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100830724 project-on-commodity-market-vishnu-mantri

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100830724 project-on-commodity-market-vishnu-mantri

  1. 1. COMMODITY MARKET 1
  2. 2. CONTENT Chapter Topic Page No No. Literature review1 Introduction to Commodity Market 042 History of Evolution of Commodity 08 Markets3 India and the Commodity Market 104 International Commodity Exchanges 155 How Commodity Market Works? 176 How to Invest in a Commodity 19 Market7 Current Scenario in Indian 23 Commodity Market8 Commodities 289 Analysis 38 ANNAXTURE 47 Summary 55 Bibliography 56 2
  3. 3. ACKNOWLEDGEMENT It is great pleasure for me to acknowledge the kind of help andguidance received to me during my project work. I was fortunate enough toget support from a large number of people to whom I shall always remaingrateful. I would like to express my sincere gratitude to Mr.ASHOTOSH DAGAfor giving me this opportunity to undergo this lucrative project and also fortheir great guidance and advice on this project, without which I will not beable to complete this project. I am very thankful to our Director Sir ______________ for givingme valuable suggestion and encouragement to bring out good project. I am very thankful to my mentor Prof. ____________ for himinspiration and for initiating diligent efforts and expert guidance in course ofmy study and completion of the project and I am very thankful to myproject guide for giving me timely and concrete guidance for making thisproject successful. I would thank to God for their blessing and my Parents also fortheir valuable suggestion and support in my project report. I would also like to thank our friends and those who have helped usduring this project directly or indirectly. VISHNU MANTRI 3
  4. 4. LITERATURE REVIEWT he emerg ence of t he market f or derivat iv e product s,most not abl yf or wa rd s, f u t u r e s a n d o p t i o n s , c a n b e t r a c e d b a c kto the willingness of risk-averseeconomic agentsto guard themselves against uncertainties arising o u t o f f luct uat io ns in asset prices.B y t heir ver y nat ure,t he f inanci al market s are m a r k e d b y a v e r y h i g h d e gr e e o f v o l a t i l i t y . T h r o u g h t h e u s e o f d e r i v a t i v e products, it is possible to partially or fully transfer price risksby locking-in assetprices. As instruments ofrisk management, these generally do not influencethefluctuations in the underlying asset prices. However, bylocking-in asset prices,derivat iv e product s minimize t heimpact of f luct uat ions in asset prices on t he profitabilityand cash flow situation of risk-averseinvestors.Derivative products initially emerged, as hedgingdevices against fluctuations incommodity prices andcommodity-linked derivatives remained the sole formof such products for almost three hundred years. Thefinancial derivatives cameint o spot light in post -1970 perio d due t o gro win g inst abil it y in t he f inancia lmarkets. However, since their emergence, these productshave become verypopular and by 1990s, they accounted forabout two-thirds of total transactions inderivat iv e product s.I n recent ye ars, t he market f or f inancial derivat iveshasgro wn t remend ousl y bot h in t erms of variet y of inst rument s avail abl e, t heir comple xit y and alsot urnover. I n t he class of equit y derivat ives, f ut uresand options on stock indices have gained more popularitythan on individualstocks,especia lly among inst it ut ion al invest ors, wh o are major users of index- linke d derivatives.Even smallinvest ors f ind t hese usef ul due t o high correlat io n oft he pop ular indices with various portfolios and ease 4
  5. 5. of use. The lower costs associatedwithindex derivat ives vis- vis derivat iv e product sbased on indivi dua l securit ies is another reason for theirgrowing use.As in the present scenario, Derivative Trading is fastgaining momentum. Chapter 1 Introduction to Commodity MarketWhat is “Commodity”? Any product that can be used for commerce or an articleof commerce which is traded on an authorized commodity exchange isknown as commodity. The article should be movable of value,something which is bought or sold and which is produced or used asthe subject or barter or sale. In short commodity includes all kinds ofgoods. Indian Forward Contracts (Regulation) Act (FCRA), 1952defines “goods” as “every kind of movable property other thanactionable claims, money and securities”. In current situation, all goods and products of agricultural(including plantation), mineral and fossil origin are allowed forcommodity trading recognized under the FCRA. The nationalcommodity exchanges, recognized by the Central Government, permitscommodities which include precious (gold and silver) and non-ferrousmetals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oilsand oilcakes, raw jute and jute goods, sugar and gur, potatoes andonions, coffee and tea, rubber and spices. Etc.What is a commodity exchange? A commodity exchange is an association or a company or anyother body corporate organizing futures trading in commodities forwhich license has been granted by regulating authority.What is Commodity Futures? A Commodity futures is an agreement between two parties tobuy or sell a specified and standardized quantity of a commodity at acertain time in future at a price agreed upon at the time of enteringinto the contract on the commodity futures exchange. The need for a futures market arises mainly due to thehedging function that it can perform. Commodity markets, like any 5
  6. 6. other financial instrument, involve risk associated with frequent pricevolatility. The loss due to price volatility can be attributed to thefollowing reasons:Consumer Preferences: - In the short-term, their influence on pricevolatility 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 bringingabout wild fluctuations in prices. This can especially noticed inagricultural commodities where the weather plays a major role inaffecting the fortunes of people involved in this industry. The futuresmarket has evolved to neutralize such risks through a mechanism;namely hedging.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. • Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. • 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.Benefits of Commodity Futures Markets:- The primary objectives of any futures exchange are authenticprice discovery and an efficient price risk management. The 6
  7. 7. beneficiaries include those who trade in the commodities being offeredin the exchange as well as those who have nothing to do with futurestrading. It is because of price discovery and risk management throughthe existence of futures exchanges that a lot of businesses andservices 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. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal. 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. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc. 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. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions. 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. The manufacturers can, as a result, smooth out the influence of changes in their input prices 7
  8. 8. very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments.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. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions.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. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to payback the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This posses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending.7. 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. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade. 8
  9. 9. Chapter 2 History of Evolution of commodity markets Commodities future trading was evolved from need ofassured continuous supply of seasonal agricultural crops. The conceptof organized trading in commodities evolved in Chicago, in 1848. Butone can trace its roots in Japan. In Japan merchants used to store Ricein warehouses for future use. To raise cash warehouse holders soldreceipts against the stored rice. These were known as “rice tickets”.Eventually, these rice tickets become accepted as a kind of commercialcurrency. Latter on rules came in to being, to standardize the tradingin rice tickets. In 19th century Chicago in United States had emergedas a major commercial hub. So that wheat producers from Mid-westattracted here to sell their produce to dealers & distributors. Due tolack of organized storage facilities, absence of uniform weighing &grading mechanisms producers often confined to the mercy of dealersdiscretion. These situations lead to need of establishing a commonmeeting place for farmers and dealers to transact in spot grain todeliver wheat and receive cash in return. Gradually sellers & buyers started making commitments toexchange the produce for cash in future and thus contract for “futurestrading” evolved. Whereby the producer would agree to sell hisproduce to the buyer at a future delivery date at an agreed upon price.In this way producer was aware of what price he would fetch for hisproduce and dealer would know about his cost involved, in advance.This kind of agreement proved beneficial to both of them. As if dealeris not interested in taking delivery of the produce, he could sell hiscontract to someone who needs the same. Similarly producer who notintended to deliver his produce to dealer could pass on the sameresponsibility to someone else. The price of such contract woulddependent on the price movements in the wheat market. Latter on bymaking some modifications these contracts transformed in to aninstrument to protect involved parties against adverse factors such asunexpected price movements and unfavorable climatic factors. Thispromoted traders entry in futures market, which had no intentions to 9
  10. 10. buy or sell wheat but would purely speculate on price movements inmarket to earn profit. Trading of wheat in futures became very profitable whichencouraged the entry of other commodities in futures market. Thiscreated a platform for establishment of a body to regulate andsupervise these contracts. That’s why Chicago Board of Trade (CBOT)was established in 1848. In 1870 and 1880s the New York Coffee,Cotton and Produce Exchanges were born. Agricultural commoditieswere mostly traded but as long as there are buyers and sellers, anycommodity can be traded. In 1872, a group of Manhattan dairymerchants got together to bring chaotic condition in New York marketto a system in terms of storage, pricing, and transfer of agriculturalproducts. In 1933, during the Great Depression, the CommodityExchange, Inc. was established in New York through the merger offour small exchanges – the National Metal Exchange, the RubberExchange of New York, the National Raw Silk Exchange, and the NewYork Hide Exchange. The largest commodity exchange in USA is Chicago Boardof Trade, The Chicago Mercantile Exchange, the New York MercantileExchange, the New York Commodity Exchange and New York Coffee,sugar and cocoa Exchange. Worldwide there are major futures tradingexchanges in over twenty countries including Canada, England, India,France, Singapore, Japan, Australia and New Zealand. 10
  11. 11. Chapter 3 India and the commodity marketHistory of Commodity Market in India:- The history of organized commodity derivatives in Indiagoes back to the nineteenth century when Cotton Trade Associationstarted futures trading in 1875, about a decade after they started inChicago. Over the time datives market developed in severalcommodities in India. Following Cotton, derivatives trading started inoilseed 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 unnecessaryspeculation and were detrimental to the healthy functioning of themarket for the underlying commodities, resulting in to banning ofcommodity options trading and cash settlement of commodities futuresafter independence in 1952. The parliament passed the ForwardContracts (Regulation) Act, 1952, which regulated contracts inCommodities all over the India. The act prohibited options trading inGoods along with cash settlement of forward trades, rendering acrushing blow to the commodity derivatives market. Under the act onlythose associations/exchanges, which are granted reorganization fromthe Government, are allowed to organize forward trading in regulatedcommodities. The act envisages three tire regulations: (i) Exchangewhich organizes forward trading in commodities can regulate tradingon day-to-day basis; (ii) Forward Markets Commission providesregulatory oversight under the powers delegated to it by the centralGovernment. (iii) The Central Government- Department of ConsumerAffairs, Ministry of Consumer Affairs, Food and Public Distribution- isthe ultimate regulatory authority. The commodities future market remained dismantledand remained dormant for about four decades until the newmillennium when the Government, in a complete change in a policy,started actively encouraging commodity market. After Liberalization 11
  12. 12. and Globalization in 1990, the Government set up a committee (1993)to examine the role of futures trading. The Committee (headed byProf. K.N. Kabra) recommended allowing futures trading in 17commodity groups. It also recommended strengthening ForwardMarkets Commission, and certain amendments to Forward Contracts(Regulation) Act 1952, particularly allowing option trading in goodsand registration of brokers with Forward Markets Commission. TheGovernment accepted most of these recommendations and futures’trading was permitted in all recommended commodities. It is timelydecision since internationally the commodity cycle is on upswing andthe next decade being touched as the decade of Commodities.Commodity exchange in India plays an important role where the pricesof any commodity are not fixed, in an organized way. Earlier only thebuyer of produce and its seller in the market judged upon the prices.Others never had a say. Today, commodity exchanges are purely speculative innature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings aprice transparency and risk management in the vital market. A bigdifference between a typical auction, where a single auctioneerannounces the bids and the Exchange is that people are not onlycompeting to buy but also to sell. By Exchange rules and by law, noone can bid under a higher bid, and no one can offer to sell higherthan someone else’s lower offer. That keeps the market as efficient aspossible, and keeps the traders on their toes to make sure no one getsthe purchase or sale before they do. Since 2002, the commoditiesfuture market in India has experienced an unexpected boom in termsof modern exchanges, number of commodities allowed for derivativestrading as well as the value of futures trading in commodities, whichcrossed $ 1 trillion mark in 2006. Since 1952 till 2002 commoditydatives market was virtually non- existent, except some negligibleactivities on OTC basis. In India there are 25 recognized future exchanges, ofwhich there are three national level multi-commodity exchanges. Aftera gap of almost three decades, Government of India has allowedforward transactions in commodities through Online CommodityExchanges, a modification of traditional business known as Adhat andVayda Vyapar to facilitate better risk coverage and delivery ofcommodities. The three exchanges are: National Commodity &Derivatives Exchange Limited (NCDEX) Mumbai, Multi CommodityExchange of India Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL) Ahmedabad.Thereare other regional commodity exchanges situated in different parts ofIndia. 12
  13. 13. Legal framework for regulating commodity futures in India:- The commodity futures traded in commodity exchangesare regulated by the Government under the Forward ContractsRegulations Act, 1952 and the Rules framed there under. The regulatorfor the commodities trading is the Forward Markets Commission,situated at Mumbai, which comes under the Ministry of ConsumerAffairs Food and Public Distribution Forward Markets Commission (FMC):- It is statutory institution set up in 1953 under ForwardContracts (Regulation) Act, 1952. Commission consists of minimumtwo and maximum four members appointed by Central Govt. Out ofthese members there is one nominated chairman. All the exchangeshave been set up under overall control of Forward Market Commission(FMC) of Government of India.National Commodities & Derivatives Exchange Limited (NCDEX) National Commodities & Derivatives Exchange Limited(NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life InsuranceCorporation of India (LIC), National Bank of Agriculture and RuralDevelopment (NABARD) and National Stock Exchange of India Limited(NSC). Punjab National Bank (PNB), Credit Ratting Information Serviceof India Limited (CRISIL), Indian Farmers Fertilizer CooperativeLimited (IFFCO), Canara Bank and Goldman Sachs by subscribing tothe equity shares have joined the promoters as a share holder ofexchange. NCDEX is the only Commodity Exchange in the countrypromoted by national level institutions. NCDEX is a public limited company incorporated on 23April 2003. NCDEX is a national level technology driven on lineCommodity Exchange with an independent Board of Directors andprofessionals not having any vested interest in Commodity Markets.It is committed to provide a world class commodity exchange platformfor market participants to trade in a wide spectrum of commodityderivatives driven by best global practices, professionalism andtransparency. NCDEX is regulated by Forward Markets Commission(FMC). NCDEX is also subjected to the various laws of land like theCompanies Act, Stamp Act, Contracts Act, Forward ContractsRegulation Act and various other legislations. 13
  14. 14. NCDEX is located in Mumbai and offers facilities to itsmembers in more than 550 centers through out India. NCDEXcurrently facilitates trading of 57 commodities.Commodities Traded at NCDEX:- • Bullion:- Gold KG, Silver, Brent • Minerals:- Electrolytic Copper Cathode, Aluminum Ingot, Nickel Cathode, Zinc Metal Ingot, Mild steel Ingots • Oil and Oil seeds:- Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell), Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM seed oil cake, Refined soya oil, Rape seeds, Mustard seeds, Caster seed, Yellow soybean, Meal • Pulses:- Urad, Yellow peas, Chana, Tur, Masoor, • Grain:- Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR- 36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow red maize • Spices:- Jeera, Turmeric, Pepper • Plantation:- Cashew, Coffee Arabica, Coffee Robusta • Fibers and other:- Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28 mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium Staple, Mulberry, Green Cottons, , , Potato, Raw Jute, Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334 • Energy:- Crude Oil, Furnace oilMulti Commodity Exchange of India Limited (MCX) Multi Commodity Exchange of India Limited (MCX) is anindependent and de-mutulized exchange with permanentreorganization from Government of India, having Head Quarter inMumbai. Key share holders of MCX are Financial Technologies (India)Limited, State Bank of India, Union Bank of India, Corporation Bank ofIndia, Bank of India and Cnnara Bank. MCX facilitates online trading,clearing and settlement operations for commodity futures marketacross the country. 14
  15. 15. MCX started of trade in Nov 2003 and has built strategicalliance with Bombay Bullion Association, Bombay Metal Exchange,Solvent Extractors Association of India, pulses Importers Associationand Shetkari Sanghatana. MCX deals wit about 100 commodities.Commodities Traded at MCX:- • Bullion:- Gold, Silver, Silver Coins, • Minerals:- Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead • Oil and Oil seeds:- Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein, Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil, Sunflower Oil cake, Tamarind seed oil, • Pulses:- Chana, Masur, Tur, Urad, Yellow peas • Grains:- Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley, • Spices:- Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove, Ginger, • Plantation:- Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut, Coffee, • Fiber and others:- Kapas, Kapas Khalli, Cotton (long staple, medium staple, short staple), Cotton Cloth, Cotton Yarn, Gaur seed and Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute Sacking, • Petrochemicals:- High Density Polyethylene (HDPE), Polypropylene (PP), Poly Vinyl Chloride (PVC) • Energy:- Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil, Natural Gas National Multi Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised Electronic Multi Commodity 15
  16. 16. Exchange in India. On 25th July 2001 it was granted approval by Government to organize trading in edible oil complex. It is being supported by Central warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmedabad. Chapter 4 INTERNATIONAL COMMODITY EXCHANGES Futures’ trading is a result of solution to a problem relatedto the maintenance of a year round supply of commodities/ productsthat are seasonal as is the case of agricultural produce. The UnitedStates, Japan, United Kingdom, Brazil, Australia, Singapore are homesto leading commodity futures exchanges in the world.The New York Mercantile Exchange (NYMEX):- The New York Mercantile Exchange is the world’s biggestexchange for trading in physical commodity futures. It is a primarytrading forum for energy products and precious metals. The exchangeis in existence since last 132 years and performs trades trough twodivisions, the NYMEX division, which deals in energy and platinum andthe COMEX division, which trades in all the other metals. Commodities traded: - Light sweet crude oil, Natural Gas, HeatingOil, Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper,Aluminum, Platinum, Palladium, etc.London Metal Exchange:- The London Metal Exchange (LME) is the world’spremier non-ferrous market, with highly liquid contracts. Theexchange was formed in 1877 as a direct consequence of the industrialrevolution witnessed in the 19 th century. The primary focus of LME is inproviding a market for participants from non-ferrous based metalsrelated industry to safeguard against risk due to movement in basemetal prices and also arrive at a price that sets the benchmarkglobally. The exchange trades 24 hours a day through an inter officetelephone market and also through a electronic trading platform. It is 16
  17. 17. famous for its open-outcry trading between ring dealing members thattakes 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 worldwas the Chicago Board of Trade (CBOT) during 1848 by group ofChicago merchants who were keen to establish a central market placefor trade. Presently, the Chicago Board of Trade is one of the leadingexchanges in the world for trading futures and options. More than 50contracts on futures and options are being offered by CBOT currentlythrough open outcry and/or electronically. CBOT initially dealt only inAgricultural commodities like corn, wheat, non storable agriculturalcommodities 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 secondlargest commodity futures exchange in the world. It trades in tometals and energy contracts. It has made rapid advancement incommodity trading globally since its inception 20 years back. One ofthe biggest reasons for that is the initiative TOCOM took towardsestablishing Asia as the benchmark for price discovery and riskmanagement in commodities like the Middle East Crude Oil. TOCOM’srecent tie up with the MCX to explore cooperation and businessopportunities is seen as one of the steps towards providing platformfor futures price discovery in Asia for Asian players in Crude Oil sincethe demand-supply situation in U.S. that drives NYMEX is differentfrom demand-supply situation in Asia. In Jan 2003, in a majoroverhaul of its computerized trading system, TOCOM fortified itsclearing system in June by being first commodity exchange in Japan tointroduce an in-house clearing system. TOCOM launched options ongold futures, the first option contract in Japanese market, in May2004.Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver,Platinum, Aluminum, Rubber, etcChicago Mercantile Exchange:- The Chicago Mercantile Exchange (CME) is the largestfutures exchange in the US and the largest futures clearing house inthe world for futures and options trading. Formed in 1898 primarily to 17
  18. 18. trade in Agricultural commodities, the CME introduced the world’s firstfinancial futures more than 30 years ago. Today it trades heavily ininterest rates futures, stock indices and foreign exchange futures. Itsproducts often serves as a financial benchmark and witnesses thelargest 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 doneeither through pit trading or electronically.Commodities Traded: - Butter milk, Diammonium phosphate, Feedercattle, frozen pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk,Urea, Urea Ammonium Nitrate, etc Chapter 5 How Commodity market works? There are two kinds of trades in commodities. The first is thespot trade, in which one pays cash and carries away the goods. Thesecond is futures trade. The underpinning for futures is the warehousereceipt. A person deposits certain amount of say, good X in a warehouse and gets a warehouse receipt. Which allows him to ask forphysical delivery of the good from the warehouse. But some onetrading in commodity futures need not necessarily posses such areceipt to strike a deal. A person can buy or sale a commodity futureon an exchange based on his expectation of where the price will go.Futures have something called an expiry date, by when the buyer orseller either closes (square off) his account or give/take delivery of thecommodity. The broker maintains an account of all dealing parties inwhich the daily profit or loss due to changes in the futures price isrecorded. Squiring off is done by taking an opposite contract so thatthe net outstanding is nil. For commodity futures to work, the seller should be able todeposit the commodity at warehouse nearest to him and collect thewarehouse receipt. The buyer should be able to take physical deliveryat a location of his choice on presenting the warehouse receipt. But atpresent in India very few warehouses provide delivery for specificcommodities. Following diagram gives a fair idea about working of theCommodity market. 18
  19. 19. Today Commodity trading system is fully computerized.Traders need not visit a commodity market to speculate. With onlinecommodity trading they could sit in the confines of their home or officeand call the shots. The commodity trading system consists of certainprescribed steps or stages as follows:I. Trading: - At this stage the following is the system implemented- - Order receiving - Execution - Matching - Reporting - Surveillance - Price limits - Position limitsII. Clearing: - This stage has following system in place- - Matching - Registration - Clearing - Clearing limits - Notation - Margining - Price limits - Position limits - Clearing house. 19
  20. 20. III. Settlement: - This stage has following system followed as follows- - Marking to market - Receipts and payments - Reporting - Delivery upon expiration or maturity. 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 clearingmember of previously mentioned Commodity Exchanges. The investorcan ask for the details from the Commodity Exchanges about the list ofapproved members.What is Identity Proof? When investor approaches Clearing Member, the member will askfor identity proof. For which Xerox copy of any one of the following canbe given a) PAN card Number b) Driving License c) Vote ID d) PassportWhat statements should be given for Bank Proof? The front page of Bank Pass Book and a canceled cheque of aconcerned bank. Otherwise the Bank Statement containing details canbe given.What are the particulars to be given for address proof? 20
  21. 21. In order to ascertain the address of investor, the clearing memberwill insist on Xerox copy of Ration card or the Pass Book/ BankStatement 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 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 acommodity broker? While selecting a commodity broker investor should ideally keepcertain aspects in mind to ensure that they are not being missed inany 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 betweenindividual traders and the commodity exchange. In other words theCommodity Broker is the member of Commodity Exchange, havingdirect connection with the exchange to carry out all trades legally. Heis also known as the authorized dealer.How to become a Commodity Trader/Broker of CommodityExchange? To become a commodity trader one needs to complete certainlegal and binding obligations. There is routine process followed, whichis stated by a unit of Government that lays down the laws and actswith regards to commodity trading. A broker of Commodities is also 21
  22. 22. required to meet certain obligations to gain such a membership inexchange. To become a member of Commodity Exchange the broker ofbrokerage firm should have net worth amounting to Rs. 50 Lakh. Thissum has been determined by Multi Commodity Exchange.How to become a Member of Commodity Exchange? To become member of Commodity Exchange the personshould 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 accountof his clients, and clear and settle trades himself. A sole proprietor,Partnership firm, a joint Hindu Undivided Family (HUF), a corporateentity, a cooperative society, a public sector organization or any otherGovernment or non-Government entity can become a TCM. There are two types of TCM, TCM-1 and TCM-2. TCM-1refers to transferable non-deposit based membership and TCM-2 refersto non-transferable deposit based membership. A person desired to register as TCM is required to submitan 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 AdmissionCommittee and committee is also empowered to frame rules or criteriarelating to selection or rejection of a member.Institutional Trading-cum-clearing Member (ITCM):- Only an Institution/ Corporate can be admitted by the Exchangeas a member, conferring upon them the right to trade and clearthrough the clearing house of exchange as an Institutional Trading-cum-clearing Member (ITCM). The member may be allowed to makedeals for himself as well as on behalf of his clients and clear and settlesuch deals. ITCMs can also appoint sub-brokers, authorized personsand Trading Members who would be registered as trading members.Professional Clearing Member (PCM):- 22
  23. 23. A PCM entitled to clear and settle trades executed by othermembers of the exchange. A corporate entity and an institution onlycan apply for PCM. The member would be allowed to clear and settletrades of such members of the Exchange who choose to clear andsettle their trades through such PCM.Membership Details for NCDEX:-1Trading-cum-clearing Member: - TCMSr. Particulars NCDEX: TCMNo. Interest Free Cash1 15.00 Lakhs Security Deposit Collateral Security2 15.00 Lakhs Deposit3 Admission Fee 5.00 Lakhs4 Annual Membership Fees 0.50 Lakhs Advance Minimum5 0.50 Lakhs Transaction Charges6 Net worth Requirement 50.00 LakhsProfessional Clearing Membership: - PCMSr. Particulars NCDEX: PCMNo. Interest Free Cash1 25.00 Lakhs Security Deposit Collateral Security Deposit2 25.00 Lakhs Annual Subscription3 1.00 Lakhs Charges Advance Minimum4 1.00 Lakhs Transaction Charges5 Net worth Requirement 5000.00 LakhsMembership Details for MCX:-21 www.ncdex.com2 MCX Certified Commodity Professional Reference Material 23
  24. 24. Initial Net worth Criteria Admission AnnualCategory Security Fees Subscription Corporate Partnership Individual Deposit Rs. 10 Rs. 15 Rs. 50TCM-1 Rs 50,000 Rs 50 Lakhs Rs. 50 Lakhs Lakhs Lakhs Lakhs Rs. 5 Rs. 50 Rs. 50 Rs. 50TCM-2 Rs 50,000 Rs. 50 Lakhs Lakhs Lakhs Lakhs Lakhs Rs. 10 Rs. 50 Rs. 50ITCM Rs 50,000 N.A. N.A. Lakhs Lakhs Lakhs Rs. 50PCM Nil Rs 1,00,000 Rs. 5Crores N.A. N.A. Lakhs Chapter 7 Current Scenario in Indian Commodity MarketNeed of Commodity Derivatives for India:- India is among top 5 producers of most of the Commodities, inaddition to being a major consumer of bullion and energy products.Agriculture contributes about 22% GDP of Indian economy. Itemployees around 57% of the labor force on total of 163 millionhectors of land Agriculture sector is an important factor in achieving aGDP growth of 8-10%. All this indicates that India can be promoted asa major centre for trading of commodity derivatives.Trends in volume contribution on the three NationalExchanges:-Pattern on Multi Commodity Exchange (MCX):- MCX is currently largest commodity exchange in the country interms of trade volumes, further it has even become the third largest inbullion and second largest in silver future trading in the world. 24
  25. 25. Coming to trade pattern, though there are about 100commodities traded on MCX, only 3 or 4 commodities contribute formore than 80 percent of total trade volume. As per recent data thelargely traded commodities are Gold, Silver, Energy and base Metals.Incidentally the futures’ trends of these commodities are mainly drivenby international futures prices rather than the changes in domesticdemand-supply and hence, the price signals largely reflectinternational scenario. Among Agricultural commodities major volume contributorsinclude Gur, Urad, Mentha Oil etc. Whose market sizes areconsiderably small making then vulnerable to manipulations.Pattern on National Commodity & Derivatives Exchange(NCDEX):- NCDEX is the second largest commodity exchange in thecountry after MCX. However the major volume contributors on NCDEXare agricultural commodities. But, most of them have commoninherent problem of small market size, which is making themvulnerable to market manipulations and over speculation. About 60percent 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 beenlargely trading in Agricultural Commodities. Trade on NMCE hadconsiderable proportion of commodities with big market size as juterubber etc. But, in subsequent period, the pattern has changed andslowly moved towards commodities with small market size or narrowcommodities. Analysis of volume contributions on three major nationalcommodity exchanges reveled the following pattern, Major volume contributors: - Majority of trade has beenconcentrated 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:- 25
  26. 26. It appears that speculators or operators choose commodities orcontracts where the market could be influenced and extremespeculations possible. In view of extreme volatilities, the FMC directs the exchanges toimpose restrictions on positions and raise margins on thosecommodities. Consequently, the operators/speculators chose anothercommodity and start operating in a similar pattern. When FMC bringsrestrictions on those commodities, the operators once again move tothe other commodities. Likewise, the speculators are moving from onecommodity to other (from methane to Urad to guar etc) where themarket could be influenced either individually or with a group.Beneficiaries: - So far the beneficiaries from the current nature oftrading are Exchangers: - making profit from mounting volumes Arbitragers Operators In order to understand the extent of progress the trading thetrading in Commodity Derivatives has made towards its specifiedobjectives (price discovery and price risk management), the currenttrends are juxtaposed against the specificationSpecified and actual pattern of futures trade:- 3Process Aught to be ActualCommodities There should be large Largely Traded are demand for and supply of the commodity- no • Bullion, Metals and individual or a group of • Commodities with small persons acting in concert market size (or narrow should be in a position to Commodities) like guar, influence the demand or Burmese Urad, Mentha etc. supply, and consequently the price substantially Towards this, the major Produced or consumed Commodities in the Country such as wheat, rice, jute etc. and India is the top first or second producer of these Commodities.3 FMC & TECL research 26
  27. 27. Trade Hedging together with Over speculation andStrategy Moderate speculation to Manipulation leading to wide Smoothen the price Fluctuations. Fluctuations.Beneficiaries Farmers/producers,, So far exchangers, Consumers and traders arbitrageurs, Either through direct Operators etc., Participation or through Further there were instances of Price signals. Wrong price signals accruing losses to farmers in case of menthe, and to traders in case Of imported pulses. Price Discovery • Pure replication of International trends not Taking in account of Domestic D-S in case of Non-agril. Commodities • Wide fluctuations from Over speculation and Manipulation in case ofObjectives Largely traded agril. commodities Risk Management No such evidences and contrarily, the extreme volatilities in certain commodities are making futures More risky for participants. Thus it is evident that the realization of specified objectives isstill a distinct destination. It is further, evident from the nature of thecommodities largely traded on national exchanges that the factorsdriving the current pattern of futures trade are purely speculative.Reasons for prevailing trade pattern:- No wide spread participation of all stake holders of commoditymarkets. The actual benefits may be realized only when all the stakeholders in commodity market including producers, traders, consumersetc trade actively in all major commodities like rice, wheat, cotton etc.Some Suggestions to make futures market as a level playing fieldfor all stake holders:- • Creation of awareness among farmers and other rural participants to use the futures trading platform for risk mitigation. 27
  28. 28. • Contract specifications should have wider coverage, so that a large number of varieties produced across the country could be included.• Development of warehousing and facilities to use the warehouse receipt as a financial instrument to encourage participation farmers.• Development of physical market through uniform grading and standardization and more transparent price mechanisms.• Delivery system of exchanges is not good enough to attract investors. E.g.- In many commodities NCDEX forces the delivery on people with long position and when they tend to give back the delivery in next month contract the exchange simply refuses to accept the delivery on pretext of quality difference and also auctions the product. The traders have to take a delivery or book losses at settlement as there are huge differences between two contracts and also sometimes few contracts are not available for trading for no reason at all.• Contract sizes should have an adequate range so that smaller traders can participate and can avoid control of trading by few big parties.• Setting of state level or district level commodities trading helpdesk run by independent organization such as reputed NGO for educating farmers.• 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 system. As good delivery system is the back bone of any Commodity trade, warehousing problem has to be handled on a war footing.• At present there are restrictions in movement of certain goods from one state to another. These needs to be removed so that a truly national market could develop for commodities and derivatives. 28
  29. 29. • Regulatory changes are required to bring about uniformity in Octri and sales tax etc. VAT has been introduced in country in 2005, but, has not yet been uniformly implemented by all states. • 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. So in practice contracts are settled in Cash but before maturity. There is need to modify the law to bring it closer to the wide spread practice and save participants from unnecessary hassle. Chapter 8 CommoditiesSteel: -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 andconstruction material in the world. It is most important, multifunctional and the most adaptable of materials. Steel production is 20times higher a compared to production of all non-ferrous metals puttogether. 29
  30. 30. Steel compared to other materials of its type has lowproduction costs. The energy required for extracting iron from ore isabout 25% of what is needed for extracting aluminum. There are altogether about 2000 grades of steeldeveloped of which 1500 grades are high-grade steels. The largenumber of grades gives steel the characteristics of basic productionmaterial.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 orcold) rolled strip product. Plate products vary in dimensions from 10mm to 200 mm and thin flat rolled products from 1 mm to 10 mm.Plate products are used for ship building, construction, large diameterwelded pipes and boiler applications. Thin flat products find end useapplications in automotive body panels, domestic ‘white goods’products, ‘tin cans’ and the whole host of other products from officefurniture to heart pacemakers. Plates, HR coils and HR Sheet, CRSheet and CR coils, GP/GC (galvanized plates and coils) pipes etc. areincluded in this category. A long steel product is a road or a bar. Typical rod productare the reinforcing rods made from sponge iron for concrete, ingots,billets, engineering products, gears, tools, etc. Wiredrawn productsand seamless pipes are also part of the long products group. Bars,rods, structures, railway materials, etc are included in this category. Sponge Iron/ Direct reduced iron (DRI): This is a highquality product produced by reducing iron ore in a solid state and isprimarily used as an iron input in electric arc furnace (EAF) steelmaking process. This industry is an integral part of the steel sector.India is one of the leading countries in terms of sponge ironproduction. There are a number of coal-based sponge iron/DRI plants(in the eastern and central region) and also three natural gas basedplants (in western part of the country) in the country.Global Scenario: - The total output of the word crude steel in 2006 stood at 945million tons, resulting in a growth of 6.7% over the previous year. China is the word’s largest crude steel producer in the year2006 with around 220.12 million tons of steel production, followed byJapan and USA. USA was largest importer of steel products, bothfinished and semi finished, in 2005, followed by China and Germany. The words largest exporter of semi-finished and finished steelwas Japan in 2005, followed by Russia and Ukraine. 30
  31. 31. China is the largest consumer now and consumption of steel byChina is estimated to increase by 12-13% in 2007.Indian Scenario: - Percentage Change > 5% 2-5% < 2% No. of Times Ingots- Mandi 2 10 10 HRC 2.5 Mumbai 8 3 11 HRC 2.0 Imported 12 4 6 HRC fob- Europe 5 9 8 th India is the 8 largest producer of the steel with an annualproduction of 36.193 million tons, while the consumption is around 30million tons. Iron & steel can be freely exported and imported from India.India is a net exporter of steel. The Government of India has taken a number of policymeasures, such as removal of iron & steel industry from the list ofindustries reserved for public sector, deregulation of price anddistribution of iron & steel and lowering import duty on capital goodsand raw materials, since liberalization for the growth and developmentof Indian iron & steel industry. After liberalization India has seen huge scale addition to itssteel making capacity. The country faces shortage of iron and steelmaterials.Factors Influencing Demand & Supply of Steel Long and SteelFlat: - The demand for steel is dependent on the overall health of theeconomy and the in fracture development activities being undertaken.The steel prices in the Indian market primarily depend on the domesticdemand and supply conditions, and international prices. Governmentand different producer and consumer associations regularly monitorsteel prices. The duty imposed on import of steel and its fractions also havean impact on steel prices. The price trend in steel in Indian marketshas been a function of World’s economic activity. Prices of inputmaterials of iron and steel such as power tariff, fright rates and coalprices, also contribute to the rise in the input costs for steel making.Monthly Variations in Steel Prices from Feb 2005- Dec 2006: - 44 MCX certified Commodity Professional Reference Material. 31
  32. 32. Contract specifications of Steel FlatSymbol STEELFLATDescription STEELFLATMMMYYTrading Period Mondays through SaturdaysTrading session Monday to Friday: 1st session: 10.00 am to 5.00 pm 2nd session: 5.30 pm to 8.00 pm Saturday: 10.00 am to 2.00 pmNo. of contracts a year 12Contact Duration 4 monthsTradingTrading unit 25 MTPrice Quote Rs./ton, Ex-Taloj Kalambo (excluding execise duty and sales tax).Maximum order size 200 MTTick size (minimum Rs. 10Price movement)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 be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next three days, after which the special margin will be relaxed.Maximum Allowable Open For individual clients: 1,00,000 MTPosition For a member collectively for all clients: 25% of open market position. DeliveryDelivery unit 25 MT with tolerance limit Between 23.5 MT to 26.5 MTDelivery Center(s) Warehouses at Taloja/ KalamboliQuality SpecificationsHR coil conforming to the following specification: Thickness 2 mm 32
  33. 33. Width either 1250mm or 910 mm at seller’s option. It should confirm to IS 11513 Grade D/SAE 1008 (Internationalequivalent)Delivery is acceptable only in coil form.Contract specifications of Steel LongSymbol STEELLONGDescription STEELLONGMMMYYTrading Period Mondays through SaturdaysTrading session Monday to Friday: 1st session: 10.00 am to 5.00 pm 2nd session: 5.30 pm to 8.00 pm Saturday: 10.00 am to 2.00 pmNo. of contracts a year 12Contact Duration 4 monthsTradingTrading unit 15 MTPrice Quote Rs./ton, Ex- Mandi Gobindgarh (including excise duty but excluding sales tax).Maximum order size 300 MTTick size (minimum Rs. 10Price movement)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 be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next three days, after which the special margin will be relaxed.Maximum Allowable Open For individual clients: 1,00,000 MTPosition For a member collectively for all clients: 25% of open market position. DeliveryDelivery unit 15 MT with tolerance limit Between 13.5 MT to 16.5 MTDelivery Center(s) Warehouses at Mandi GobindgarhQuality SpecificationsMild steels ingots “3 ½ * 4 ½ inch”Carbon composition: Below 0.25%Manganese: Above 0.45% 33
  34. 34. Material should be physically sound. It should have no hollowness, nopiping no rising. Its surface should be plain.Quality Specifications: -Sponge Iron FuturesSponge Iron LumpsChemical 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 seller’s 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 ½ * 4 ½ inch. • Carbon composition: Below 0.25% • Manganese: Above 0.45% 34
  35. 35. • 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 ½ * 4 ½ 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. WHEAT Wheat is cereal grain and consumed worldwide. Wheat ismore popular than any other cereal grain for use in baked goods. Itspopularity stems from the gluten that forms when lour is mixes withwater. Wheat is the most widely grown cereal grain in the world.Global and Indian Scenario: - The world wheat production in the recent years has beenobserved to be hovering between 555 million tons to 625 million tons ayear. 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 around60% of total global production. World’s wheat consumption is continuously growing withgrowth in a population, as it is one of the major staple foods acrossthe world. The major consuming countries of wheat are EU, China,India, Russia, USA and Pakistan. India has largest area in the worldunder wheat. However, in terms of production, India is second largestbehind China. In India, Wheat is sown during October to December 35
  36. 36. and harvested during March to May. The wheat marketing season inIndia is assumed to begin from April every year. The major wheat producing states in India are Utter Pradesh,Punjab, Haryana, Madhya Pradesh, Rajastan and Bihar. Which togetheraccount for around 93% of total production. In terms of productivity,Punjab stands first followed by Haryana, Rajastan, UP, Gujarat, Biharand MP. Indian wheat is largely soft/medium hard, medium protein,bread wheat. India is also produces around 1.5 million tons of durumwheat, mostly in central and western India, which is not segregatedand marketed separately. India consumes around 72-74 million tons ofWheat every year. There are around 1000 large flourmills in India, with a millingcapacity of around 15 million tons. The total procurement of wheat byGovernment agencies during last 15 years from 8 to 20 million tons,accounting for only 15-20% of the total production. India exportedaround 5 m illion tons subsidized by Government in 2004-05, as aresult of surplus stock. Recently Govt. took decision to import wheat inview of, declining stocks and increasing demand.Key market moving Factors: - Price tends to be lower as harvesting progresses and producestarts coming in to the market. At the time sowing and beforeharvesting price tend to rise in a view of tight supply situation.Weather has profound influence on wheat production. Temperatureplays crucial role towards maturity of wheat and productivity. Change in Minimum Support Price (MSP) by Govt. and the stockavailable with Food corporation of India and the release from officialstock influence of the price. Though, international trade is limited, theups and downs in the production and consumption at all the 36
  37. 37. major/minor producing and consuming nation dose influence the longterm price trend.Contract specifications of WheatContract Period Five MonthsTrading Period Mondays through SaturdaysTrading session Monday to Friday: 10.00 am to 5.00 pm Saturday: 10.00 am to 2.00 pmTradingTrading unit 10 MTQuotation based value 1 QuintalMaximum order size 500 MTTick size (minimum 10 PaisePrice movement)Price Quotation Ex-warehouse Delhi (including all taxes, levies and sales tax/ VAT, as the case may be)Daily price limits 4%Initial margin 5%Special margin In case of additional volatility, a special margin at such other percentage, as deemed fit will be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next 2 days, after which the special margin will be relaxed.Maximum Allowable Open Clientwise- 20000 MT, Member wise-80000Position MT or 20% of open position, which ever is higher. DeliveryDelivery unit 10 MT with tolerance limit of 5%Delivery Margin 25%Delivery Center(s) Warehouses at DelhiQuality Specifications Wheat of Standard Mill variety confirming to the following qualitystanderds will be delieverable. The material will be tested using a 3mmsieve.Defects(a) Foreign Matter 2.0% (Max) 37
  38. 38. (organic/inorganic)(b) Damaged Kernels 2.00 (Max) provided that infestation damaged not to exceed 1 per 100 kernels.(c) Shrunken Shriveled 3.00% (Max) & broken grainsTotal defects (a+b+c) Below 6%Acceptable up to 8% With rebate on 1:1 basisRejected total defect is Above 8%Teat weight up to 76 kg/hl 76kg/hl. Min. acceptable with rebate of 150 grams per kg/hl or pro-rata variance in hector liter weight deducted per quintal Below 74 kg/hlRejected Below 74 kg/hlMoisture 11%Acceptable (Max)13% With rebate 1:1Reject able Above 13%Quality Specifications: -Wheat of Standard Mill variety conforming to the following quality standardswill be deliverable; The material will be tested by using 3 mm sieve.Defects: -1. Foreign Matter (organic/inorganic) 2.0% (maximum)2. Damaged Kernel 2.0% (maximum) provided that infestation damaged not exceed 13. Sunken, Shriveled and Per 100 kernels.Broken grains 3.00% (maximum)Total Defects (a+b+c) Below 6%Acceptable Up to 8% with rebate on 1:1 basisRejected if total defects Above 8%Total Weight 76 kg/hl. (minimum)Up to 74 kg/hl Acceptable with rebate of 150 grams per kg/hl or pro-rata variance in hector liter weight deducted per quintal weight delivered.Below 74 kg/hl RejectedMoisture 11% (maximum)Acceptable Up to 13% with rebate 1:1Reject able Above 135Packing Packing should be in B Twill once 38
  39. 39. used 100kg jute bags, the tare weight deduction per bag for net weight calculation shall be 1 kg per quintal of gross weight. ANALYSIS Survey was conducted across Mumbai City (in areas likeAndheri, Santacruz, Bandra Church gate) to judge the awareness ofpeoples regarding investment in Commodity Market. 39
  40. 40. Sample size 30 peoples COMMODITY MARKET Questionnaire for Investors1. Do you have any investment plan? a. YES b. NO (if no move to question no. 4)2. If, yes, where you would like to invest your money? a. Bank F.D. b. Share Market c. Commodity Market d. Other (specify)3. Why you prefer specific investment? -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- --4. If no, why? a. Not aware about invest avenues b. Insufficient income c. Other (specify)5. Do you aware about Commodity Market? a. YES b. NO (if no move to question no 12)6. Are you willing to invest in Commodity Market? (If in Q. 2 Commodity Market, skip this question) a. If YES, why? ------------------------------------------------------------------------------ b. If NO, why? ------------------------------------------------------------------------------ (If no move to the Question no.10)7. If yes, which Commodity Exchange you will prefer for investment? a. MCX b. NCDEX c. NMCE d. Other (specify) f. Can’t Say8. Why you prefer specific Commodity Exchange for investment? (if answer to Q.7 f, skip this question) -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- --9. In which Commodities you will prefer to Invest? And why? a. Bullion b. Agricultural c. Metals d. Fossils/Energy -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- 40
  41. 41. -------------------------------------------------------------------------------------------------- --- 10. What is your perception about Commodity Market? a. Less Risky b. Risky c. Very Risky 11. What you think Commodity Market Advertisements (hoardings, prints etc) are explanatory enough to give needed useful information? a. YES b. NO 12. Gender a. Male b. Female 13. Age Group a. Below 21 Years b. 21 years – 30 years c.31 years – 40 years d. 41 years – 50 years e. Above 50 years 14. Occupation a. Govt. Job b. Private Job c. Business d. Other (specify) 15. Income Group (Per month) a. Nil b. Below 10,000/- c. 10,000 – 20,000/- d. 20,000 – 30,000/- e. Above 30,000/------------------------------------------------------------------------------------------------------------------------------------------------------- Quantitative Analysis 41
  42. 42. 1. Investor’s preferences: - Other 7% 23% Share Market 43% Bank F.D. 27% Commodity Market Investment Prefrences specified in other category 3% 30% Real Estate Jwelary Not Specified 67% Analysis of data revels that majority of people preferinvestment in Real Estate (28.81% of total sample) which specified inother category investment and it is greater than share marketinvestment preference.2. People’s knowledge about Commodity Market: - 42
  43. 43. 13% Know Don’t Know 87% Very few people heard of commodity market. Vast majority ofpeople are unaware about Commodity Market.3. Investor’s interested to invest in Commodity Market: - (Out of those, who know Commodity Market) Interested 50 % 50 % Not Interested Though some people heard of commodity market due to lack of complete knowledge about it half of then are not interested in investing in Commodity Market. 43
  44. 44. 4.Commodity Market Investors Preferences 13% 37% Bullion 20% Metals Agricultural Fossils/Energy 30% Above data revels that majority of commodity investors like to invest in Bullion (Gold & Silver). 5. Perception about Commodity Market 25% Less Risky Risky 50% Very Risky 25% Analysis of data shows that majority of people who areaware about commodity market; feel that investment in commoditymarket is very risky. So efforts should be done to minimize the risk incommodity investment and make peoples about minimum risk incommodity investment. 44
  45. 45. 6. Opinion about Commodity Market Advertisements (Expressed by those who know commodity market) N o t In fo rm a tiv e 100 There is no second opinion amongst commodity investors, that commodity market advertisements do not give all the necessary information. 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. 45
  46. 46. 4. Advertisements: - Commodity market Advertisements should be moreinformative. And it is the failure of commodity market’sadvertisement campaign to attract people’s attention; as majorityof people are not aware about commodity market.------------------------------------------------------------------------------------------------------------------------------------------------------ Questionnaire for Brokers1. Since how many years you are working as a broker? -------------------------------------------------------------------------------------------------- -2. How does one become broker? -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------3. Which Commodity Exchange you prefer to work? a. MCX b. NCDEX c. NMCE d. Other (specify)4. Why do you prefer the specific Commodity Exchange? -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------5. In which commodities do you deal? -------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------6. Why do you prefer those commodities? 46
  47. 47. -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- 7. If one wants to invest in Commodity Market, how to go about it? -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- 10. What is your perception about Commodity Market? a. Less Risky b. Risky c. Very Risky 11. Any suggestion for commodity market? ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- 12. Gender a. Male b. Female 13. Age Group a. Below 21 years b. 21 years – 30 years c. 31 years – 40 years d. 41 years – 50 years e. Above 50 years 14. Income Group (per year) a. Below 1,00,000/- b. 1,00,000 – 1,50,000/- c. 1,50,000 - 2,50,000/- 47
  48. 48. d. Above 2,50,000/------------------------------------------------------------------------------------------------------------------------------------------------------- COMMODITY MARKET Questionnaire for Officials1. What is MCX/ NCDX/ NMCE/……. -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ---2. History behind formation of MCX/ NCDX/ NMCE/……………….. -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ----3. What are the departments at MCX/ NCDX/ NMCE/………. -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ---4. How work is done in each department? -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ---- 48
  49. 49. 5. How one can become broker at MCX/ NCDX/ NMCE/…………. -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ---- 6. How one can become member of MCX/ NCDX/ NMCE……….. -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ---- ANNEXURETerms and Definitions related to Commodity Market: - • Accruals:- Commodities on hand ready for shipment, storage and manufacture • Arbitragers: - Arbitragers are interested in making purchase and sale in different markets at the same time to profit from price discrepancy between the two markets. • At the Market: - An order to buy or sell at the best price possible at the time an order reaches the trading pit. • Basis: - Basis is the difference between the cash price of an asset and futures price of the underlying asset. Basis can be negative or positive depending on the prices prevailing in the cash and futures. • Basis grade: - Specific grade or grades named in the exchanges future contract. The other grades deliverable are subject to price of underlying futures • Bear: - A person who expects prices to go lower. 49
  50. 50. • Bid: - A bid subject to immediate acceptance made on the floor of exchange to buy a definite number of futures contracts at a specific price.• Breaking: - A quick decline in price.• Bulging: - A quick increase in price.• Bull: - A person who expects prices to go higher.• Buy on Close: - To buy at the end of trading session at the price within the closing range.• Buy on opening: - To buy at the beginning of trading session at a price within the opening range.• Call: - An option that gives the buyer the right to a long position in the underlying futures 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 is based. This product can include agricultural commodities, financial instruments and the cash equivalent of index futures.• Close: - The period at the end of trading session officially designated by exchange during which all transactions are considered made “at the close”.• Closing price: - The price (or price range) recorded during the period designated by the exchange as the official close.• Commission house: - A concern that buys and sells actual commodities or futures contract for the accounts of customers.• Consumption Commodity: - Consumption commodities are held mainly for consumption purpose. E.g. Oil, steel• Cover: - The cancellation of the short position in any futures contract buys the purchase of an equal quantity of the same futures contract. 50
  51. 51. • 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 the day unless expressly designated as an open order or “good till canceled” order.• Delivery: - The tender and receipt of actual commodity, or in case of agriculture commodities, warehouse receipts covering such commodity, in settlement of futures contract. Some contracts settle in cash (cash delivery). In which case open positions 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 the terms of futures contract.• Delivery notice: - A notice for a clearing member’s intention to deliver a stated quantity of commodity in settlement of a short futures position.• Derivatives: - These are financial contracts, which derive their value from an underlying asset. (Underlying assets can be equity, commodity, foreign exchange, interest rates, real estate or any other asset.) Four types of derivatives are trades forward, futures, options and swaps. Derivatives can be traded either in an exchange 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 contract terms on most exchanges.• Exchange: - Central market place for buyers and sellers. Standardized contracts ensure that the prices mean the same to everyone in the market. The prices in an exchange are determined in the form of a continuous auction by members who are acting on behalf of their clients, companies or themselves.• Forward contract: - It is an agreement between two parties to buy or sell an asset at a future date for price agreed upon while signing agreement. Forward contract is not traded on an exchange. This is oldest form of derivative contract. It is traded in OTC Market. Not on an exchange. Size of forward contract is 51
  52. 52. customized as per the terms of agreement between buyer and seller. The contract price of forward contract is not transparent, as it is not publicly disclosed. Here valuation of open position is not calculated on a daily basis and there is no requirement of MTM. Liquidity is the measure of frequency of trades that occur in a particular commodity forward contract is less liquid due to its customized nature. In forward contracts, counter- party risk is high due to customized & bilateral nature of the transaction. Forward contract is not regulated by any exchange. Forward contract is generally settled by physical delivery. In this case delivery is carried out at delivery center specified in the customized bilateral agreement.• Futures Contract:- It is an agreement between two parties to buy or sell a specified and standardized quantity and quality of an asset at certain time in the future at price agreed upon at the time of entering in to contract on the futures exchange. It is entered on centralized trading platform of exchange. It is standardized in terms of quantity as specified by exchange. Contract price of futures contract is transparent as it is available on centralized trading screen of the exchange. Here valuation of Mark-to-Mark position is calculated as per the official closing price on daily basis and MTM margin requirement exists. Futures contract is more liquid as it is traded on the exchange. In futures contracts the clearing-house becomes the counter party to each transaction, which is called novation. Therefore, counter party risk is almost eliminated. A regulatory authority and the exchange regulate futures contract. Futures contract is generally cash settled but option of physical settlement is available. Delivery tendered in case of futures contract should be of standard quantity and quality as specified by the exchange.• Futures commission merchant: - A broker who is permitted to accept the orders to 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 by professional traders or commodity trading advisors.• Futures Market:-It facilitates buying and selling of standardized contractual agreements (for future delivery) of underlying asset as the specific commodity and not the physical commodity itself. 52

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