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  1. 1. A report onDynamics of Indian commodity market Submitted By: Group No: 1 Girish Hitesh Madhu Mala Nirmal Reshma
  2. 2. AcknowledgementAs any other report the success of this report is the result of active involvement of many people:From time of inception of an idea till the end. Many brains has worked together to make thisexclusive and informative report on Dynamics of Indian Commodity Market.With a great pleasure and privilege we are presenting this report with our deepest gratitude to ourinstitute for providing us this immense.We would like to acknowledge our sincere thanks, to Dr. Himani Joshi (Academic Coordinator)for her guidance throughout the project, her interest, enthusiasm and Involvement had beengreatest motivational factor during the study.It is a privilege to have weighty appreciation to Mrs. Neha Saxena for giving us completesupport and cooperation, and for helping us with the knowledge regarding the planning of thebusiness and execution of the same.Special and sincere thanks to all the respondents who co-operated with us and share theirsuggestions and recommendation.Stevens Business School (2009-2011) Page 2
  3. 3. Preface By working together, ordinary people can perform extraordinary feats; they can pushthings that comes in their hands higher up a little further on towards the height of excellence. We have accepted the above statement and has prepared the report based on ourknowledge and secondary data. We are very glad to present our report that has all efforts knowledge & hard workinvolved in its completion.Stevens Business School (2009-2011) Page 3
  4. 4. Table of Content Sr. No. Particular Page no.1 Introduction 52 History 83 Indian Commodity Market 104 Structure of commodity market 135 Commodity Traded 166 Pricing 187 Functioning 218 Major Players 259 Performance of Commodity Market 3010 Trends 3711 Gold – in Indian commodity market 4012 Characteristics of commodity market 5113 Strategies for trading in commodities and futures 5614 How to trade in commodity market 6015 Commodity exchanges in world 6416 Commodity exchanges in India 6717 Conclusion 7318 References 75Stevens Business School (2009-2011) Page 4
  5. 5. IntroductionStevens Business School (2009-2011) Page 5
  6. 6. 1.1- COMMODITYA commodity may be defined as an article, a product or material that is bought and sold. It canbe classified as every kind of movable property, except Actionable Claims, Money & Securities.Commodities actually offer immense potential to become a separate asset class for market-savvyinvestors, arbitrageurs and speculators. Retail investors, who claim to understand the equitymarkets, may find commodities an unfathomable market. But commodities are easy tounderstand as far as fundamentals of demand and supply are concerned. Retail investors shouldunderstand the risks and advantages of trading in commodities futures before taking a leap.Historically, pricing in commodities futures has been less volatile compared with equity andbonds, thus providing an efficient portfolio diversification option.1.2- COMMODITY MARKETCommodity markets are markets where raw or primary products are exchanged. These rawcommodities are traded on regulated commodities exchanges, in which they are bought and soldin standardized contractsCommodity market is an important constituent of the financial markets of any country. It is themarket where a wide range of products, viz., precious metals, base metals, crude oil, energy andsoft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, activeand liquid commodity market. This would help investors hedge their commodity risk, takespeculative positions in commodities and exploit arbitrage opportunities in the market.Stevens Business School (2009-2011) Page 6
  7. 7. 1.3- OverviewDespite intermittent curbs, India‘s six-year-old commodity futures market has seen a steadystream of new entrants, drawn by the promise of richer rewards. The intense growth, even in theabsence of basic reforms, has attracted financial institutions, trading companies and banks to setup large commodity bourse. Since, Indian Commodity Exchange (ICEX), promoted by Indiabulls Financial Services Ltd in partnership with MMTC is going to start its operation fromNovember 2009; it is expected to create an extensive competition among national levelcommodity exchanges. Commodity derivatives market of India is drawing attention from all overthe world, albeit FMC had banned nine commodities since early 2007, out of which 4 are still outof trade and even financial institutions and foreign entities are barred from trading in the market.Even, industry players are of the view that commodity market regulator (FMC) should permitbanks and financial institutions to trade in commodity futures, allow options, exchange-tradedindices and some more powers to the market regulator from Ministry of Consumer Affairs todevelop the market.Stevens Business School (2009-2011) Page 7
  8. 8. HistoryStevens Business School (2009-2011) Page 8
  9. 9. Before the North American futures market originated some 150 years ago, farmers would growtheir crops and then bring them to market in the hope of selling their commodity of inventory.But without any indication of demand, supply often exceeded what was needed, and un-purchased crops were left to rot in the streets. Conversely, when a given commodity such asSoybeans was out of season, the goods made from it became very expensive because the cropwas no longer available, lack of supply.In the mid-19th century, grain markets were established and a central marketplace was createdfor farmers to bring their commodities and sell them either for immediate delivery (spot trading)or for forward delivery. The latter contracts, forwards contracts, were the forerunners to todaysfutures contracts. In fact, this concept saved many farmers from the loss of crops and helpedstabilize supply and prices in the off-season.Todays commodity market is a global marketplace not only for agricultural products, but alsocurrencies and financial instruments such as Treasury bonds and securities futures. Its adiverse marketplace of farmers, exporters, importers, manufacturers and speculators. Moderntechnology has transformed commodities into a global marketplace where a Kansas farmer canmatch a bid from a buyer in Europe.Stevens Business School (2009-2011) Page 9
  10. 10. Indian Commodity MarketStevens Business School (2009-2011) Page 10
  11. 11. The vast geographical extent of India and her huge population is aptly complemented by the sizeof her market. The broadest classification of the Indian Market can be made in terms of thecommodity market and the bond market. The commodity market in India comprises of allpalpable markets that we come across in our daily lives. Such markets are social institutions thatfacilitate exchange of goods for money. The cost of goods is estimated in terms of domesticcurrency. India Commodity Market can be subdivided into the following two categories:  Wholesale Market  Retail MarketThe traditional wholesale market in India dealt with whole sellers who bought goods from thefarmers and manufacturers and then sold them to the retailers after making a profit in theprocess. It was the retailers who finally sold the goods to the consumers. With the passage oftime the importance of whole sellers began to fade out for the following reasons:  The whole sellers in most situations, acted as mere parasites that did not add any value to the product but raised its price which was eventually faced by the consumers.  The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt.In recent years, the extent of the retail market (both organized and unorganized) has evolved inleaps and bounds. In fact, the success stories of the commodity market of India in recent yearshas mainly centered on the growth generated by the Retail Sector. Almost every commodityunder the sun both agricultural and industrial is now being provided at well distributed retailoutlets throughout the country.Moreover, the retail outlets belong to both the organized as well as the unorganized sector. Theunorganized retail outlets of the yesteryears consist of small shop owners who are price takerswhere consumers face a highly competitive price structure. The organized sectors on the otherhand are owned by various business houses like Pantaloons, Reliance, Tata and others. Suchmarkets are usually selling a wide range of articles agricultural and manufactured, edible andStevens Business School (2009-2011) Page 11
  12. 12. inedible, perishable and durable. Modern marketing strategies and other techniques of salespromotion enable such markets to draw customers from every section of the society. Howeverthe growth of such markets has still centered on the urban areas primarily due to infrastructurallimitations.Considering the present growth rate, the total valuation of the Indian Retail Market is estimatedto cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become fourtimes by 2010 than what it presently is.The size of the commodities markets in India is also quite significant. Of the countrys GDP ofRs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industriesconstitute about 58 per cent. Currently, the various commodities across the country clock anannual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading,the size of the commodities market grows many folds here on.Stevens Business School (2009-2011) Page 12
  13. 13. STRUCTURE OF COMMODITY MARKETStevens Business School (2009-2011) Page 13
  14. 14. Stevens Business School (2009-2011) Page 14
  15. 15. Consumers (Retail/ Warehouses Hedger Institutional) (Exporters / Millers Industry) Producers (Farmers/Co-Clearing Bank Commodities operatives/Instituti Ecosystem onal) MCX Traders Transporters/ (speculators) Support agencies Quality arbitrageurs/ Certification client AgenciesStevens Business School (2009-2011) Page 15
  16. 16. DIFFERENT TYPES OF COMMODITIES TRADEDStevens Business School (2009-2011) Page 16
  17. 17. World-over one will find that a market exits for almost all the commodities known to us. Thesecommodities can be broadly classified into the following:METAL Aluminum, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, ZincBULLION Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver MFIBER Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn, Kapas Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour Crude OilENERGYSPICES Cardamom, Jeera, Pepper, Red ChiliPLANTATIONS Areca nut, Cashew Kernel, Coffee (Robusta), RubberPULSES Chana, Masur, Yellow PeasPETROCHEMICALS HDPE, Polypropylene(PP), PVCOIL & OIL SEEDS Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy SeedsCEREALS MaizeOTHERS Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M-30, Sugar S-30Stevens Business School (2009-2011) Page 17
  18. 18. PricingStevens Business School (2009-2011) Page 18
  19. 19. Prices and monthly changes Historical Prices Price ForecastsCommodities Units 02 Dec 2Q 08 4Q 08 1Q 09 2Q 09 3m 6m EnergyWTI Crude $/bbl 76.60 123.8 59.08 43.32 59.79 85.00 92.00OilBrent Cude $/bbl 77.88 122.79 57.49 45.72 59.90 83.50 90.5OilRBOB $/gal 1.99 3.17 1.34 1.25 1.71 2.16 2.44GasolineUSGC $/gal 1.97 3.53 1.84 1.34 1.56 2.16 2.35Heating OilNYMEX $/mmBt 4.53 11.47 6.40 4.47 3.81 5.50 6.00Nat. Gas uUK NBP p/th 28.59 63.08 65.59 45.30 27.57 28.60 31.30Nat. Gas Industrial MetalsLME $/mt 2157 2995 1885 1401 1530 2160 2260AluminumLME Copper $/mt 7125 8323 3948 3494 4708 7460 8105LME Nickel $/mt 16300 25859 11118 10625 13147 16640 17590LME Zinc $/mt 2430 2150 1219 1208 1509 2390 2620 Precious MetalsLondon Gold $/troy oz 1212 896 795 908 922 1200 1260London $/troy oz 19.2 17.2 10.2 12.6 13.8 20.0 21.0Silver AgricultureCBOT cent/bu 555 843 552 551 572 500 550WheatCBOT cent/bu 1034 1388 915 9 49 1116 1050 1050SoybeanCBOT Corn cent/bu 392 629 384 377 406 400 450NYBOT cent/lb 74 72 47 46 54 70 70CottonNYBOT cent/lb 143 136 112 113 124 140 140Coffee Stevens Business School (2009-2011) Page 19
  20. 20. Prices and monthly changes Historical Prices Price Forecasts Units 02 Dec 2Q 08 4Q 08 1Q 09 2Q 09 3m 6mNYBOT $/mt 3317 2769 2252 2553 2499 2700 2700CocoaNYBOT cent/lb 23.0 11.2 11.6 12.7 14.7 20.0 17.0SugarCME Live cent/lb 82.1 93.7 88.7 83.8 83.0 85.0 90.0CattleCME Lean cent/lb 59.7 72.5 59.1 60.1 63.2 65.0 80.0Hog Stevens Business School (2009-2011) Page 20
  21. 21. FunctioningStevens Business School (2009-2011) Page 21
  22. 22. The futures market is a centralized market place for buyers and sellers from around the worldwho meet and enter into commodity futures contracts. Pricing mostly is based on an open crysystem, or bids and offers that can be matched electronically. The commodity contract will statethe price that will be paid and the date of delivery. Almost all futures contracts end without theactual physical delivery of the commodity.7.1- What Exactly Is a Commodity Contract?Lets say, for example, that you decide to subscribe to satellite TV. As the buyer, you enter intoan agreement with the company to receive a specific number of channels at a certain price everymonth for the next year. This contract made with the satellite company is similar to a futurescontract, in that you have agreed to receive a product or commodity at a later date, with the priceand terms for delivery already set. You have secured your cost for now and the next year, even ifthe price of satellite rises during that time. By entering into this agreement, you have reducedyour risk of higher prices.Thats how the futures market works. Except instead of a satellite TV provider, a producer ofwheat may be trying to secure a selling price for next seasons crop, while a bread maker may betrying to secure a buying price to determine how much bread can be made and at what profit. Sothe farmer and the bread maker may enter into a futures contract requiring the delivery of 5,000bushels of grain to the buyer in June at a price of $4 per bushel. By entering into this futurescontract, the farmer and the bread maker secure a price that both parties believe will be a fairprice in June. It is this contract that can then be bought and sold in the commodity market.A futures contract is an agreement between two parties: a short position, the party who agrees todeliver a commodity, and a long position, the party who agrees to receive a commodity. In theabove scenario, the farmer would be the holder of the short position (agreeing to sell) while thebread maker would be the holder of the long (agreeing to buy). (We will talk more about theoutlooks of the long and short positions in the section on strategies, but for now its important toknow that every contract involves both positions.)Stevens Business School (2009-2011) Page 22
  23. 23. In every commodity contract, everything is specified: the quantity and quality of the commodity,the specific price per unit, and the date and method of delivery. The price of a futures contract isrepresented by the agreed - upon price of the underlying commodity or financial instrument thatwill be delivered in the future. For example, in the above scenario, the price of the contract is5,000 bushels of grain at a price of $4 per bushel.7.2- Profit And Loss - Cash Settlement.The profits and losses of futures depend on the daily movements of the market for that contractand is calculated on a daily basis. For example, say the futures contracts for wheat increases to$5 per bushel the day after the above farmer and bread maker enter into their commodity contractof $4 per bushel. The farmer, as the holder of the short position, has lost $1 per bushel becausethe selling price just increased from the future price at which he is obliged to sell his wheat. Thebread maker, as the long position, has profited by $1 per bushel because the price he is obliged topay is less than what the rest of the market is obliged to pay in the future for wheat. On the daythe change occurs, the farmers account is debited $5,000 ($1 per bushel X 5,000 bushels) andthe bread makers account is credited by $5,000 ($1 per bushel X 5,000 bushels).As the market moves every day, these kinds of adjustments are made accordingly. Unlike thestock market, futures positions are settled on a daily basis, which means that gains and lossesfrom a days trading are deducted or credited to a persons account each day. In the stock market,the capital gains or losses from movements in price arent realized until the investor decides tosell the stock or cover his or her short position. As the accounts of the parties in futures contractsare adjusted every day, most transactions in the futures market are settled in cash, and the actualphysical commodity is bought or sold in the cash market. Prices in the cash and futures markettend to move parallel to one another, and when a futures contract expires, the prices merge intoone price. So on the date either party decides to close out their futures position, the contract willbe settled. If the contract was settled at $5 per bushel, the farmer would lose $5,000 on theStevens Business School (2009-2011) Page 23
  24. 24. contract and the bread maker would have made $5,000 on the contract. But after the settlementof the wheat futures contract, the bread maker still needs wheat to make bread, so he will inactuality buy his wheat in the cash market (or from a wheat pool) for $5 per bushel (a total of$25,000) because thats the price of wheat in the cash market when he closes out his contract.However, technically, the bread makers futures profits of $5,000 go towards his purchase, whichmeans he still pays his locked-in price of $4 per bushel ($25,000 - $5,000 = $20,000). Thefarmer, after also closing out the contract, can sell his wheat on the cash market at $5 per bushel,but, because of his losses from the futures contract with the bread maker, the farmer still actuallyreceives only $4 per bushel. In other words, the farmers loss in the commodity contract is offsetby the higher selling price in the cash market--this is referred to as hedging.Now that you see that a futures contract is really more like a financial position, you can also seethat the two parties in the wheat futures contract discussed above could be two speculators ratherthan a farmer and a bread maker. In such a case, the short speculator would simply have lost$5,000 while the long speculator would have gained that amount. (Neither would have to go tothe cash market to buy or sell the commodity after the contract expires.)Stevens Business School (2009-2011) Page 24
  25. 25. Major Players In Commodity marketStevens Business School (2009-2011) Page 25
  26. 26. The players in the futures market fall into two categories: 1) Hedger 2) Speculator 3) Arbitrage8.1- Hedgers:A Hedger can be Farmers, manufacturers, importers and exporter. A hedger buys or sells in thefutures market to secure the future price of a commodity intended to be sold at a later date in thecash market. This helps protect against price risks.The holders of the long position in futures contracts (buyers of the commodity), are trying tosecure as low a price as possible. The short holders of the contract (sellers of the commodity)will want to secure as high a price as possible. The commodity contract, however, provides adefinite price certainty for both parties, which reduces the risks associated with price volatility.By means of futures contracts, Hedging can also be used as a means to lock in an acceptableprice margin between the cost of the raw material and the retail cost of the final product sold.Example:A silversmith must secure a certain amount of silver in six months time for earrings and braceletsthat have already been advertised in an upcoming catalog with specific prices. But what if theprice of silver goes up over the next six months? Because the prices of the earrings and braceletsare already set, the extra cost of the silver cant be passed onto the retail buyer, meaning it wouldbe passed onto the silversmith. The silversmith needs to hedge, or minimize her risk against aStevens Business School (2009-2011) Page 26
  27. 27. possible price increase in silver. How? The silversmith would enter the futures market andpurchase a silver contract for settlement in six months time (lets say June) at a price of $5 perounce. At the end of the six months, the price of silver in the cash market is actually $6 perounce, so the silversmith benefits from the futures contract and escapes the higher price. Had theprice of silver declined in the cash market, the silversmith would, in the end, have been better offwithout the futures contract. At the same time, however, because the silver market is veryvolatile, the silver maker was still sheltering himself from risk by entering into the futurescontract. So thats basically what a hedger is: the attempt to minimize risk as much as possible bylocking in prices for a later date purchase and sale.Someone going long in a securities future contract now can hedge against rising equity prices inthree months. If at the time of the contracts expiration the equity price has risen, the investorscontract can be closed out at the higher price. The opposite could happen as well: a hedger couldgo short in a contract today to hedge against declining stock prices in the future. A potato farmerwould hedge against lower French fry prices, while a fast food chain would hedge against higherpotato prices. A company in need of a loan in six months could hedge against rising in theinterest rates future, while a coffee beanery could hedge against rising coffee bean prices nextyear.8.2- Speculator:Other commodity market participants, however, do not aim to minimize risk but rather to benefitfrom the inherently risky nature of the commodity market. These are the speculators, and theyaim to profit from the very price change that hedgers are protecting themselves against. A hedgerwould want to minimize their risk no matter what theyre investing in, while speculators want toincrease their risk and therefore maximize their profits. In the commodity market, a speculatorbuying a contract low in order to sell high in the future would most likely be buying that contractfrom a hedger selling a contract low in anticipation of declining prices in the future.Stevens Business School (2009-2011) Page 27
  28. 28. Unlike the hedger, the speculator does not actually seek to own the commodity in question.Rather, he or she will enter the market seeking profits by off setting rising and declining pricesthrough the buying and selling of contracts. Long ShortHedger Secure a price now to protect Secure a price now to protect against future rising prices against future declining pricesSpeculator Secure a price now in Secure a price now in anticipation of rising prices anticipation of declining pricesIn a fast-paced market into which information is continuously being fed, speculators and hedgersbounce off of--and benefit from--each other. The closer it gets to the time of the contractsexpiration, the more solid the information entering the market will be regarding the commodityin question. Thus, all can expect a more accurate reflection of supply and demand and thecorresponding price. Regulatory Bodies the United States futures market is regulated by theCommodity Futures Trading Commission, CFTC, and an independent agency of the U.S.government. The market is also subject to regulation by the National Futures Association, NFA,a self-regulatory body authorized by the U.S. Congress and subject to CFTC supervision.A Commodity broker and/or firm must be registered with the CFTC in order to issue or buy orsell futures contracts. Futures brokers must also be registered with the NFA and the CFTC inorder to conduct business. The CFTC has the power to seek criminal prosecution through theDepartment of Justice in cases of illegal activity, while violations against the NFAs businessethics and code of conduct can permanently bar a company or a person from dealing on thefutures exchange. It is imperative for investors wanting to enter the futures market to understandthese regulations and make sure that the brokers, traders or companies acting on their behalf arelicensed by the CFTC.Stevens Business School (2009-2011) Page 28
  29. 29. 8.3- Arbitrage:Arbitrage refers to the opportunity of taking advantage between the price difference between twodifferent markets for that same stock or commodity.In simple terms one can understand by an example of a commodity selling in one market at pricex and the same commodity selling in another market at price x + y. Now this y, is the differencebetween the two markets is the arbitrage available to the trader. The trade is carriedsimultaneously at both the markets so theoretically there is no risk. (This arbitrage should not beconfused with the word arbitration, as arbitration is referred to solving of dispute between two ormore parties.)The person who conducts and takes advantage of arbitrage in stocks, commodities, interest ratebonds, derivative products, forex is know as an arbitrageur.An arbitrage opportunity exists between different markets because there are different kind ofplayers in the market, some might be speculators, others jobbers, some market-markets, andsome might be arbitrageurs.In India there are a good amount of Arbitrage opportunities between NCDEX, MCX incommodities.Stevens Business School (2009-2011) Page 29
  30. 30. Performance Of Commodity MarketStevens Business School (2009-2011) Page 30
  31. 31. India‘s inflation fell to near zero levels although it may take some time for it to get reflected inthe prices of essential commodities. Even as the BSE Sensex is moving in a narrow range unableto break the 9000 mark, India‘s largest commodity bourse created a record by as its turnovertouched Rs 32016 crore on a single day the previous highest being Rs 29,887 crore in September18, 2008. Angel Commodities, one of the leading commodity brokerages also announced thecrossing of a major milestone of Rs 1000 crore turnover. What ever gains in BSE in recent dayshas been attributed to growth in commodity stocks.Commodity market regulator, Forward Markets Commission (FMC) will install at least 180display boards at locations such as rural post offices, Krishi Vigyan Kendras and APMCs acrossthe country in the next 10 days to provide prices of farm com modity futures to farmers.Meanwhile gold and crude oil continue to generate more volumes in India‘s commodity bourses.9.1- Precious MetalsGold prices recovered strongly from its lows during last week and almost touched a high of$970/oz., as the Federal Reserves plans to purchase as much as $1.15 trillion in U.S. bonds andmortgage-backed securities sparked worries of inflation ahead, raising golds appeal as a hedgeagainst rising prices. This is the most aggressive plan taken by Fed since the early 1960. Demandfrom gold ETF also increased during this week. Holdings in SPDR Gold Trust, world‘s largestgold ETF, touched an all time high of 1103.29 tons.The volatility in prices in the Bullion pack has increased greatly over the past few months with19 March being a highly volatile trading day. Spot Gold is finding excellent support in the zoneof $880-$890 levels which is viewed as value buying zone by investors. Whereas majorresistance zone is seen between $960-$970. The demand for the safe-haven asset is still prevalentwith the USD weakening consistently over the past few trading sessions. Also, the increasedvolatility in the Rupee is playing its role in determining domestic bullion prices. In comingweeks & months, the state of the overall global economic scenario will play a key role indetermining bullion prices as investors evaluate various asset classes to channel their funds. Stillgold remains the best bet under current market scenario. MCX April Gold can face resistancearound Rs.15600 levels, whereas support is seen at Rs. 14850 per 10 gramStevens Business School (2009-2011) Page 31
  32. 32. 9.2- Crude OilCrude Oil prices traded higher amidst high amount of volatility in the last week. Oil pricessurged to a three month high on account of weak dollar and rally in global equity markets.Despite bearish inventory data, prices rebounded from its lows, after US Federal Reservedecided to buy Treasury bonds worth $300bn to ease credit market. Steps taken by Fed rekindledhopes for economic recovery and rise in energy demand. Crude Oil prices have increased bymore than 20% this year, on account of strict implementation of production cuts by OPEC toreduce excess supply and weak dollar against major currencies. Volatility in oil prices hasincreased sharply in past few trading sessions. We expect that oil prices can witness fierce tusslebetween bulls and bears in coming weeks. Factors like falling demand and weak economic dataare favoring bears, but weak dollar, rise in risk appetite amidst strong equity markets are givingbulls a reason to come back in to market. After last week‘s rally, oil prices can witness profitbooking. During this week, NYMEX May Crude Oil prices are expected to trade in the range of$42.50 and $ RubberRubber prices in domestic and global markets were on a recovery mode this week. In theweekend covering groups lifted the prices to further highs driven by possibly a speculativeinterest. However, 2009 as predicted by many analysts is not going to be a good year for rubberwith consumption to fall 5.5 percent across the globe mainly due to falling automobile sales.Rubber prices have slumped 50 percent in a year as the global recession slashed tire demand.Europe‘s car market shrank 7.8 percent in 2008, while U.S. sales contracted 18 percent to a 16percent year low.In TOCOM and Shanghai, benchmark natural rubber futures climbed to the highest in more thantwo weeks as producers restated proposed output cuts and on speculation China, the world‘slargest consumer, is adding the commodity to state stockpiles.Stevens Business School (2009-2011) Page 32
  33. 33. Spot rubber flared up on Friday. Sheet rubber RSS 4 moved up to Rs 76.50 from Rs.75.50 a kg,while the market made all-round improvement even in the absence of enquires from the majormanufacturers. The volumes were comparatively better.The April futures for RSS 4 firmed up to Rs 77.99 (Rs 77.50), May to Rs 79 (Rs 78.56), June toRs 79.99 (Rs 79.67) and July to Rs 79.95 (Rs 79.80) a kg on National Multi CommodityExchange (NMCE).Towards weekend in global markets, RSS 3 slipped further to Rs 73.37 (Rs 73.81) a kg onSingapore Commodity Exchange. The grade‘s spot weakened to Rs 73.68 (Rs 74.43) a kg atBangkok. The physical rubber rates were: RSS-4: 76.50 (75.50), RSS-5: 75 (74), Ungraded:73.50 (73), ISNR 20: 74 (73.50), and Latex 60%: 57.50 (57).Meanwhile, India‘s Rubber Board has raised alarm against the rapid growth in tyre importsmainly from China. A steady trend with an slight upward bias could be expected for rubber nextweek.9.4- Base metalsBase metal prices are moving higher on the back of a weaker dollar and stable equities as boththese factors have improved market sentiments. A weaker dollar makes base metals lookattractive for holders of other currencies. This is providing a strong support to base metal pricesbut the upside could be capped as LME inventories have touched a 15-year high. The basemetals market is in an oversupply situation and fundamentals look bearish. However, the currentrise in base metal prices is mainly due to technical buying and short-covering. In the comingweek, base metal prices are expected to remain volatile as the US is expected to announceeconomic data like existing home sales, new home sales, 4Q GDP, personal income andspending.Stevens Business School (2009-2011) Page 33
  34. 34. 9.5- SoybeanRefined soy oil futures fell sharply during the last week as government of India scrapped importduty on soy oil to reduce premium over palm oil. Government of India extended ban on exportsof edible oil. Last year, Govt. of India had banned export soy oil in March to control rise in price.According to the Solvent Extractor‘s Association of India, India‗s import of edible oil increasedto 7,30,094 metric tonnes in February, 2009, up 69.40% as compared to last year during the sameperiod. Edible oil imports in the first four months of oil marketing year (November to February)was 28,24,941 metric tonnes, up 87% as compared to 15,12,695 metric tonnes during the sameperiod last year. PEC Ltd. has floated two separate tenders for the local sales of 3161 metrictonnes of crude soy oil. PEC is authorized by the government of India to import edible oils andsales the local market. Global vegetable oil prices may still fall due to ample global supply. Inthe coming week, prices are expected to move lower on account of higher import of edible oiland scrapped import duty on soybean oil. NCDEX April Refined Soy Oil has support at 430/422and resistance is seen at 452/460 levels in this week.9.6- Other Edible OilIndia‘s edible oil and oilseeds Futures recovered from their lower level tracking the globalmarkets. The Bursa Malaysia Derivative making decent gains in the past few days and CBOT‘sprojection aided market sentiments. It was a firm trend in crude palm oil that lends support to theoil seeds complex. The June Contract closed at 1985 a gain of 74. Nynex Crude Oil has supportat US $51 per barrel. Mustard Seed and castor seed tracked the gains in soybean and ended on amixed to higher note in physical, Futures marketsStevens Business School (2009-2011) Page 34
  35. 35. 9.7- TurmericSpot prices at Erode and Nizamabad over the past couple of days are being quoted at higher ratesdue to better off takes at the domestic market. Prices in the previous week were quoted in therange of Rs. 4,200-4,350/qtl. Even though the arrivals are more off takes are equally better due todomestic buying. Arrivals on an average in the previous week were around 25,000 bags daily inboth the major mandis of Nizamabad and Erode. Fear of lower availability of Turmeric in 2009is supporting the prices to strengthen. Demand from the domestic market especially from localstockiest is present but the overseas demand has reduced as the prices are at higher levels.Farmers are hoarding the stocks and not bringing in fresh turmeric to the market in good quantityin order to reap maximum profits. Turmeric Futures April 09 contract touched a high ofRs.5,090/qtl tracking spot prices. Prices are ruling at higher levels thus cautious trading isadvisable at futures. Prices have initial support at Rs.4,840/qtl and thereafter at Rs.4,700/qtl.Resistance could be seen at Rs.5,205/qtl and thereafter at Rs. 5,395/qtl.9.8- SugarSugar market declined sharply by 15% in the last 3-4 weeks as the Indian government hasadopted various measures to curb spiraling Sugar prices. Besides imposition of stock limits andduty free impost of Raw Sugar, Government is now considering a proposal to let state-runtrading companies import refined sugar at zero duty to bridge the widening gap between demandand supply. Final decision by the cabinet regarding the duty free imports of refined Sugar isexpected in the coming week.India will have to import 3 million tonnes of Sugar to meet its domestic consumption of 22.5-23million tonne. But imported sugar is much more expensive than local sweeteners at present,making the imports unviable. Thus, despite government‘s effort to ease import norms, we don‘texpect imports to take place in the coming months. Any significant decline in the prices shouldbe treated as a good buying opportunity as Overall, fundamentals remain supportive for theprices with lower output forecast in India and a global deficit of more than 4.3 million tonnes.Stevens Business School (2009-2011) Page 35
  36. 36. April Sugar futures are currently trading at around Rs. 2035 levels. Prices are having initialsupport at Rs. 1995 and then 1953. Resistance could be seen at Rs. 2080/qtl and thereafter Rs.2120/qtl.9.9- Black PepperThe undertone in the Black Pepper spot and futures counter this week was steady due toincreased buying interest and aided by a tight supply position. Indian parity in the internationalmarket was at $2,225-2,325 a tonne (c&f) as the rupee has strengthened against the dollar onWednesday. Overseas reports on Wednesday said that Brazil was firmer and exporters appearedto reluctant to offer. B Asta was said to have been offered at $2,000 a tonne while B1 at $1,900 atone.Vietnam was reportedly steady at $1,800 a tonne for faq 500 GL. More buying interest was seenfor black and white pepper from industry albeit for nearby deliveries. Lasta was being offered onreplacement basis at $2,200-2,250 a tonne (fob). New Indonesian crop is said to be lower at15,000 tonne against an estimated 30,000 tonnes last season. However, some substantial quantityof carry over stock is reportedly available therein the hands of middlemen and exporters.In the weekend the physical counter traded steady amidst good underlying buying interest. Thedomestic as well as the overseas buyers from Europe were active. The stock availabilityremained low inducing the Indian traders to purchase from other cheaper origin like Indonesia at$2100/tonne fob. At the benchmark Kochi markets berries were offered at Rs.10300/qtl for theungarbled variety and 10800/qtl for the garbled variety, steady as that of prior trading session.Around 33.5 tonnes were sold for the arrivals of 25 tonnes. Strengthening rupee against dollarpushed up Indian parity to $2300/tonne f.o.b while VASTA was offered at $2150/tonne andBASTA at $1950/tonne f.o.b. Pepper is likely to trade weak during early hours with thepossibility of late recovery.Stevens Business School (2009-2011) Page 36
  37. 37. TrendsStevens Business School (2009-2011) Page 37
  38. 38. Assocham estimates that by 2010 volume on Indian exchanges will cross Rs. 75 lakh crore.Stevens Business School (2009-2011) Page 38
  39. 39. 10.1- Commodity-wise TurnoverStevens Business School (2009-2011) Page 39
  40. 40. Gold (Indian commodity market)Stevens Business School (2009-2011) Page 40
  41. 41. 11.1- IntroductionGold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset,and partly a commodity. As much as two thirds of gold‘s total accumulated holdings relate to―store of value‖ considerations. Holdings in this category include the central bank reserves,private investments, and high-cartages jewelers bought primarily in developing countries as avehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of gold‘s totalaccumulated holdings can be considered a commodity, the jewelers bought in Western marketsfor adornment, and gold used in industry.The distinction between gold and commodities is important. Gold has maintained its value inafter-inflation terms over the long run, while commodities have declined.Some analysts like to think of gold as a ―currency without a country‘. It is an internationallyrecognized asset that is not dependent upon any government‘s promise to pay. This is animportant feature when comparing gold to conventional diversifiers like T-bills or bonds, whichunlike gold, do have counter-party risk.11.2- What makes gold special?  Timeless and Very Timely Investment  Gold is an effective diversifier  Gold is the ideal gift  Gold is highly liquid  Gold responds when you need it mostStevens Business School (2009-2011) Page 41
  42. 42. 11.3- Market Characteristics  The gold market is highly liquid. Gold held by central banks, other major institutions, and retail jewelery is reinvested in market.  Due to large stock of gold, against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium.  Effective portfolio diversifier: This phrase summarizes the usefulness of gold in terms of ―Modern Portfolio Theory‖, a strategy used by many investment managers today. Using this approach, gold can be used as a portfolio diversifier to improve investment performance.  Effective diversification during ―stress‖ periods: Traditional method of portfolio diversification often fails when they are most needed, that is during financial stress (instability). On these occasions, the correlations and volatilities of return for most asset class (including traditional diversifiers, such as bond and alternative assets) increase, thus reducing the intended ―cushioning‖ effect of the diversified portfolio.11.4- Importance and Uses Gold has mainly three types of uses: Jewellery Demand, Investment Demand and Industrialuses.  Jewellery Demand- Jewellery consistently accounts for around three-quarters of gold demand. In terms of retail value, the USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 25% of demand in 2007.Stevens Business School (2009-2011) Page 42
  43. 43.  Investment demand- Investment demand in gold has increased considerably in recent years. Since 2003, investment has representing the strongest source of growth in demand, with an increase in value terms to the end of 2007 of around 280%.  Industrial Demand- Industrial and dental uses account for around 13% of gold demand (an annual average of over 425 tonnes from 2003 to 2007 inclusive).11.5- World Gold Demand & Supply Year Mine Production Total supply Total demand2006 2486 3574 34092007 2473 3488 35262008 2407 3468 3659Source: GFMSStevens Business School (2009-2011) Page 43
  44. 44. 11.6- Major Gold Producing Countries (2008) share China 12% United State 29% South Africa 10% Australia Peru Russia 10% Canada 3% Indonessia 4% 10% Uzbekistan 4% Ghana 4% 7% 7% OthersSource: GFMSStevens Business School (2009-2011) Page 44
  45. 45. 11.6- Domestic ScenarioIndia is arguably the largest bullion market in the world. It has been until now, the undisputedsingle-largest Gold bullion consumer, with its own final demand outweighing the next largestmarket – China by almost 57 percent. But it seems now, that the Chinese Gold buyers havecaught up during 2008 as Chinese demand is surging rapidly (up by 15 percent year-on-year).Indian demand fell as Indian Gold sales collapsed by about 65 percent in the year 2008. In spiteof being the largest consumer of gold, India plays no major role globally in influencing thisprecious metals pricing, output or quality issues.India‘s total gold holdings are between 10,000 tonnes and 15,000 tonnes of which the ReserveBank of India has only around 400 tonnes. India has the largest number of gold Jewellery shopsin the world.11.7- Major Gold Mines in IndiaThere is a huge mismatch between demand and primary supply in India, the balance being madeup by imports. The only major gold mine currently in production is the Hutti mine, owned byHutti Gold Mines Company Limited, which produces around 3 tons of gold a year. HindustanCopper also produces some gold as a by-product.11.8- Gold Production in India (in tonNEs):State 2005-06 2006-07 2007-08Karnataka 2.846 2.334 2.831Jharkhand 0.201 0.154 0.027Gujarat 6.710 10.335 9.135Total 9.757 12.823 11.993Source: www.pib.nic.inStevens Business School (2009-2011) Page 45
  46. 46. As given in the above table, gold production in India is ruling lower in recent years. Karnatakawas the leading producer of this precious metal with the output ranging from 2 to 3 tons perannum during 2005-06 and 2007-08. Jharkhand also produces small quantity of gold.11.9- Gold Demand in IndiaGold, the ultimate safe haven in troubled times, remained the hot commodity throughout theyear. It scaled new heights in the global markets and in India, which is the largest buyer of themetal.Year India (IN TONNES) World (IN TONNES) % share of World Demand2004 617.7 2961.5 20.862005 721.6 3091.9 23.342006 721.9 2681.9 26.922007 769.2 2810.9 27.362008 660.2 2906.8 22.71Source: GFMSIndian demand for Gold accounts for on an avg. 25% share of world gold demand. In 2008,demand for gold has decreased in India because of high price amid global financial crisis.Stevens Business School (2009-2011) Page 46
  47. 47. 11.10- Gold Imports in IndiaIndia imports around 500-800 tonnes of gold on an average every year. In 2008, India‘s goldimports dipped by 45 per cent to touch 450 tons. However, buying of gold Jewellery has fallensharply in January, February & March month of the year 2009, leading to a slump in the yellowmetal‘s imports.11.11- Gold PricesThere are many factors, which affect the gold prices in domestic as well as international market.However, it is highly correlated with the US dollar, the worlds main trading currency. Gold haslong been regarded by investors as a good protection against depreciation in a currencys value,both internally (i.e. against inflation) and externally (against other currencies). Gold is widelyconsidered to be a particularly effective hedge against fluctuations in the US dollar, the worldsmain trading currency.Stevens Business School (2009-2011) Page 47
  48. 48. The gold price has been found to be negatively correlated with the US dollar and this relationshipappeared to be consistent over time. It is a consistently good protection against the economicinstability and the exchange rate fluctuations.11.12- Factors influencing Gold Prices  World macro economic factors including US Dollar, interest rate and so on  Global gold mine production  Demand by Central banks  Domestic demand, which is linked to agricultural prosperity and festivals/marriages etc  Producer / miner hedging interest  Comparative returns on stock markets  US dollar movement against other currencies  Indian rupee movement against the US dollar  Geopolitical tensions  Global economic situationStevens Business School (2009-2011) Page 48
  49. 49. CHINESE COMMODITY MARKET (GOLD)IntroductionGold plays a vital role in Chinese culture. The Chinese have a strong affinity to gold whencompared with Western countries. Gold has been present in Chinese history since the time of theHan Dynasty and even today is regarded as a sign of prosperity, an ornament, a currency and aninherent part of Chinese religion. Weddings are important gold-buying occasions amongst theChinese. Gold is also traditionally bought as a gift during the Chinese New Year.According to the Chinese lunar calendar, 2010 is the Year of the Tiger and the year which startedon 14 February 2010, promises to be a year of excitement, prosperity and potential good luck foralmost everyone. Those who make a real effort will enjoy an auspicious wave of success whenthe brave and resilient Tiger rules. Some Chinese also describe 2010 as the Golden Tiger Year.Today, China is the second largest gold consumption market and the world‘s largest producer.Gold demand from China‘s two largest sectors, (jewellery and investment) reached a combinedtotal of 423 tonnes in 2009. However, total domestic mine supply contributed only 314 tonnesduring the same year. WGC studies indicate that in the long term, gold demand is likely tocontinue to accelerate, driven by investment demand in China, while current jewelleryconsumption is likely to continue to grow despite higher gold prices. Gold could also gain furthermomentum from central bank purchasing.Chinese gold demand is catching up with Western consumption levels. This is because marketliberalization tends to have a dramatic impact in a local market. In India, for example, its goldconsumption more than doubled from around 300 tonnes in the early 1990s to over 700 tonnes atthe end of 2008 when the liberalization process was in full swing. WGC estimates that asubstantial increase in gold demand would take place if demand in China were to rise toJapanese, USA or Taiwanese levels. In this case, total annual incremental demand ranges fromanother 1,000 tonnes at USA and Japanese per capita consumption levels, and still more, ifChinese consumption per capita were to rise to Taiwanese levels.Stevens Business School (2009-2011) Page 49
  50. 50. Jewellery is by far the most dominant category of Chinese gold demand, accounting for almost80% of all gold consumption in China in 2009. Chinese gold jewellery off-take increased 6%year-on-year to 347.1 tonnes in 2009 and China was the only country to experience animprovement in jewellery demand last year. WGC estimates that current per capita consumptionof gold jewellery in China is around 0.26gm. This level is low when compared to countries withsimilar gold cultures. If gold were consumed in China at the same rate per capita as in India,Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to asmuch as 4,000 tonnes in the jewellery sector alone.Stevens Business School (2009-2011) Page 50
  51. 51. Characteristics of Commodity MarketStevens Business School (2009-2011) Page 51
  52. 52. In commodity futures market, the calculation of profit and loss will be slightly different than on anormal stock exchange. The main concepts in commodity market are: 1) Margins. In the futures market, margin refers to the initial deposit of good faith made into anaccount in order to enter into a futures contract. This margin is referred to as good faith becauseit is this money that is used to debit any losses.When you open a futures account, the futures exchange will state a minimum amount of moneythat you must deposit into your account. This original deposit of money is called the initialmargin. When your contract is liquidated, you will be refunded the initial margin plus or minusany gains or losses that occur over the span of the futures contract. In other words, the amount inyour margin account changes daily as the market fluctuates in relation to your futures contract.The minimum-level margin is determined by the futures exchange and is usually 5% to 10% ofthe futures contract. These predetermined initial margin amounts are continuously under review:at times of high market volatility, initial margin requirements can be raised.The initial margin is the minimum amount required to enter into a new futures contract, but themaintenance margin is the lowest amount an account can reach before needing to bereplenished. For example, if your margin account drops to a certain level because of a series ofdaily losses, brokers are required to make a margin call and request that you make an additionaldeposit into your account to bring the margin back up to the initial amount.E.g. - Lets say that you had to deposit an initial margin of $1,000 on a contract and themaintenance margin level is $500. A series of losses dropped the value of your account to $400.This would then prompt the broker to make a margin call to you, requesting a deposit of at leastan additional $600 to bring the account back up to the initial margin level of $1,000.Stevens Business School (2009-2011) Page 52
  53. 53. Word to the wise: when a margin call is made, the funds usually have to be deliveredimmediately. If they are not, the commodity brokerage can have the right to liquidate yourCommodity position completely in order to make up for any losses it may have incurred on yourbehalf. 2) LeverageLeverage refers to having control over large cash amounts of a commodity with comparativelysmall levels of capital. In other words, with a relatively small amount of cash, you can enter intoa futures contract that is worth much more than you initially have to pay (deposit into yourmargin account). It is said that in the futures market, more than any other form of investment,price changes are highly leveraged, meaning a small change in a futures price can translate into ahuge gain or loss.Futures positions are highly leveraged because the initial margins that are set by the exchangesare relatively small compared to the cash value of the contracts in question (which is part of thereason why the futures market is useful but also very risky). The smaller the margin in relation tothe cash value of the futures contract, the higher the leverage. So for an initial margin of $5,000,you may be able to enter into a long position in a futures contract for 30,000 pounds of coffeevalued at $50,000, which would be considered highly leveraged investments.You already know that the futures market can be extremely risky, and therefore not for the faintof heart. This should become more obvious once you understand the arithmetic of leverage.Highly leveraged investments can produce two results: great profits or even greater losses.Due to leverage, if the price of the futures contract moves up even slightly, the profit gain will belarge in comparison to the initial margin. However, if the price just inches downwards, that samehigh leverage will yield huge losses in comparison to the initial margin deposit. For example, sayStevens Business School (2009-2011) Page 53
  54. 54. that in anticipation of a rise in stock prices across the board, you buy a futures contract with amargin deposit of $10,000, for an index currently standing at 1300. The value of the contract isworth $250 times the index (e.g. $250 x 1300 = $325,000), meaning that for every point gain orloss, $250 will be gained or lost.If after a couple of months, the index realized a gain of 5%, this would mean the index gained 65points to stand at 1365. In terms of money, this would mean that you as an investor earned aprofit of $16,250 (65 points x $250); a profit of 162%!On the other hand, if the index declined 5%, it would result in a monetary loss of $16,250—ahuge amount compared to the initial margin deposit made to obtain the contract. This means youstill have to pay $6,250 out of your pocket to cover your losses. The fact that a small change of5% to the index could result in such a large profit or loss to the investor (sometimes even morethan the initial investment made) is the risky arithmetic of leverage. Consequently, while thevalue of a commodity or a financial instrument may not exhibit very much price volatility, thesame percentage gains and losses are much more dramatic in futures contracts due to lowmargins and high leverage. 3) Pricing and LimitsContracts in the Commodity futures market are a result of competitive price discovery. Prices arequoted as they would be in the cash market: in dollars and cents or per unit (gold ounces,bushels, barrels, index points, percentages and so on).Prices on futures contracts, however, have a minimum amount that they can move. Theseminimums are established by the futures exchanges and are known as ticks. For example, theminimum sum that a bushel of grain can move upwards or downwards in a day is a quarter ofone U.S. cent. For futures investors, its important to understand how the minimum priceStevens Business School (2009-2011) Page 54
  55. 55. movement for each commodity will affect the size of the contract in question. If you had a graincontract for 3,000 bushels, a minimum of $7.50 (0.25 cents x 3,000) could be gained or lost onthat particular contract in one day.Futures prices also have a price change limit that determines the prices between which thecontracts can trade on a daily basis. The price change limit is added to and subtracted from theprevious days close, and the results remain the upper and lower price boundary for the day.Say that the price change limit on silver per ounce is $0.25. Yesterday, the price per ounce closedat $5. Todays upper price boundary for silver would be $5.25 and the lower boundary would be$4.75. If at any moment during the day the price of futures contracts for silver reaches eitherboundary, the exchange shuts down all trading of silver futures for the day. The next day, thenew boundaries are again calculated by adding and subtracting $0.25 to the previous days close.Each day the silver ounce could increase or decrease by $0.25 until an equilibrium price is found.Because trading shuts down if prices reach their daily limits, there may be occasions when it isNOT possible to liquidate an existing futures position at will.The exchange can revise this price limit if it feels its necessary. Its not uncommon for theexchange to abolish daily price limits in the month that the contract expires (delivery or spotmonth). This is because trading is often volatile during this month, as sellers and buyers try toobtain the best price possible before the expiration of the contract.In order to avoid any unfair advantages, the CTFC and the Commodity futures exchanges imposelimits on the total amount of contracts or units of a commodity in which any single person caninvest. These are known as position limits and they ensure that no one person can control themarket price for a particular commodity.Stevens Business School (2009-2011) Page 55
  56. 56. Strategies for Trading In Commodities and FuturesStevens Business School (2009-2011) Page 56
  57. 57. Futures contracts try to predict what the value of an index or commodity will be at some date inthe future. Speculators in the futures market can use different strategies to take advantage ofrising and declining prices. The most common strategies are known as going long, going shortand spreads. 1) Going LongWhen an investor goes long, that is, enters a contract by agreeing to buy and receive delivery ofthe underlying at a set price, it means that he or she is trying to profit from an anticipated futureprice increase.For example, lets say that, with an initial margin of $2,000 in June, Joe the speculator buys oneSeptember contract of gold at $350 per ounce, for a total of 1,000 ounces or $350,000. Bybuying in June, Joe is going long, with the expectation that the price of gold will rise by the timethe contract expires in September.By August, the price of gold increases by $2 to $352 per ounce and Joe decides to sell thecontract in order to realize a profit. The 1,000 ounce contract would now be worth $352,000 andthe profit would be $2,000. Given the very high leverage (remember the initial margin was$2,000), by going long, Joe made a 100% profit!Of course, the opposite would be true if the price of gold per ounce had fallen by $2. Thespeculator would have realized a 100% loss. Its also important to remember that throughout thetime the contract was held by Joe, the margin may have dropped below the maintenance marginlevel. He would have thus had to respond to several margin calls, resulting in an even bigger lossor smaller profit.Stevens Business School (2009-2011) Page 57
  58. 58. 2) Going ShortA speculator who goes short, that is, enters into a futures contract by agreeing to sell and deliverthe underlying at a set price, is looking to make a profit from declining price levels. By sellinghigh now, the contract can be repurchased in the future at a lower price, thus generating a profitfor the speculator.Lets say that Sara did some research and came to the conclusion that the price of Crude Oil wasgoing to decline over the next six months. She could sell a contract today, in November, at thecurrent higher price, and buy it back within the next six months after the price has declined. Thisstrategy is called going short and is used when speculators take advantage of a declining market.Suppose that, with an initial margin deposit of $3,000, Sara sold one May crude oil contract (onecontract is equivalent to 1,000 barrels) at $25 per barrel, for a total value of $25,000.By March, the price of oil had reached $20 per barrel and Sara felt it was time to cash in on herprofits. As such, she bought back the contract which was valued at $20,000. By going short, Saramade a profit of $5,000! But again, if Saras research had not been thorough, and she had made adifferent decision, her strategy could have ended in a big loss. 3) SpreadsAs going long and going short, are positions that basically involve the buying or selling of acontract now in order to take advantage of rising or declining prices in the future. Anothercommon strategy used by commodity traders is called spreads. Spreads involve takingStevens Business School (2009-2011) Page 58
  59. 59. advantage of the price difference between two different contracts of the same commodity.Spreading is considered to be one of the most conservative forms of trading in the futures marketbecause it is much safer than the trading of long / short (naked) futures contracts.There are many different types of spreads, including:  Calendar spread - This involves the simultaneous purchase and sale of two futures of the same type, having the same price, but different delivery dates.  Inter-Market spread - Here the investor, with contracts of the same month, goes long in one market and short in another market. For example, the investor may take Short June Wheat and Long June Pork Bellies.  Inter-Exchange spread - This is any type of spread in which each position is created in different futures exchanges. For example, the investor may create a position in the Chicago Board of Trade, CBOT and the London International Financial Futures and Options Exchange, LIFFE.Stevens Business School (2009-2011) Page 59
  60. 60. How to trade in commodity marketStevens Business School (2009-2011) Page 60
  61. 61. You can invest in the futures market in a number of different ways, but before taking the plunge,you must be sure of the amount of risk youre willing to take. As a futures trader, you shouldhave a solid understanding of how the market works and contracts function. Youll also need todetermine how much time, attention, and research you can dedicate to the investment. Talk toyour broker and ask questions before opening a futures account.Unlike traditional equity traders, futures traders are advised to only use funds that have beenearmarked as risk capital. Once youve made the initial decision to enter the market, the nextquestion should be, how? Here are three different approaches to consider:  Self Directed  Full Service  Commodity pool 1) Self Directed: - As an investor, you can trade your own account, without theaid or advice of a Commodity broker. This involves the most risk because you becomeresponsible for managing funds, ordering trades, maintaining margins, acquiring research, andcoming up with your own analysis of how the market will move in relation to the commodity inwhich youve invested. It requires time and complete attention to the market. 2) Full Service: - Another way to participate in the market is by opening amanaged account, similar to an equity account. Your broker would have the power to trade onyour behalf, following conditions agreed upon when the account was opened. This method couldlessen your financial risk, because a professional broker would be assisting you, or makinginformed decisions on your behalf. However, you would still be responsible for any lossesincurred and margin calls.Stevens Business School (2009-2011) Page 61
  62. 62. 3) Commodity Pool: - A third way to enter the market, and one that offers thesmallest risk, is to join a commodity pool. Like a mutual fund, the commodity pool is a group ofcommodities which can be invested in. No one person has an individual account; funds arecombined with others and traded as one. The profits and losses are directly proportionate to theamount of money invested. By entering a commodity pool, you also gain the opportunity toinvest in diverse types of commodities. You are also not subject to margin calls. However, it isessential that the pool be managed by a skilled broker, for the risks of the futures market are stillpresent in the commodity pool.Stevens Business School (2009-2011) Page 62
  63. 63. DIFFERENT SEGMENTS IN COMMODITIES MARKETThe commodities market exits in two distinct forms namely the Over the Counter (OTC) marketand the Exchange based market. Also, as in equities, there exists the spot and the derivativessegment. The spot markets are essentially over the counter markets and the participation isrestricted to people who are involved with that commodity say the farmer, processor, wholesaleretc. Derivative trading takes place through exchange-based markets with standardized contracts,settlements etc.Stevens Business School (2009-2011) Page 63
  64. 64. LEADING COMMODITY MARKETS OF WORLDStevens Business School (2009-2011) Page 64
  65. 65. Some of the leading exchanges of the world are:s. no. Global commodity exchanges1 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 Trade6 Winnipeg Commodity Exchange, Manitoba7 Dalian Commodity Exchange, China8 Bursa Malaysia Derivatives exchange9 Singapore Commodity Exchange (SICOM)10 Chicago Mercantile Exchange (CME), US11 London Metal Exchange12 Tokyo Commodity Exchange (TOCOM)13 Shanghai Futures Exchange14 Sydney Futures Exchange15 London International Financial Futures and Options Exchange (LIFFE)16 National Multi-Commodity Exchange in India (NMCE), India17 National Commodity and Derivatives Exchange (NCDEX), India18 Multi Commodity Exchange of India Limited (MCX), India19 Dubai Gold & Commodity Exchange (DGCX)20 Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX))Stevens Business School (2009-2011) Page 65
  66. 66. RegulatorsEach exchange is normally regulated by a national governmental (or semi-governmental)regulatory agency: Country Regulatory agencyAustralia Australian Securities and Investments CommissionChinese mainland China Securities Regulatory CommissionHong Kong Securities and Futures CommissionIndia Securities and Exchange Board of India and Forward Markets Commission (FMC)Singapore Monetary Authority of SingaporeUK Financial Services AuthorityUSA Commodity Futures Trading CommissionMalaysia Securities CommissionStevens Business School (2009-2011) Page 66
  67. 67. Commodity Exchanges in IndiaStevens Business School (2009-2011) Page 67
  68. 68. The government of India has allowed national commodity exchanges, similar to the BSE & NSE,to come up and let them deal in commodity derivatives in an electronic trading environment.These exchanges are expected to offer a nation-wide anonymous, order driven; screen basedtrading system for trading. The Forward Markets Commission (FMC) will regulate theseexchanges.Consequently four commodity exchanges have been approved to commence business in thisregard. They are:S.NO COMMODITY MARKET IN INDIA1. Multi Commodity Exchange (MCX), Mumbai2. National Commodity and Derivatives Exchange Ltd (NCDEX), Mumbai3. National Board of Trade (NBOT), Indore4. National Multi Commodity Exchange (NMCE), AhmadabadStevens Business School (2009-2011) Page 68
  69. 69. 1) NMCE: (National Multi Commodity Exchange of India Ltd.)NMCE is the first demutualised electronic commodity exchange of India granted the Nationalexchange on Govt. of India and operational since 26th Nov, 2002.Promoters of NMCE are, Central warehousing corporation (CWC), National AgriculturalCooperative Marketing Federation of India (NAFED), Gujarat Agro- Industries CorporationLimited (GAICL), Gujarat state agricultural Marketing Board (GSAMB), National Institute ofAgricultural Marketing (NIAM) and Neptune Overseas Ltd. (NOL). Main equity holders arePNB. TheHead Office of NMCE is located in Ahmadabad. There are various commodity trades on NMCEPlatform including Agro and non-agro commodities. 2) NCDEX (National Commodity & Derivates Exchange Ltd.)NCDEX is a public limited co. incorporated on April 2003 under the Companies Act, 1956; itobtained its certificate for commencement of Business on May 9, 2003. It commenced itsoperational on Dec 15, 2003. Promoters shareholders are : Life Insurance Corporation of India(LIC), National Bank for Agriculture and Rural Development (NABARD) and National StockExchange of India (NSE) other shareholder of NCDEX are: Canara Bank, CRISIL limited,Goldman Sachs, Intercontinental Exchange (ICE), Indian farmers fertilizer corporation Ltd(IFFCO) and Punjab National Bank (PNB).NCDEX is located in Mumbai and currently facilitates trading in 57 commodity mainly in Agroproduct.Stevens Business School (2009-2011) Page 69
  70. 70. 3) MCX (Multi Commodity Exchange of India Ltd.)Headquartered in Mumbai, MCX is a demutualised nation wide electronic commodity futureexchange. Set up by Financial Technologies (India) Ltd. permanent recognition fromgovernment of India for facilitating online trading, clearing and settlement operations for futuremarket across the country. The exchange started operation in Nov, 2003.MCX equity partners include, NYSE Euronext, State Bank of India and its associated, NABARDNSE, SBI Life Insurance Co. Ltd., Bank of India, Bank of Baroda, Union Bank of India,Corporation Bank, Canara Bank, HDFC Bank, etc.MCX is well known for bullion and metal trading platform. 4) ICEX (Indian Commodity Exchange Ltd.)ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is jointlypromote by Indiabulls Financial Services Ltd. and MMTC Ltd. and has Indian Potash Ltd.KRIBHCO and IFC among others, as its partners having its head office located at Gurgaon(Haryana).Regulator of Commodity exchanges:-FMCL forward Market commission headquarter in Mumbai, is regulation authority which isoverseen by the minister of consumer affairs, food and public distribution Govt. of India, It isstation body set up in 1953 under the forward contract (Regulation) Act 1952.Stevens Business School (2009-2011) Page 70
  71. 71. Market share of commodity exchangesin India (APPROX) % of market share of exchange OTHERS NBOT NMCE 2% 1% 1% NCDEX 22% MCX 74%Stevens Business School (2009-2011) Page 71
  72. 72. Risk associated with Commodities MarketNo risk can be eliminated, but the same can be transferred to someone who can handle it betteror to someone who has the appetite for risk. Commodity enterprises primarily face the followingclasses of risk. Namely: The price Risk, the quantity risk, the yield/output risk and the politicalrisk, talking about the nationwide commodity exchanges, the risk of the counter party notfulfilling his obligations on due date or at any time therefore is the most common risk.This risk is mitigated by collection of the following margins:-  Initial margins  Exposure margins  Mark to Market on daily positions  Surveillance.Stevens Business School (2009-2011) Page 72
  73. 73. ConclusionStevens Business School (2009-2011) Page 73
  74. 74. The commodity Market is poised to play an important role of price discovery and riskmanagement for the development of agricultural and other sectors in the supply chain. New issueand problems Govt. regulators and other share holders will need to proactive and quick in theirresponse to new developments. WTO regime makes it all the more urgent to develop thesemarkets to enable our economy, especially agriculture to meet the challenge of new regime andbenefits from the opportunities unfolding before U.S. with risks not belong absorbed any morethe idea is to transfer it as the focus is shifting to ―Manage price change rather than change pricesthe commodity markets will play a key role for the same.‖Stevens Business School (2009-2011) Page 74
  75. 75. References   December 3, 2009, Commodities, Goldman Sachs Global Economics, Commodities and Strategy Commodities  USDA, Goldman Sachs Global ECS Research  GFMS  World Gold Council (WGC)  International Monetary Fund (IMF)    Business School (2009-2011) Page 75