodity futures trading

3. To study the perception of investors of commodity futures (questionnaire)


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Chapter-2

Research Design and Implementation

METHODOLOGY OF RESEARCH

In this study primary analytical research method is used, which includes

questionnaire, tabulation an analysis. This is one of the most import methods.

SAMPLE DESIGN

In this study convenient random sampling method is used to select the respondents.The sample size is 25 respondents.

SOURCES OF DATA

The various sources of data are

1. Primary Sources, which includes questionnaire, and a survey.

2. Secondary sources

TOOLS FOR DATA COLLECTION

The questionnaire is the tool used for data collection.

ANALYSIS AND INTERPRETATION

The various tools for analysis used are graphs, charts, percentage growth, secondary data.


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LIMITATIONS OF THE STUDY

The following are the limitations of the study

Due to non-availability of sufficient time and money, a detailed study could not

be made.

The research is confined to Bangalore only.

The sample size taken is 25 only.


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Chapter-3

Review of Literature

COMMODITIES TRADED IN INDIA

I have gone through plenty of articles before conducting survey, some of the

glimpse are:

History of Commodity Market in India:-

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

were detrimental 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


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and 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.

Commodity exchange in India plays an important role where the prices of any

commodity are not fixed, in an organized way. Earlier only the buyer of produce and its

seller in the market judged upon the prices. Others never had a say.

Today, commodity exchanges are purely speculative in nature. Before

discovering the price, they reach to the producers, end-users, and even the retail

investors, at a grassroots level. It brings a price transparency and risk management in the

vital market.

INTERNATIONAL COMMODITY EXCHANGES

Futures trading is a result of solution to a problem related to the

maintenance of a year round supply of commodities/ products that are seasonal as is thecase of agricultural produce. The United States, Japan, United Kingdom, Brazil,

Australia, Singapore are homes to leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX):-

The New York Mercantile Exchange is the worlds biggest exchange for

trading in physical commodity futures. It is a primary trading forum for energy products

and precious metals. The exchange is in existence since last 132 years and performs

trades trough two divisions, the NYMEX division, which deals in energy and platinum

and the COMEX division, which trades in all the other metals.

Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline,

RBOB Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum,

Palladium, etc.


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London Metal Exchange:-The London Metal Exchange (LME) is the worlds

premier non-ferrous market, with highly liquid contracts. The exchange was formed in

1877 as a direct consequence of the industrial revolution witnessed in the 19 th century.

The primary focus of LME is in providing a market for participants from non-ferrous

based metals related industry to safeguard against risk due to movement in base metal

prices and also arrive at a price that sets the benchmark globally. The exchange trades 24

hours a day through an inter office telephone market and also through a electronic trading

platform. It is famous for its open-outcry trading between ring dealing members that

takes place on the market floor.

Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum

Alloy, North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear

Low Density Polyethylene, etc.

The Chicago Board of Trade:- The first commodity exchange established in the

world was the Chicago Board of Trade (CBOT) during 1848 by group of Chicago

merchants who were keen to establish a central market place for trade. Presently, the

Chicago Board of Trade is one of the leading exchanges in the world for trading futures

and options. More than 50 contracts on futures and options are being offered by CBOT

currently through open outcry and/or electronically. CBOT initially dealt only in

Agricultural commodities like corn, wheat, non storable agricultural commodities and

non-agricultural products like gold and silver.

Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol,

Rough Rice, Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM):- The Tokyo Commodity Exchange

(TOCOM) is the second largest commodity futures exchange in the world. It trades in to

metals and energy contracts. It has made rapid advancement in commodity tradingglobally since its inception 20 years back. One of the biggest reasons for that is the

initiative TOCOM took towards establishing Asia as the benchmark for price discovery

and risk management in commodities like the Middle East Crude Oil. TOCOMs recent

tie up with the MCX to explore cooperation and business opportunities is seen as one of

the steps towards providing platform for futures price discovery in Asia for Asian players


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in Crude Oil since the demand-supply situation in U.S. that drives NYMEX is different

from demand-supply situation in Asia.

Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum,

Aluminum, Rubber, etc

Chicago Mercantile Exchange:- The Chicago Mercantile Exchange (CME) is the

largest futures exchange in the US and the largest futures clearing house in the world for

futures and options trading. Formed in 1898 primarily to trade in Agricultural

commodities, the CME introduced the worlds first financial futures more than 30 years

ago. Today it trades heavily in interest rates futures, stock indices and foreign exchange

futures. Its products often serves as a financial benchmark and witnesses the largest open

interest in futures profile of CME consists of livestock, dairy and forest products and

enables small family farms to large Agri-business to manage their price risks. Trading in

CME can be done either through pit trading or electronically.

Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen

pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate,

etc

COMMODITIES TRADED IN INDIA


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EXHIBIT 5.1 COMMODITIES IN WHICH FUTURES TRADING IS BEING

CONDUCTED IN INDIA.

Chapter 5


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How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade, in which onepays cash and carries away the goods. The second is futures trade. The underpinning forfutures is the warehouse receipt. A person deposits certain amount of say, good X in awarehouse and gets a warehouse receipt. Which allows him to ask for physical deliveryof the good from the warehouse? But some one trading in commodity futures need notnecessarily posses such a receipt to strike a deal. A person can buy or sale a commodityfuture on an exchange based on his expectation of where the price will go. Futures havesomething called an expiry date, by when the buyer or seller either closes (square off) hisaccount or give/take delivery of the commodity. The broker maintains an account of alldealing parties in which the daily profit or loss due to changes in the futures price isrecorded. Squiring off is done by taking an opposite contract so that the net outstanding isnil.

For commodity futures to work, the seller should be able to deposit thecommodity at warehouse nearest to him and collect the warehouse receipt. The buyershould be able to take physical delivery at a location of his choice on presenting thewarehouse receipt. But at present in India very few warehouses provide delivery forspecific commodities.

Following diagram gives a fair idea about working of the Commodity market.

Today Commodity trading system is fully computerized. Traders need notvisit a commodity market to speculate. With online commodity trading they could sit inthe confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stagesas follows:

I. Trading: - At this stage the following is the system implemented-


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- Order receiving

- Execution

- Matching

- Reporting

- Surveillance

-Price limits

- Position limits

II. Clearing: - This stage has following system in place-- Matching- Registration

- Clearing

- Clearing limits

- Notation

- Margining

-

Price limits- Position limits

- Clearing house.

III. Settlement: - This stage has following system followed as follows-- Marking to market

- Receipts and payments

- Reporting

- Delivery upon expiration or maturity.


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Chapter 6

How to invest in a Commodity Market?

With whom investor can transact a business?

An investor can transact a business with the approved clearing member of previously

mentioned Commodity Exchanges. The investor can ask for the details from the

Commodity Exchanges about the list of approved members.

What is Identity Proof?

When investor approaches Clearing Member, the member will ask for identity proof.

For which Xerox copy of any one of the following can be given

a) PAN card Number

b) Driving License

c) Vote ID

d) Passport

What statements should be given for Bank Proof?

The front page of Bank Pass Book and a canceled cheque of a concerned bank.

Otherwise the Bank Statement containing details can be given.

What are the particulars to be given for address proof?

In order to ascertain the address of investor, the clearing member will insist on Xerox

copy of Ration card or the Pass Book/ Bank Statement where the address of investor is

given.

What are the other forms to be signed by the investor?

The clearing member will ask the client to sign

a) Know your client form

b) Risk Discloser Document


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The above things are only procedure in character and the risk involved and only after

understanding the business, he wants to transact business.

What aspects should be considered while selecting a commodity broker?

While selecting a commodity broker investor should ideally keep certain aspects in mind

to ensure that they are not being missed in any which way. These factors include

Net worth of the broker of brokerage firm.

The clientele.

The number of franchises/branches.

The market credibility.

The references.

The kind of service provided- back office functioning being most important.

Credit facility.

The research team.

These are amongst the most important factors to calculate the credibility of

commodity broker.

Broker:-

The Broker is essentially a person of firm that liaisons between individual traders and the

commodity exchange. In other words, the Commodity Broker is the member of

Commodity Exchange, having direct connection with the exchange to carry out all trades

legally. He is also known as the authorized dealer.

How to become a Commodity Trader/Broker of Commodity Exchange?

To become a commodity trader one needs to complete certain legal and binding

obligations. There is routine process followed, which is stated by a unit of Government

that lays down the laws and acts with regards to commodity trading. A broker of

Commodities is also required to meet certain obligations to gain such a membership in

exchange.


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To become a member of Commodity Exchange the broker of brokerage firm

should have net worth amounting to Rs. 50 Lakh. This sum has been determined by Multi

Commodity Exchange.

How to become a Member of Commodity Exchange?

To become member of Commodity Exchange the person should comply with

the following Eligibility Criteria.

1. He should be Citizen of India.

2. He should have completed 21 years of his age.

3. He should be Graduate or having equivalent qualification.

4. He should not be bankrupt.

5. He has not been debarred from trading in Commodities by statutory/regulatory

authority,

There are following three types of Memberships of Commodity Exchanges.

Trading-cum-Clearing Member (TCM):-

A TCM is entitled to trade on his own account as well as on account of his clients, and

clear and settle trades himself. A sole proprietor, Partnership firm, a joint Hindu

Undivided Family (HUF), a corporate entity, a cooperative society, a public sector

organization or any other Government or non-Government entity can become a TCM.

There are two types of TCM, TCM-1 and TCM-2. TCM-1 refers to

transferable non-deposit based membership and TCM-2 refers to non-transferable deposit

based membership.

A person desired to register as TCM is required to submit an application as per

the format prescribed under the business rules, along with all enclosures, fee and other

documents specified therein. He is required to go through interview by Membership

Admission Committee and committee is also empowered to frame rules or criteria

relating to selection or rejection of a member.


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Institutional Trading-cum-clearing Member (ITCM):-

Only an Institution/ Corporate can be admitted by the Exchange as a member,

conferring upon them the right to trade and clear through the clearing house of exchange

as an Institutional Trading-cum-clearing Member (ITCM). The member may be allowed

to make deals for himself as well as on behalf of his clients and clear and settle such

deals. ITCMs can also appoint sub-brokers, authorized persons and Trading Members

who would be registered as trading members.

Professional Clearing Member (PCM):-

A PCM entitled to clear and settle trades executed by other members of the

exchange. A corporate entity and an institution only can apply for PCM. The member

would be allowed to clear and settle trades of such members of the Exchange who choose

to clear and settle their trades through such PCM.

Membership Details for NCDEX:-

Trading-cum-clearing Member: - TCM

Sr.

No.Particulars NCDEX: TCM

1Interest Free Cash SecurityDeposit

15.00 Lakhs

2 Collateral Security Deposit 15.00 Lakhs3 Admission Fee 5.00 Lakhs

4 Annual Membership Fees 0.50 Lakhs

5Advance MinimumTransaction Charges

0.50 Lakhs

6 Net worth Requirement 50.00 Lakhs

Professional Clearing Membership: - PCM

Sr.

No.Particulars NCDEX: PCM

1Interest Free Cash Security

Deposit25.00 Lakhs

2Collateral Security Deposit

25.00 Lakhs

3Annual SubscriptionCharges

1.00 Lakhs

4Advance MinimumTransaction Charges

1.00 Lakhs

5 Net worth Requirement 5000.00 Lakhs


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Membership Details for MCX:

Category

Admissi

on

Fees

Initial

Security

Deposit

Annual

Subscription

Net worth Criteria

CorporatePartnershi

pIndividual

TCM-1Rs. 10Lakhs

Rs. 15Lakhs

Rs 50,000Rs 50Lakhs

Rs. 50Lakhs

Rs. 50Lakhs

TCM-2Rs. 5Lakhs

Rs. 50Lakhs

Rs 50,000Rs. 50Lakhs

Rs. 50Lakhs

Rs. 50Lakhs

ITCMRs. 10Lakhs

Rs. 50Lakhs

Rs 50,000Rs. 50Lakhs

N.A. N.A.

PCM NilRs. 50Lakhs

Rs 1,00,000Rs.5Crores

N.A. N.A.


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Chapter-7

Current Scenario in Indian Commodity Market

1 CURRENT SCENARIOThe growth paradigm of Indias commodity markets is best reflected by the figures from

the regulators official website, which indicated that the total value of trade on the

commodity futures market in the financial year 2008/09 was INR52.49 lakh crore (over

US$1 trillion) as against INR 40.66 lakh crore in the preceding year, registering a growth

of 29.09%, even under challenging economic conditions globally.

The unqualified success of the futures market has ensured the next step, i.e., the launch of

electronic spot markets for agro-products. Being in a time-zone that falls in the gap left

by the major commodity exchanges in the US, Europe and Japan has also worked in

Indias favour because commodity business by its very nature is a 24/7 business.

Innovation coupled with modern and successful financial market environment has

ensured the beginning of a success story in commodities, which will eventually see India

becoming a price-setter in major commodities on the strength of its large production and

consumption.

Need of Commodity Derivatives for India:-

India is among top 5 producers of most of the Commodities, in addition to being a

major consumer of bullion and energy products. Agriculture contributes about 22% GDP

of Indian economy. It employees around 57% of the labor force on total of 163 million

hectors of land Agriculture sector is an important factor in achieving a GDP growth of 8-

10%. All this indicates that India can be promoted as a major centre for trading of

commodity derivatives.


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Trends in volume contribution on the three National Exchanges:-

Pattern on Multi Commodity Exchange (MCX):-

MCX is currently largest commodity exchange in the country in terms of tradevolumes, further it has even become the third largest in bullion and second largest in

silver future trading in the world.

Coming to trade pattern, though there are about 100 commodities traded on MCX,

only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per

recent data the largely traded commodities are Gold, Silver, Energy and base Metals.

Incidentally the futures trends of these commodities are mainly driven by international

futures prices rather than the changes in domestic demand-supply and hence, the price

signals largely reflect international scenario.

Among Agricultural commodities major volume contributors include Gur, Urad,

Mentha Oil etc. Whose market sizes are considerably small making then vulnerable to

manipulations.

Pattern on National Commodity & Derivatives Exchange (NCDEX):-

NCDEX is the second largest commodity exchange in the country after MCX.

However, the major volume contributors on NCDEX are agricultural commodities. But,

most of them have common inherent problem of small market size, which is making them

vulnerable to market manipulations and over speculation. About 60 percent trade on

NCDEX comes from guar seed, chana and Urad (narrow commodities as specified by

FMC).

Pattern on National Multi Commodity Exchange (NMCE):-

NMCE is third national level futures exchange that has been largely trading in

Agricultural Commodities. Trade on NMCE had considerable proportion of commodities

with big market size as jute rubber etc. But, in subsequent period, the pattern has changed

and slowly moved towards commodities with small market size or narrow commodities.


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Analysis of volume contributions on three major national commodity exchanges

reveled the following pattern,

Major volume contributors: - Majority of trade has been concentrated in few

commodities that are

Non Agricultural Commodities (bullion, metals and energy)

Agricultural commodities with small market size (or narrow commodities) like

guar, Urad, Mentha etc.

Trade strategy:-

It appears that speculators or operators choose commodities or contracts where the

market could be influenced and extreme speculations possible.

In view of extreme volatilities, the FMC directs the exchanges to impose

restrictions on positions and raise margins on those commodities. Consequently, the

operators/speculators chose another commodity and start operating in a similar pattern.

When FMC brings restrictions on those commodities, the operators once again move to

the other commodities. Likewise, the speculators are moving from one commodity to

other (from methane to Urad to guar etc) where the market could be influenced either

individually or with a group.

Beneficiaries: - So far the beneficiaries from the current nature of trading are

Exchangers: - making profit from mounting volumesArbitragers

Operators


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In order to understand the extent of progress the trading the trading in Commodity

Derivatives has made towards its specified objectives (price discovery and price risk

management), the current trends are juxtaposed against the specifications.

Thus it is evident that the realization of specified objectives is still a distinct destination.

It is further, evident from the nature of the commodities largely traded on national

exchanges that the factors driving the current pattern of futures trade are purely

speculative.

Reasons for prevailing trade pattern:-

No wide spread participation of all stake holders of commodity markets. The actual

benefits may be realized only when all the stake holders in commodity market including

producers, traders, consumers etc trade actively in all major commodities like rice, wheat,

cotton etc.

Some Suggestions to make futures market as a level playing field for all

stake holders:-

Creation of awareness among farmers and other rural participants to use the

futures trading platform for risk mitigation.

Contract specifications should have wider coverage, so that a large number

of varieties produced across the country could be included.

Warehousing and logistics management structure also needs to be created at

state or area level whenever commodity production is above a certain share

of national level.

Though over 100 commodities are allowed for Derivatives trading, in

practice only a few commodities derivatives are popular for trading. Again

most of the trade takes place only on few exchanges. This problem can

possibly solved by consolidating some exchanges.

Only about 1% to 5% of total commodity derivatives traded in country are

settled in physical delivery due to insufficiencies in present warehousing


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system. As good delivery system is the back bone of any Commodity trade,

warehousing problem has to be handled on a war footing.

A difficult problem in Cash settlement of Commodities Derivatives contract

is that, under Forward Contracts Regulation Act 1952 cash settlement of

outstanding contracts at maturity is not allowed. That means outstanding

contracts at maturity should be settled in physical delivery. To avoid this

participants square off their their positions before maturity.


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Chapter 8

Steel Commodities

General Characteristics: -

Steel is an alloy of iron and carbon, containing less than 2% carbon, 1%

manganese and small amount of silicon, phosphorus, sulphur and oxygen. Steel is most

important engineering and construction material in the world. It is most important, multi

functional and the most adaptable of materials. Steel production is 20 times higher a

compared to production of all non-ferrous metals put together.

Steel compared to other materials of its type has low production costs. The

energy required for extracting iron from ore is about 25% of what is needed for extracting

aluminum.

There are altogether about 2000 grades of steel developed of which 1500

grades are high-grade steels. The large number of grades gives steel the characteristics of

basic production material.

Categories of Steel: -

Steel market is primarily divided in to two main categories- flat and long. A flat

carbon steel product is a plate product or a (hot or cold) rolled strip product. Plate

products vary in dimensions from 10 mm to 200 mm and thin flat rolled products from 1

mm to 10 mm. Plate products are sed for ship building, construction, large diameter

welded pipes and boiler applications. Thin flat products find end use applications in

automotive body panels, domestic white goods products, tin cans and the whole host

of other products from office furniture to heart pacemakers. Plates, HR coils and HR

Sheet, CR Sheet and CR coils, GP/GC (galvanized plates and coils) pipes etc. are

included in this category.

A long steel product is a road or a bar. Typical rod product are the reinforcing

rods made from sponge iron for concrete, ingots, billets, engineering products, gears,


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goods and raw materials, since liberalization for the growth and development of Indian

iron & steel industry.

After liberalization India has seen huge scale addition to its steel making capacity.

The country faces shortage of iron and steel materials.

Factors Influencing Demand & Supply of Steel Long and Steel Flate:-

The demand for steel is dependent on the overall health of the economy and the in

fracture development activities being undertaken. The steel prices in the Indian market

primarily depend on the domestic demand and supply conditions, and international

prices. Government and different producer and consumer associations regularly monitor

steel prices.

The duty imposed on import of steel and its fractions also have an impact on steel

prices. The price trend in steel in Indian markets has been a function of Worlds

economic activity. Prices of input materials of iron and steel such as power tariff, fright

rates and coal prices, also contribute to the rise in the input costs for steel making.


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Contract specifications of Steel LongSymbol STEELLONG

Description STEELLONGMMMYY

Trading Period Mondays through Saturdays

Trading session Monday to Friday:1st session: 10.00 am to 5.00 pm2nd session: 5.30 pm to 8.00 pmSaturday: 10.00 am to 2.00 pm

No. of contracts a year 12

Contact Duration 4 months

Trading

Trading unit 15 MTPrice Quote Rs./ton, Ex- Mandi Gobindgarh (including excise

duty but excluding sales tax).

Maximum order size 300 MT

Tick size (minimumPrice movement)

Rs. 10

Daily price limits 4%

Initial margin 5%

Special margin In case of additional volatility, a special margin of 2% or such other percentage, as deemed fit, will beimposed immediately on, both buy and sale side in

respect of all outstanding position, which will remainin force of next three days, after which the specialmargin will be relaxed.

Maximum Allowable OpenPosition

For individual clients: 1,00,000 MTFor a member collectively for all clients:25% of open market position.

Delivery

Delivery unit 15 MT with tolerance limitBetween 13.5 MT to 16.5 MT

Delivery Center(s) Warehouses at Mandi Gobindgarh

Quality Specifications

Mild steels ingots 3 * 4 inchCarbon composition: Below 0.25%Manganese: Above 0.45%Material should be physically sound. It should have no hollowness, no piping norising. Its surface should be plain.

Quality Specifications: -


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Sponge Iron Futures

Sponge Iron Lumps

Chemical Properties (only Magnetic Portion): -

Degree of Metallization: 88 +/- 2%.

Total Iron: 91%.

Carbon: 0.2% to 0.3%.

Sulphur: 0.05% Max.

Phosphorus: 0.06 Max.

Sio2 + Al2o3: 6% or Max.

Char & other process Contaminants: 1% Max.

Size: 3 to 20 mm

Undersize arising during tailings (-3mm): 5% Max

Steel Flat: -

HR Coil confirming to the following specification: -

Thickness 2mm

Width either 1250 mm or 910 mm at sellers option.

It should confirm to IS 11513 Grade D/ SALE 1008 (international equivalent)

Delivery is acceptable only in coil form.

Steel Long (Bhavnagar): -

Mild steel ingots 3 * 4 inch.

Carbon composition: Below 0.25%

Manganese: Above 0.45%

Material should be physically sound. It should have no hollowness, no piping and

no rising. Its surface should be plain.

Steel Long (Govindgarh): -

Mild steel ingots 3 * 4 inch.

Carboncomposition: Below 0.25%

Manganese: Above 0.45%


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Material should be physically sound. It should have no hollowness, no piping and

no rising. Its surface should be plain.

WHEAT

Wheat is cereal grain and consumed worldwide. Wheat is more popular than any other

cereal grain for use in baked goods. Its popularity stems from the gluten that forms when

lour is mixes with water. Wheat is the most widely grown cereal grain in the world.

Global and Indian Scenario: -

The world wheat production in the recent years has been observed to be hovering

between 555 million tons to 625 million tons a year. The biggest cultivators of wheat are

EU 25, China, India, USA, Russia, Australia, Canada, Pakistan, Turkey and Argentina.

EU 25, China, India and US are the four largest producers account for around 60% of

total global production.

Worlds wheat consumption is continuously growing with growth in a

population, as it is one of the major staple foods across the world. The major consuming

countries of wheat are EU, China, India, Russia, USA and Pakistan. India has largest area

in the world under wheat. However, in terms of production, India is second largest behind

China. In India, Wheat is sown during October to December and harvested during March

to May. The wheat marketing season in India is assumed to begin from April every year.The major wheat producing states in India are Utter Pradesh, Punjab, Haryana, Madhya

Pradesh, Rajasthan and Bihar. Which together account for around 93% of total

production. In terms of productivity, Punjab stands first followed by Haryana, Rajasthan,

UP, Gujarat, Bihar and MP. Indian wheat is largely soft/medium hard, medium protein,

bread wheat. India is also produces around 1.5 million tons of durum wheat, mostly in

central and western India, which is not segregated and marketed separately. India

consumes around 72-74 million tons of Wheat every year. There are around 1000 large

flourmills in India, with a milling capacity of around 15 million tons. The total

procurement of wheat by Government agencies during last 15 years from 8 to 20 million

tons, accounting for only 15-20% of the total production. India exported around 5 million

tons subsidized by Government in 2004-05, as a result of surplus stock. Recently Govt.

took decision to import wheat in view of, declining stocks and increasing demand.


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Key market moving Factors: -

Price tends to be lower as harvesting progresses and produce starts coming in to the

market. At the time sowing and before harvesting price tend to rise in a view of tight

supply situation. Weather has profound influence on wheat production. Temperature

plays crucial role towards maturity of wheat and productivity.

Change in Minimum Support Price (MSP) by Govt. and the stock available with

Food corporation of India and the release from official stock influence of the price.

Though, international trade is limited, the ups and downs in the production and

consumption at all the major/minor producing and consuming nation dose influence the

long term price trend.

Contract specifications of Wheat

Contract Period Five Months

Trading Period Mondays through Saturdays

Trading session Monday to Friday:10.00 am to 5.00 pmSaturday:10.00 am to 2.00 pm

Trading

Trading unit 10 MT

Quotation based value 1 QuintalMaximum order size 500 MT

Tick size (minimumPrice movement)

10 Paise

Price Quotation Ex-warehouse Delhi (including all taxes, levies andsales tax/ VAT, as the case may be)

Daily price limits 4%

Initial margin 5%

Special margin In case of additional volatility, a special margin atsuch other percentage, as deemed fit will be imposedimmediately on, both buy and sale side in respect of

all outstanding position, which will remain in force ofnext 2 days, after which the special margin will be


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PERFORMANCE ANALYSIS OF INDIAN COMODITY

MARKET.

Futures contracts are available for major agricultural commodities, metals and

energy. Commodity group-wise value of trading since 2004-08 is given in Fig.

COMMODITY GROUP-WISE VALUE OF TRADE


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TRADING FROM APRIL 2007-MARCH 2010 IN UNIT

(AS PER MCX)


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VOLATILITY IN MONTHLY SPOT PRICE INDICES:

ESTIMATES OF STANDARD DEVIATIONS.


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STUDY THE PERCEPTION OF INVESTORS TOWARDS

COMMODITY FUTURES.

In this section the data obtained through the questionnaire from the investors in

commodity futures is analyzed.

SECTION A:

Sex profile

Sex No. of Respondents Percentage

Male 20 80%

Female 5 20%

Bar chart showing the Sex Profile of the

Respondents

100%80%

Percentage

80%

60%

40%

20%20%

0%

Male Female

Sex

Male Female

Findings

From the above table and chart, it can be seen that 80% of the respondents were

male, and 20% were female.

Interpretation

It can be concluded that mainly males invest in commodity futures.


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Age Profile

Age Group No. of Respondents Percentage

20-30 years 13 52%

30-40 years 6 24%

40-50 years 5 20%

50 years and above 1 4%

Pie chart showing the age profile of the

respondents

4%

20%

20-30 years

52%30-40 years

40-50 years

50 years and above

24%

Findings

From the above table and chart, it can be seen that 52% of the respondents were in

the age group of 20-30 years, 24% were in the age group of 30-40 years, and 20%

were in the age group of 40-50 years and 4% in the age group of 50 years and above.

Interpretation

It can be concluded that mainly the young people have invested commodity futures.


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Education profile:

Educational No. of Respondents Percentage

Qualification

Higher Secondary 0 0%

P.U.C 1 4%

Graduate 15 60%

Post Graduate 9 36%

Pie chart showing the education profile of the

respondents

0%

4%

36%Higher Secondary

60%

Findings

P.U.C

Graduate

PostGraduate


the age group of 20-30 years, 24% were in the age group of 30-40 years, 20% were

in the age group of 40-50 years and 4% in the age group of 50 years and above.

Interpretation

It can be concluded that mainly the young graduates have invested commodity

futures.


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Occupation Profile

Occupation No. of Respondents Percentage

Government Employee 1 4%

Private Sector 7 28%

Employee

Self-Employee 5 20%

Businessmen 12 48%

Commodity Futures 3 12%

Advisor

Others 0 0%

Pie chart showing the Occupation Profile of the respondents

0%Government Employee

12%4%

Private Sector Employee

28%

Self-Employee

Businessmen

48%

20%

Commodity Futures

Advisor

Others

Findings

From the above table and chart, it can be seen that 4% of the respondents were

government employees, 28% were private sector employee, 20% were Self-

Employed and 48% were businessmen, 12% were Commodity futures advisors.

InterpretationIt can be concluded that mainly the businessmen have invested

commodity futures.


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Income Profile

Income Group No. of Respondents Percentage

Below Rs. 4 Lakh 10 40%

Rs. 4 10 Lakh 14 56%

Rs. 10 25 Lakh 1 4%

Above Rs. 25 Lakh 0 0%

Pie chart showing the income profile of the

respondents

4% 0%

40%Below Rs. 4 Lakh

Rs. 4 10 Lakh

Rs. 10 25 Lakh

56%Above Rs. 25 Lakh

Findings


the income group of below Rs. 4 lakh, 56% were in the income group of Rs. 4-10

lakh, 56% were in the income group of Rs. 4-10 lakh and 4% were in the income

group of Rs. 10-25 lakh.

Interpretation

It can be concluded that most of the people who have invested commodity futures

are in the income group of Rs.4-10 lakh.


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SECTION B

1) Which are the investments you have made (excluding commodity

futures)?

Particulars No. of Respondents Percentage

Shares 16 35%

Mutual Funds 9 20%

Bonds 3 6%

Bank Deposits 5 10%

Real Estate 7 15%

jewellery 4 9%

Insurance 2 5%

Pie chart showing the various investments made by

respondents

9%5%

Shares

35%

MutualFunds

15 %Bonds

BankDeposits

Real Estate

10%jew ellery

6%Insurance

20%

Findings

It can be seen that, out of the respondents who have invested in other securities,

35% of them have invested in shares, 20% Mutual funds, 6% in Bonds, 10% have

invested in bank deposits. 15% in real estate, 9% have invested in jewellery and the

rest 9% have invested in insurance.

Interpretation


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It can be concluded that other than commodity futures, most of the respondents

have invested in shares.


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2) What is your Experience in your previous Investment (excluding

commodity futures)?


Good 13 52%

Bad 9 36%

Reasonable 2 8%

Bar chart showing the Experience of the respondents

in their previous investment

60% 52%

Percentage

50%

36%40%

30%

20%8%

10%

0%

Good Bad Reasonable

Particulars

Good Bad Reasonable

Findings

It can be seen that 52% of the respondents had a good experience in their previous

investment, 36% had a reasonable experience in their previous investment and 8%

had a bad experience in their previous investment.

InterpretationIt can be concluded that most of the respondents had a good experience in their

previous investment


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4) Which commodities have you traded in, the most?

Commodity No. ofRespondents Percentage

Coffee 6 9%

Cotton 5 7%

Pork Belly 3 5%

Orange juice 1 1%

Wheat 6 9%

Corn 5 7%

Soybean 10 15%

Silver 15 22%

Copper 9 12%

Lumber 6 9%

Palladium 1 1%

Platinum 2 3%

oats 2 3%

Pie chart showing the mostly traded commodities by

3%

the investorsCoffee

cotton3%

Pork Belly1%

9%Orange juice

9%7%

Wheat

5%

Corn

12%1%

Soybean

9%Silver

7%

CopperLumber

22%


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15%

Palladium

FindingsIt can be seen that out of the investors in commodity futures, 22% of them have

traded mostly in silver, 15% of them traded in soybean, 12% in copper, 9% each in

coffee, wheat and lumber, 7% each in Cotton Corn, 5% in Pork Belly, 3% each in

Oats and platinum, 1% each in Orange Juice and Palladium.

Interpretation

It can be concluded that the mostly traded commodity is Silver, followed by soybean

and copper.


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6) Which is the risk management technique, which you use mostly?


Switching 3 12%

Averaging 7 28%

Locking 12 48%

Cut Loss 3 12%

Bar chart showing the mostly used risk

management technique

60%

48%50%

percentage

40%28%

30%

20%12% 12%

10%

0%

Switching Averaging Locking Cut Loss

particulars

Switching Averaging LockingCut

Loss

Findings

It can be seen that out of the risk management techniques, 48% of the investors use

locking, 28% use switching and 12% use Cut loss technique.

InterpretationIt can be concluded that locking is the mostly used risk management technique.


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7) What percentage of savings have you invested in commodity

futures?


0-10% 2 8%

10-20% 8 32%

20-30% 11 44%

30-50% 1 4%

50% and above 3 12%

Pie chart showing the percentage of savings the

investors has made in commodity futures

12%8%

4% 0-10%

32%10-20%

20-30%

30-50%

44%

50% and

above

Findings

It can be seen that, 44% of the investors have invested between 20-30% of their

savings in commodity futures, 32% of them have invested between 10-20% of their

savings, 12% of them have invested above 50% of their savings, 8% of them have

invested between 0-10% of their savings and 4% of them have invested between 30-

50% of their savings.

Interpretation


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It can be concluded that most of the investors have invested between 20-30% of

their savings in commodity futures.

8) What do think about the felicitation fee charged by your company?


Very High 1 4%

High 5 20%

Reasonable 19 76%

Low 0 0%

Bar chart showing the investors perception towards the

facility fee charged by their company

80%76%

percentage 60%

40%20%

20%4%

0%0%

Very High High Reasonable Low

particulars

Very High High Reasonable Low

Findings

It can be seen that, 76% of the investors feel that the facility fee charged by their

company is reasonable, 20% of them feel that the facility fee charged by their

company is high and 4% of the investors feel that it is very high.

Interpretations

It can be concluded that most of the investors feel that the facility fee charged by

their company is reasonable.


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10) What do you think of the return derived from commodity futures?


Good 17 68%

Reasonable 6 24%

Bad 2 8%

Bar chart showing the extent of returns derived by the

investors from commodity futures

80%68%

Percentag

e

60%

40%24%

20%8%

0%

Good Reasonable Bad

Particulars

Good Reasonable Bad

FindingsIt can be seen that, 68% of the investors feel that they got good returns from

commodity futures trading, 24% of them feel that they got reasonable returns

commodity futures, 4% of the investors felt they got bad returns from commodity

futures.

Interpretations

It can be concluded that most of the investors got good returns from commodityfutures.


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11) Do you think commodity futures can reduce risk?


Yes 22 88%

No 3 12%

Bar chart showing the investors opinion on whether risk

can be reduced by commodity futures

Percenta

ge

100%

88%

80%

60%

40%12%

20%

0%

Yes No

Particulars

Yes No

Findings

It can be seen that 92% of the investors feel that risk can be reduced through

commodity futures, and 12% of the investors feel that risk cannot be reduced

through commodity futures.

Interpretation

It can be concluded that most of the investors feel that risk can be reduced

through commodity futures trading.


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14) Have you invested in any other derivative instrument?

Particular

s No. of Respondents

Percentag

e

Yes 6 24%

No 19 76%

Percenta

g

e

Bar Chart showing whether the investors have invested in any other

derivative instrument

80%

76%

70%

60%

50%

40%24%

30%

20%

10%

0%

Yes No

Particulars

Yes No

Findings

It can be seen that 76% of the investors have not invested in any other derivative

instrument and 24% of the investors have invested in any other derivative

instrument.

Interpretation


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It can be concluded that most of the investors have not invested in any other

derivative instrument.


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15) Do you think commodity futures are a good investment

opportunity?

Particular

s No. of Respondents

Percenta

ge

Yes 23 92%

No 2 8%

Bar chart showing opinion of the investor of whether

commodity futures is a good investment opportunity

Percentage

100%92%

80%

60%

40%

20%8%

0%

Yes No

Particulars

Findings

From the above table and chart, it can be seen that 92% of the investors feel that

commodity futures is a good investment opportunity, and 8% investors feel that

commodity futures is not a good investment opportunity

InterpretationIt can be concluded that most of the investors feel that commodity futures is a

good investment opportunity


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16. Investors preferences: -

Investment Prefrences specified in other category

67%

30%

3%

Real EstateJwelary

Not Specifi

Analysis of data revels that majority of people prefer investment in Real Estate(28.81% of total sample) which specified in other category investment and it is greaterthan share market investment preference.

64

43%

27%

%

7%Other

Share Market

Bank F.D.

CommodityMarket


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17. Peoples knowledge about Commodity Market: -

13%

87%

Know

Dont Kno

Very few people heard of commodity market. Vast majority of people are unawareabout Commodity Market.

18. Investors interested to invest in Commodity Market:(Out of those, who know Commodity Market)

50%50%

Interested

Not Interested

Though some people heard of commodity market due to lack of completeknowledge about it half of then are not interested in investing in Commodity Market.

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4.Commodity Market Investors Preferences

37%

30%

20%

13%

Bullion

Metals

Agricultural

Fossils/Energy

Above data revels that majority of commodity investors like to invest inBullion (Gold & Silver).

20. Perception about Commodity Market

25%

25%

50%

Less Ri

Risky

Very Ris

Analysis of data shows that majority of people who are aware about commodity

market; feel that investment in commodity market is very risky. So efforts should be done

to minimize the risk in commodity investment and make peoples about minimum risk in

commodity investment.

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Qualitative Analysis

1. Investment preferences: -Most of the investors prefer least risky investment which gives higher returns.

That is why majority (70% of sample) of people interested in investments other than

Share and commodity market.

Very less number of people (only 7%) showed their interest in investment in

commodity market. Main reason for this is lack of awareness and complete

information about commodity market.

2.Commodity Exchanges: -People who are interested in commodity investment showed more concern

towards NCDEX; for its brand name and people think there might be surety of

transaction at NCDEX.

3.Commodities: -Bullion is most preferred commodity for investment. Because one can expect

maximum returns from such investment due to rapidly increasing prices of bullion in

market.

4.Advertisements: -Commodity market Advertisements should be more informative. And it is the

failure of commodity markets advertisement campaign to attract peoples attention;

as majority of people are not aware about commodity market

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CONCLUSION

This decade is termed as Decade of Commodities. Prices of all commodities are heading

northwards due to rapid increase in demand for commodities. Developing countries likeChina are voraciously consuming the commodities. Thats why globally commodity

market is bigger than the stock market.

India is one of the top producers of large number of commodities and has a long history

of trading in commodities and related derivatives. The Commodities Derivatives market

has seen ups and downs, but seems to have finally arrived now. The market has made

enormous progress in terms of Technology, transparency and trading activity.

Interestingly, this has happened only after the Government protection was removed from

a number of Commodities, and market force was allowed to play their role. This should

act as a major lesson for 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. The management of price risk is going to

assume even greater importance in future with the promotion of free trade and removal of

trade barriers in the world.

As majority of Indian investors are not aware of organized commodity market; their

perception about is of risky to very risky investment. Many of them have wrong

impression about commodity market in their minds. It makes them specious towards

commodity market. Concerned authorities have to take initiative to make commodity-

trading process easy and simple. Along with Government efforts, NGO s should come

forward to educate the people about commodity markets and to encourage them to invest

in to it. There is no doubt that in near future commodity market will become Hot spot for

Indian farmers rather than spot market. And producers, traders as well as consumers will

be benefited from it. But for this to happen one has to take initiative to standardize andpopularize the Commodity Market.

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6. How one can become member of MCX/ NCDX/ NMCE..

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

PEOPLE QUESTIONNAIRE

PART A

1) Name:

2) Sex:

o Male o Female

3) Age:

o 20-30 Years o 30-40 years

o 40-50 years o Above 50 years

4) Education:

o Higher secondary o Pre-university

o Graduation o Post-graduation

5) Occupation:

o Government

employee o Self-employee

o

Commodity futuresanalyst

o

Private sectoremployee

o Businessman

o Others

____________

6) Income:

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Below 4 lakh 4,00,001 10,00,000

10,00,001 25,00,000 Above 25,00,000

PART -B

1) Have you invested in commodity futures?

Yes No

2) Have you invested in any other security?

Yes No

3) Which are the investments you have made (excluding commodity futures)?

Shares Bonds

Mutual funds Bank deposits

Real estate Jewelry

Others ___________

4) What is your experience in your previous investment (excluding commodity

futures)?

Good Reasonable

Bad

5) How often do you trade in commodity futures?

Everyday Once a week

Trade only when there is a good price

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Buy on opening: - To buy at the beginning of trading session at a price within theopening range.

Call: - An option that gives the buyer the right to a long position in the underlyingfutures at a specific price, the call writer (seller)may be assigned a short position

in the underlying futures if the buyer exercises the call.

Cash commodity: - The actual physical product on which a futures contract isbased. This product can include agricultural commodities, financial instrumentsand the cash equivalent of index futures.

Close: - The period at the end of trading session officially designated byexchange during which all transactions are considered made at the close.

Closing price: - The price (or price range) recorded during the period designatedby the exchange as the official close.

Commission house: - A concern that buys and sells actual commodities orfutures contract for the accounts of customers.

Consumption Commodity: - Consumption commodities are held mainly forconsumption purpose. E.g. Oil, steel

Cover: - The cancellation of the short position in any futures contract buys thepurchase of an equal quantity of the same futures contract.

Cross hedge: - When a cash commodity is hedged by using futures contract of

other commodity.

Day orders: - Orders at a limited price which are understood to be good for theday unless expressly designated as an open order or good till canceled order.

Delivery: - The tender and receipt of actual commodity, or in case of agriculturecommodities, warehouse receipts covering such commodity, in settlement offutures contract. Some contracts settle in cash (cash delivery). In which case openpositions are marked to market on last day of contract based on cash market close.

Delivery month: - Specified month within which delivery may be made under theterms of futures contract.

Delivery notice: - A notice for a clearing members intention to deliver a statedquantity of commodity in settlement of a short futures position.

Derivatives: - These are financial contracts, which derive their value from anunderlying asset. (Underlying assets can be equity, commodity, foreign exchange,

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interest rates, real estate or any other asset.) Four types of derivatives are tradesforward, futures, options and swaps. Derivatives can be traded either in anexchange or over the counter.

Differentials: - The premium paid for grades batter than the basis grade and the

discounts allowed for the grades. These differentials are fixed by the contractterms on most exchanges.

Exchange: - Central market place for buyers and sellers. Standardized contractsensure that the prices mean the same to everyone in the market. The prices in anexchange are determined in the form of a continuous auction by members who areacting on behalf of their clients, companies or themselves.

Forward contract: - It is an agreement between two parties to buy or sell anasset at a future date for price agreed upon while signing agreement. Forwardcontract is not traded on an exchange.

Futures Contract:- It is an agreement between two parties to buy or sell aspecified and standardized quantity and quality of an asset at certain time in thefuture at price agreed upon at the time of entering in to contract on the futuresexchange.It is entered on centralized trading platform of exchange.

Futures commission merchant: - A broker who is permitted to accept the ordersto buy and sale futures contracts for the consumers.

Futures Funds: - Usually limited partnerships for investors who prefer to participate in the futures market by buying shares in a fund managed byprofessional traders or commodity trading advisors.

Futures Market:-It facilitates buying and selling of standardized contractualagreements (for future delivery) of underlying asset as the specific commodity

and not the physical commodity itself. The formulation of futures contract is veryspecific regarding the quality of the commodity, the quantity to be delivered anddate for delivery.

Hedging: - Means taking a position in futures market that is opposite to positionin the physical market with the objective of reducing or limiting risk associatedwith price.

In the money: - In call options when strike price is below the price of underlyingfutures. In put options, when the strike price is above the underlying futures. In-the-money options are the most expensive options because the premium includesintrinsic value.

Index Futures: - Futures contracts based on indexes such as the S & P 500 orValue Line Index. These are the cash settlement contracts.

Investment Commodities: - An investment commodity is generally held forinvestment purpose. e.g. Gold, Silver

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Limit: - The maximum daily price change above or below the price close in aspecific futures market. Trading limits may be changed during periods ofunusually high market activity.

Limit order: - An order given to a broker by a customer who has some

restrictions upon its execution, such as price or time.

Liquidation: - A transaction made in reducing or closing out a long or shortposition, but more often used by the trade to mean a reduction or closing out oflong position.

Local: - Independent trader who trades his/her own money on the floor of theexchanges. Some local act as a brokers as well, but are subject to certain rules thatprotect customer orders.

Long: - (1) The buying side of an open futures contract or futures option; (2) a

trader whose net position in the futures or options market shows an excess of openpurchases over open sales.

Margin: - Cash or equivalent posted as guarantee of fulfillment of a futurescontract (not a down payment).

Margin call: - Demand for additional funds or equivalent because of adverseprice movement or some other contingency.

Market to Market: - The practice of crediting or debating a traders accountbased on daily closing prices of the futures contracts he is long or short.

Market order: - An order for immediate execution at the best available price.

Nearby: - The futures contract closest to expiration.

Net position: - The difference between the open contracts long and the opencontracts short held in any commodity by any individual or group.

Offer: - An offer indicating willingness to sell at a given price (opposite of bid).

On opening: - A term used to specify execution of an order during the opening.

Open contracts: - Contracts which have been brought or sold without thetransaction having been completed by subsequent sale, repurchase or actualdelivery or receipt of commodity.

Open interest: - The number of open contracts. It refers to unliquidatedpurchases or sales and never to their combined total.

Option: - It gives right but not the obligation to the option owner, to buy anunderlying asset at specific price at specific time in the future.

Out-of-the money: - Option calls with the strike prices above the price of theunderlying futures, and puts with strike prices below the price of the underlyingfutures.

Over the counter: - It is alternative trading platform, linked to network of dealerswho do not physically meet but instead communicates through a network ofphones & computers.

Pit: - An octagonal platform on the trading floor of an exchange, consisting ofsteps upon which traders and brokers stand while trading (if circular called ring).

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Point: - The minimum unit in which changes in futures prices may be expressed(minimum price fluctuation may be in multiples of points).

Position: - An interest in the market in the form of open commodities.

Premium: - The amount by which a given futures contracts price or commoditysquality exceeds that of another contract or commodity (opposite of discount). In

options, the price of a call or put, which the buyer initially pays to the optionwriter (seller).

Price limit: - The maximum fluctuation in price of futures contract permittedduring one trading session, as fixed by the rules of a contract market.

Purchase and sales statement: - A statement sent by FMC to a customer when hisfutures option has been reduced or closed out (also called P and S)

Put: - In options the buyer of a put has the right to continue a short position in anunderlying futures contract at the strike price until the option expires; the seller(writer) of the put obligates himself to take a long position in the futures at thestrike price if the buyer exercises his put.

Range: - The difference between high and low price of the futures contract duringa given period.

Ratio hedging: - Hedging a cash position with futures on a less or more than one-for-one basis.

Reaction: - The downward tendency of a commodity after an advance.

Round turn: - The execution of the same customer of a purchase transaction anda sales transaction which offset each other.

Round turn commission: - The cost to the customer for executing a futurescontract which is charged only when the position is liquidated.

Scalping: - For floor traders, the practice of trading in and out of contractsthrough out the trading day in a hopes for making a series of small profits.

Settlement price: - The official daily closing price of futures contract, set by theexchange for the purpose of setting margins accounts.

Short: - (1) The selling of an option futures contract. (2) A trader whose netposition in the futures market shows an excess of open sales over open purchases.

Speculator: - Speculator is an additional buyer of the commodities whenever itseems that market prices are lower than they should be.

Spot Markets:-Here commodities are physically brought or sold on a negotiatedbasis.

Spot price: - The price at which the spot or cash commodity is selling on the cashor spot market.

Spread: - Spread is the difference in prices of two futures contracts. Striking price: - In options, the price at which a futures position will be

established if the buyer exercises (also called strike or exercise price).

Swap: - It is an agreement between two parties to exchange different streams ofcash flows in future according to predetermined terms.

Technical analysis (charting): - In price forecasting, the use of charts and otherdevices to analyze price-change patters and changes in volume and open interestto predict future market trends (opposite of fundamental analysis).

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Time value: - In options the value of premium is based on the amount of time leftbefore the contract expires and the volatility of the underlying futures contract.Time value represents the portion of the premium in excess of intrinsic value.Time value diminishes as the expiration of the options draws near and/or if theunderlying futures become less volatile.

Writer: - A sealer of an option who collects the premium payment from thebuyer.

BIBLIOGRAPHY

Trading Commodities and Financial Futures: A Step by Step guide to

Mastering the Market, 3rd Edition by George Kleinman

Options, Futures and Other Derivatives by Johan C. Hull

http://commodities.in

http://finance.indiamart.com/markets/commodity/

http://www.commoditiescontrol.com

http://www.mcxindia.com

http://www.ncdex.com

MCX Certified Commodity Professional Reference Material

Business World (15th September 2003)

Business World (4th December 2006)

http://investmentz.co.in

http://trade.indiainfoline.com

http://www.finance.indiamart.com

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http://commodities.in/http://finance.indiamart.com/markets/commodity/http://www.commoditiescontrol.com/http://www.mcxindia.com/http://www.ncdex.com/http://investmentz.co.in/http://trade.indiainfoline.com/http://www.finance.indiamart.com/http://commodities.in/http://finance.indiamart.com/markets/commodity/http://www.commoditiescontrol.com/http://www.mcxindia.com/http://www.ncdex.com/http://investmentz.co.in/http://trade.indiainfoline.com/http://www.finance.indiamart.com/


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