Msop batch 9 commodity market project

Commodity Market
MSOP Batch - 9
27th
Feb to 14th
Mar 2014
The Project provides a short summary on various facts related to the
“Emerging scenario of Commodity Futures” in respect to the present and
practical capital market world.
Prepared by:
Rohit Natani
220558771 / 08 / 2007

ACKNOWLEDGEMENT
At this point of time I would like to express my gratitude to all those who gave me
their support to complete this project
I am grateful to my Sir Dr. Girish Goyal and Mr. Shyam Agarwal for giving me
permission to commence this project in the first instance and to do the necessary
study and research. I want to thank both and other faculty members for all their
professional advice, value added time, effort, and expertise help, support, interest
and valuable hints that encouraged me to go ahead with my project.
I am deeply indebted to my colleagues for their meticulous planning, layout,
presentation and above all for their consideration and time.
My heartfelt appreciation also goes to my friends for their stimulating suggestions
and encouragement which helped me at each level of my research and in writing
of this project.
Especially, I would like to give my special thanks to my parents, family members
and god whose patient love enabled me to complete this work.
I have tried my best to enclose practical approach of commodity market in this
project instead of getting deep into theoretical part.

CONTENTS
Sr. No. Topic Page No.
1. Introduction 4-7
2. Definitions 8-11
3. Working of commodity market 12
4. Process of trading 13-14
5. Demo and timings of trading 15
6. Details about commodity market 16-20
7. Myths of commodity market 21-24
8. What can commodity market offers? 24-25
9. Do`s and Don`ts for dealing in commodity futures 26-27
10. Rights of clients in commodity market 27
11. Beware of the following 28
12. Case Studies 28-30
13. Conclusion 30-31
14. Bibliography 32-37

Commodity Market - Introduction
Ever since the drawn of civilization, commodity trading has become an integral
part of mankind. The first and foremost reason is that commodity represents the
fundamental elements of lifestyle of human beings. In the early days, people used to
exchange goods for goods, which was called as ‘Barter System’. With the advancement
of civilization, trading system has gone through various changes and has now entered
into an era of Future trading besides existence physical trading across the world.
The history of Commodity Future trading can be traced back to 1688 with the
introduction of Future trading in rice in Japan. This was followed by an increased
participation in commodity derivatives, especially in Futures, in the industrialized
countries like America and Britain. All the countries opened the avenue for introduction
of Future trading in commodities in 19th
century. Major commodity Future trading
platforms opened in the world are Chicago Board of Trade (NYBOT) and New York
Mercantile Exchange (NYMEX).
A Commodity derivative is a contract which derives its value from an underlying
commodity. The main purpose of Future market is to provide a mechanism for
successfully managing the price risk associated with commodities. Future markets
provide a platform for buyers and sellers to trade in a huge number of diverse
commodities such as agricultural products, metals and energy. These markets are not
only meant for hedgers, speculators and arbitrages, but also for retail investors who
want to trade in booming commodity market.

A Commodities exchange is an exchange where various commodities and
derivatives products are traded. Most commodity markets across the world trade in
agricultural products and other raw materials (like, Jeera, sugar, Chilli, Chana, Energy
Sector Crude oil, Metals-Copper, Zinc, Lead, Bullions-Gold, Silver, etc.) and contracts
based on them. These contracts can include spot prices, forwards, futures and options
on futures. Other sophisticated products may include interest rates environmental
instruments, swaps, or ocean freight contracts.
Commodities exchanges usually trade futures contracts on commodities.
Speculators and investors also buy and sell the futures contracts in attempt to make a
profit and provide liquidity to the system. However, due to the leverage provided by the
exchange to traders those participating in commodity futures trading face substantial
amounts of speculative risk.
A futures contract is a standardized contract between two parties to exchange a
specified asset of standardized quantity and quality for a price agreed today (the
futures price or the strike price) but with delivery occurring at a specified future date,
the delivery date.
The contracts are traded on a futures exchange. The party agreeing to buy the
underlying asset in the future, the "buyer" of the contract, is said to be "long", and the
party agreeing to sell the asset in the future, the "seller" of the contract, is said to be
"short". The terminology reflects the expectations of the parties -- the buyer hopes the
asset price is going to increase, while the seller hopes for a decrease. Note that the
contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience
reflecting the position each party is taking (long or short).

Indian scenario
The commodity derivatives markets in India are as old as those of the US. The
origin of commodity derivatives markets in India can be traced back to 1875, when
Bombay Cotton Trade Association Ltd., was set up to start trading in cotton Futures.
Subsequent to this, many other associations have started Future trading in commodities
at different places.
For example, the Futures trading in oilseeds started in 1900 at Bombay, raw jute
and jute products in 1912 in Calcutta, wheat in Hapur in 1913, bullion in Bombay in
1920. However, in 1939, the Option trading in cotton was banned by the government of
Bombay to restrict the speculative activity in the cotton market. in subsequent years,
forward trading in various commodities like oilseeds, food grains, vegetable oil, sugar
cloth were also prohibited.
India’s commodity exchanges have come a long way since their opening up in the
early twenty first century. In India, three national level exchanges namely
1. Multi Commodity Exchange of India (MCX)
2. National Commodity and Derivatives Exchange (NCDEX) and
3. National Multi Commodity Exchanges (NMCX)
These are operating to cater to the needs of Indian investors. Apart from these national
level exchanges, nearly 20 regional exchanges are in operation, to deal with specified
commodities in that region.

Present Scenario
- Ban completely lifted in 2003
- Emergence of national level de-mutualised online multi-commodity exchanges
- 3 National and 20 regional exchanges
- Trade in 60 commodities compared with just 8 in 2000
- Growth exceeds 7-8 times in FY09 over FY10
Structure of Indian Commodity Market
Forward Markets Commission (FMC) is the regulator of the
Commodity Futures Market.

Definations
Arbitrage
The simultaneous purchase and sale of similar Commodities in different markets to
take advantage of a price discrepancy.
Backwardation
A futures market in which the relationship between two delivery months of the same
commodity is abnormal.
The opposite of Contango.
Basis
The difference between the current cash price of a commodity and the futures price
of the same commodity.
Bear Market
A market in which prices are declining. A market participant who believes prices will
move lower is called a “bear.” A news item is considered bearish if it is expected to
result in lower prices.
Bid
An expression of willingness to buy a commodity at a given price.
The opposite of Offer.
Broker
A company or individual that executes futures and options orders on behalf of
financial and commercial institutions or the general public.
Bull Market
A market in which prices are rising. A market participant who believes prices will
move higher is called a “bull.” A news item is considered bullish if it is expected to
result in higher prices.
Clear
The process by which a clearing house maintains records of all trades and settles
margin flow on a daily mark-to-market basis for its clearing members.

Clearinghouse
An agency or separate corporation of a futures exchange that is responsible for
settling trading accounts, collecting and maintaining margin monies, regulating
delivery and reporting trade data. The clearinghouse becomes the buyer to each
seller (and the seller to each buyer) and assumes responsibility for protecting buyers
and sellers from financial loss by assuring performance on each contract.
Clearing Member
A member of an exchange clearinghouse responsible for the financial commitments
of its customers. All trades of a non-clearing member must be registered and
eventually settled through a clearing member.
Closing Price
At the end of each day’s trading, the system calculates the weighted average price of
all trades of that contract done during the last 30 minutes of a trading session.
Commission
A fee charged by a broker to a customer for executing a transaction.
Contango
A futures market in which prices in succeeding delivery months are progressively
higher.
The opposite of Backwardation.
Delivery
The transfer of the cash commodity from the seller of a futures contract to the buyer
of a futures contract. Each futures exchange has specific procedures for delivery of
cash commodity. Some futures contracts, such as stock index contracts, are cash
settled.
Expiration Date
Generally the last date on which an option may be exercised. It is not uncommon for
an option to expire on a specified date during the month prior to the delivery month
for the underlying futures contracts.
FMC
Forward market commission.

Futures Contract
It is an agreement between two parties to buy or sell a specified quantity and quality
of an asset at a certain time in the future at a price agreed upon at the time of
entering into the contract on the futures exchange.
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 the agreement. Forward contract is not traded in
the exchange.
Long
One who has bought futures contracts.
Margin
An amount of money deposited by both buyers and sellers of futures contracts and
by sellers of options contracts to ensure performance of the terms of the contract
(the making or taking delivery of the commodity or the cancellation of the position
by a subsequent offsetting trade). Margin in commodities is not a down payment, as
in securities.
Maintenance Margin
A set minimum margin (per outstanding futures contract) that a customer must
maintain in his margin account to retain the futures position.
Mark-to-Market
To debit or credit a margin account on a daily basis based on the close of that day’s
trading session. In this way, buyers and sellers are protected against the possibility of
contract default.
Market Order
An order to buy or sell a futures or options contract at whatever price is obtainable
when the order reaches the trading floor.
NBOT
National Board of Trade
Open Interest
The total number of futures contracts of a given commodity that have not yet been
offset by an opposite futures transaction nor fulfilled by delivery of the commodity.

Each open transaction has a buyer and a seller, but for calculation of open interest,
only one side of the contract is counted.
Overbought
A technical opinion that the market price has risen too steeply and too fast in
relation to underlying fundamental factors.
Oversold
A technical opinion that the market price has declined too steeply and too fast in
relation to underlying fundamental factors.
Price Discovery
The process of determining the price of a commodity by trading conducted in open
outcry at an exchange.
Settlement Price
The last price paid for a futures contract on any trading day.
Settlement prices are used to determine open trade equity, margin calls and invoice
prices for deliveries.
Short
One who has sold futures contracts
Speculator
A market participant who tries to profit from buying and selling by anticipating
future price movements.
Spot
Usually refers to a cash market price for a physical commodity that is available for
immediate delivery.
Volume
The number of purchases and sales of futures contracts made during a specified
period of time, often the total transactions for one trading day.
Warehouse Receipt
A document guaranteeing the existence and availability of a given quantity and
quality of a commodity in storage; commonly used as the instrument of transfer of
ownership in both cash and futures transactions.

Working of Commodity Market
Relationship between Clients and Government

1. Offline Trading
2. Online trading
Types of Trading
Take a position in the commodity
Liquidate the position by squaring up

Demo of Trading
Timings

Details about commodity market
Regulating Body - The commodity futures traded in commodity exchanges are regulated
by the Government under the Forward Contracts Regulations Act, 1952 and the Rules
framed there under. The regulator for the commodities trading is the Forward Markets
Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs
Food and Public Distribution.
Forward Markets Commission (FMC):- It is statutory institution set up in 1953 under
Forward Contracts (Regulation) Act, 1952. Commission consists of minimum two and
maximum four members appointed by Central Govt. Out of these members there is one
nominated chairman. All the exchanges have been set up under overall control of
Forward Market Commission (FMC) of Government of India.
Two types of Commodity Market prevails in India
1. MCX
The Multi Commodity Exchange of India Limited (MCX), India’s first listed exchange, is a
state-of-the-art, commodity futures exchange that facilitates online trading, and
clearing and settlement of commodity futures transactions, thereby providing a
platform for risk management. The Exchange, which started operations in November
2003, operates within the regulatory framework of the Forward Contracts (Regulation)
Act, 1952.

MCX has been certified to three ISO standards including ISO 9001:2008 quality
management standard, ISO 27001:2005 information security management standard and
ISO 14001:2004 environment management standard.
2.NCDEX
National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally
managed on-line multi commodity exchange. The shareholders of NCDEX comprises of
large national level institutions, large public sector bank and companies.
NCDEX is a public limited company incorporated on April 23, 2003 under the Companies
Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It
commenced its operations on December 15, 2003.
As on March 30, 2013, the Exchange offered 31 contracts for trading of which: 23
agricultural commodities, 3 precious metals, 2 energy, 1 polymer and 2 other metals.
The top 5 commodities, in terms of volume traded at the Exchange, were Soya oil,
Soyabean, RM seed, Chana and Castor Seed.

COMMODITIES TRADED
World-over one will find that a market exits for almost all the commodities known to us.
These commodities can be broadly classified into the following:
METAL
Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long
(Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc
BULLION Gold, Gold HNI, Gold M, I-gold, Silver, Silver HNI, Silver M
FIBER
Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton
Yarn, Kapas
ENERGY
Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E.
Sour Crude Oil
SPICES Cardamom, Jeera, Pepper, Red Chilli, Turmeric
PLANTATIONS Areca nut, Cashew Kernel, Coffee (Robusta), Rubber
PULSES Chana, Masur, Yellow Peas
PETROCHEMICALS HDPE, Polypropylene(PP), PVC
OIL & 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, Soy meal,
Soy Bean, Soy Seeds
CEREALS Maize
OTHERS
Guar gum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra),
Potato (Tarkeshwar), Sugar M-30, Sugar S-30
INDIAN EXCHANGES
The following are the list of exchange and commodities in which futures contracts are
traded in India are as follows
S.NO EXCHANGE COMMODITY
1
India pepper & Spice Trade Association ,
Kochi(IPSTA)
Pepper (both domestic and
international contracts)
2
Vijay Beopar chamber Ltd.,
Muzaffarnagar Gur
3
Rajdhani oil & oilseed exchange ltd,
Delhi
Gur, Mustard seed its oil &
oilcake

4
Bhatinda Om & oil exchange ltd
,Bhantada Gur
5 The chamber of commerce ,Hapur
Gur , potatoes and Mustard
seed
6
The Meerut Agro Commodity Exchange
ltd., Meerut Gur
7
The Bombay Commodity Exchange Ltd.,
Bombay Oilseed complex
8
Rajkot seeds, oil & Bullion Merchants
Association , Rajkot
Castrol seed, Ground nut, its
oil & cake, cottonseed its oil
&cake, cotton & RBD
Palmolein
9
The Ahmedabad Commodity Exchange,
Ahmedabad
Castrol seed, cottonseed , its
oil and oilcake
10
The East India Jute & Hussian Exchange
Ltd., Calcutta Hessian & sacking
11
The East India cotton Association Ltd.,
Calcutta Cotton
12
The Spices & Oilseeds Exchange Ltd,
Sangli Turmeric
13
Kanpur Commodity Exchange Ltd.,
Kanpur
Rapeseed/Mustard seed, its
oil and cake
14 National Board of trade, Indore
Soya seed, Soya oil and Soya
meals. Rapeseed/Mustard
seed its oil and oilcake and
RBD Palmolien
15
The First Commodities Exchange of India
Ltd., Kochi
Copra/Coconut, its oil&
oilcake
16
Central India Commerce Exchange Ltd.,
Gwalior Gur and Mustard Seed
17 E-Sugar India Ltd., Mumbai Sugar
18
National Multi –Commodity Exchange of
India Ltd., Ahmedabad
Oilseed complex and Rubber ,
sugar, Aluminum, nickel ,Zinc,
Copper, Lead. tin ,pepper,
Gram and Sacking
19
Coffee Futures Exchange India
Ltd.,Bangalore Coffee
20
Surendranagar Cotton oil & Oilseeds,
Surendranagar Cotton,. Cotton seed, Kapas

21 E-Commodities Ltd.,New Delhi Sugar
22 Bullion Merchants Association , Bikaner Mustard seed its oil & oilcake
23
Multi Commodity Exchange (MCX),
Mumbai Metals & Agri Commodities
24
National Commodity and Derivation
Exchange ( NCDEX), Mumbai Metals & Agri Commodities
25
National Multi Commodity Exchange
(NMCE) Metals & Agri Commodities
26 Indian Commodity Exchange ( ICEX) Metals & Agri Commodities
Participants of Commodity Market
1. Hedgers
- A hedger buys or sells in the futures market to secure the future price of a commodity
intended to be sold at a later date in the cash market.
-This helps to protect against price risks.
-They have economic interest in the underlying assets and exposed to risk of
fluctuations of prices of the underlying assets.
2. Speculators
- They are the participants who have no economic interest in the underlying assets.
-They participate in the derivatives market to make a short term profits by taking call on
direction of the price movements. For eg: Long position or Short position.
- They are ready to take risk.
-They are the one who brings depth to the market.
3. Arbitragers
- They are those who also have no economic interest in the underlying assets but they
participate in the derivatives market to make a short term profits from difference in the
price of an assets in two different market.

For eg: Buy in the market which offers the assts at lower price and sell the asset
simultaneously in other market which offers higher price.
Myths on commodities trading
In recent past, we notice that the regulators banned trading in few commodities,
thereby creating misconception in the minds of traders about the commodities market.
Hence, the following is an attempt to demystify the common myths prevailing among
the investors.
1) Commodity market is too complex to understand:
Commodities markets are not complex as the product dealt in are natural and therefore
cannot be artificially manipulated. The demand and supply also depends upon economic
factors. It is easier to understand commodities as in our daily life we are familiar with
commodities, we know the ruling prices of these commodities in the market, while in
stocks, we are not fully aware about internal affairs of the company.
2) Only farmers are interested In trading and also only they should be trading:
It is in correct to say that farmers would use this market. Actually, the farmers only use
the commodity future prices as a tool to decide which crop to grow and to what extent
and some large formers would use this market to hedge their risk through an
intermediary. These intermediaries would normally be the same commission agents
who help formers to sell their crop in cash market. Apart from farmer, others related to
commodity trading either directly or indirectly can participate in trading to hedge their
price risk.

3) Commodity markets are operating to serve the needs of speculators and not
of the real investors:
Commodities markets existence serves for price discovery and price risk
management. Through this platform everybody related to commodities can find better
price discovery mechanism. Producers and consumers of the commodity can minimize
their price risk by way of hedging. However, speculators constitute only one dimension
the market. They can work only because someone is hedging their risk in the market.
This market provides the price signals to producers as well as consumers to meet their
long term requirement. These price signals are not available to users unless there is a
commodity futures exchange and in its absence, the markets have price fluctuations.
Price stabilization comes from the price discovery process when market participants
react positively to the information available to decide a price.
4) Large membership is required to run commodity exchanges:
It is a misconception that to be a successful commodity exchange it needs large
number of members. Success of any commodity exchange depends upon good and well-
spread brokerage houses and there penetration levels. Once the commodity futures
trading is well established, then the services will be broadened to many intermediaries
with separate trading rights and have few members with separate trading rights and
have few members with clearing rights like banks.
5) Commodities are only cash settled contracts:
Unlike equity market, commodities traded through exchanges are deliverable on
expiry. To facilitate smooth delivery process, the Forward Markets Commission (FMC)
has categorized the delivery mechanism into three dimensions viz., compulsory delivery
contracts, sellers’ option contracts. On expiry of the contracts, the open positions will be
either settled by delivery or cash depending upon sellers and buyers. Since the delivery

process takes long time to materialize and one has to keep track of all the delivery
process transactions, nobody wants to take burden of delivery handling process.
Note:
Compulsory delivery option- it is an option where on the expiry of contract of a
particular commodity, all the open outstanding positions are closed out by way of
delivery. Heavy penalties are levied in case of default in delivery.
Seller option – it is an option where the sellers has right to deliver the particular
commodity on the expiry of the contract. In this option seller has to give his intention 5
working days prior to the expiry of the contract. The client who has not delivery
intention and having open position at the expiry of the contract has to bear a stipulated
penalty.
Both Option/Intention Matching – in both the option contract the delivery happens only
case of where the intention from buyer as well as seller received for a prescribed
commodity to the extent of matched quantity. These contracts are generally cash
selected and there is no penalty for open position.
6) The quality of produce stored in godown is guaranteed by
depository/warehouse:
Quality of produce is stored in exchange designated warehouse is not
guaranteed by anyone until the standards in warehousing management improve to
ensure preservation of the quality of goods stored. If the quality is not assured no
benefit accrues to the user. Therefore, the exchange should provide a system, whereby
the seller must ensure quality certification before tendering delivery and the buyer must
have option to recheck the at the time of collecting delivery and in case of any
discrepancies compare to the contract specifications, they should have an option to
reject it. Worldwide no demat delivery is operational in commodity.

7) Commodity future markets are more risky and so it is not advisable to trade
in commodities:
While scrip price can go down even by 30-40 percent in a single trading session, it
cannot happen in commodity futures price is based on the intrinsic value of the
commodity. For instance, a scrip future can go down from Rs.4000 to Rs.2800 in a
trading session, but Gold Feb 2004 contract would normally not come down from
Rs.10300 to Rs.8400 in a single trading session, because the inherent value of the gold
would not fall so drastically. Therefore it would volatile than stocks.
What can commodity market offer?
If you are an investor, commodities futures represent a good form of investment
because of the following reasons..
 High Leverage – The margins in the commodity futures market are less than the F&O
section of the equity market.
 Less Manipulations - Commodities markets, as they are governed by international
price movements are less prone to rigging or price manipulations.
 Diversification – The returns from commodities market are free from the direct
influence of the equity and debt market, which means that they are capable of being
used as effective hedging instruments providing better diversification. If you are an
importer or an exporter, commodities futures can help you in the following ways…

 Hedge against price fluctuations – Wide fluctuations in the prices of import or
export products can directly affect your bottom-line as the price at which you
import/export is fixed before-hand. Commodity futures help you to procure or sell the
commodities at a price decided months before the actual transaction, thereby ironing
out any change in prices that happen subsequently.
If you are a producer of a commodity, futures can help you as follows:
 Lock-in the price for your produce – If you are a farmer, there is every chance that
the price of your produce may come down drastically at the time of harvest. By taking
positions in commodity futures you can effectively lock-in the price at which you wish to
sell your produce
 Assured demand – Any glut in the market can make you wait unendingly for a buyer.
Selling commodity futures contract can give you assured demand at the time of harvest.
If you are a large scale consumer of a product, here is how this market can help you.
 Control your cost – If you are an industrialist, the raw material cost dictates the final
price of your output. Any sudden rise in the price of raw materials can compel you to
pass on the hike to your customers and make your products unattractive in the market.
By buying commodity futures, you can fix the price of your raw material.
 Ensure continuous supply – Any shortfall in the supply of raw materials can stall
your production and make you default on your sale obligations. You can avoid this risk
by buying a commodity futures contract by which you are assured of supply of a fixed
quantity of materials at a pre-decided price at the appointed time.

DO’S AND DON’TS FOR DEALING IN COMMODITY FUTURES
Do`s Don`ts
1. Read the FMC/ Exchange guidelines and
circulars available on the websites of the
Exchanges
1. Do not fall prey to market rumors and tips
2. Refer to Forward Contracts (Regulation) Act
{FC(R)A}, 1952 before dealing in futures
trading in commodities
2. Do not act based on bull/bear run of market
sentiment in the market.
3. Go through all rules, regulations, bye-laws and
circulars issued by the Exchange available on the
websites of the respective exchange
3. Do not go by any explicit/ implicit promise made
by analysts/ advisors/ experts/ market intermediary
until convinced.
4. Read commodity contract specifications and the
concerned circulars carefully including recent
modifications, if any.
4. Do not go by the reports/ predictions made in
various print and electronic media without
verification.
5. Understand the commodity and price impacting
parameters before participating in commodity
futures
5. Do not trade in any commodity without knowing
the risk and rewards associated with it.
6. Study historical and seasonal price movement
and keep the track of Government Policy
announcements.
6. Do not trade based on long-term price prospects
of the commodity without understanding your
short-term risk bearing capacity
7. Be aware of the risks associated with your
positions in the market and your ability to respond
to margin calls on them as un favorable price
movements result into higher margin requirement.
7. Do not let risks against your positions
accumulate in the market beyond your capacity to
bear them.
8. Collect/pay mark-to- market margins on your
futures position on a daily basis from/to your
Trading Member as per the Exchange rules and
regulations
8. Do not miss on keeping track of your financial
and contractual obligations against your positions

9. Trade only through Exchange Registered
Member and always insist on contract note
against a confirmed trade.
9. Do not undertake off-market transactions in
commodities. It is both risky and illegal
10.Insist on reading and signing a ‘Risk Disclosure
Agreement’.
10. Do not start trading before reading and
understanding the Risk Disclosure Agreement.
11. Pay required margin in time and understand the
consequences of non payment.
11. Do not delay payment/ deliveries of
commodities to Member.
12. State clearly to the Member who will be placing
orders on your behalf
12. Do not give authority to the Member of the
Exchange to make ‘sale’ and ‘purchase’ decisions
on your behalf and also do not surrender the right
of receiving contract notes on a daily basis.
Portfolio Management Schemes (PMS) are not
allowed in commodity market.
13. Ensure that the Contract Note contains all the
relevant information, such as Member Registration
Number, Order No., Order Date, Order time, Trade
No., Trade Rate, Quantity, and Arbitration Clause.
13. Do not accept unsigned/ duplicate contract
note/ confirmation memo.
Do not accept contract note/ confirmation memo
signed by any unauthorized person.
Rights of the Clients in Commodity Market
1. In case of any dispute with a Member regarding the trades done on a Commodity
Exchange, the client can contact the Exchange for suitable redressal as per the byelaws
of the Exchange including use of arbitration mechanism of the Exchange
2. All rights are available to a client for all exchange-traded transactions for which the
client must have a duly authorized contract note of the broker.
3. Approach the Exchange Management or the FMC for redressal of the grievances.

BEWARE OF THE FOLLOWING
1. Any person who promises you high returns in a short span of time. No schemes for
assured returns are allowed in commodity markets.
2. Dabba’ (Bucket Shops). Dabba trading (trading outside the exchange platform) is
illegal, punishable under law and highly risky.
3. Advices through television or print media. They are not the opinion of the channel or
publisher but of the the individual speaker/writer.
4. SMS’s/Emails/rumors/and trading tips. Please do not be lured by such sources of
information promising quick gains and unrealistic high returns.
5. Advice available on Websites/Blogs/astrology predictions or /Newspaper. Use of such
unconfirmed information exposes one to undue risk.
Case Study
Not much work has been existing in literature pertaining to commodity exchanges,
particularly with respect to the objectives that the present study seeks to accomplish. As
such, effort has been made in this chapter to review available studies pertaining to any
aspect of commodity exchanges, and the studies related to the organizational structures
of institutions.
The intra-state spatial integration of rice markets in India was investigated by Ghosh
and Madhusudan (2000) who used ML method of co-integration. Intra-state regional
integration of rice markets was evaluated by testing the long run linear relationship
between the prices of the state-specific variety of rice quoted in spatially separated
locations in four selected states. The co integration results for Uttar Pradesh indicated
that the regional markets are integrated to such an extent that the Law of one price
(LOP) holds for III and IV ARWA variety of rice. However, no evidence was found in favor
of the LOP for the coarse or common variety of rice marketed in Bihar, Orissa and West
Bengal, even though, the regional rice markets were found to be integrated. The results

pertaining to inter-state regional integration of rice markets represented by four market
centers chosen from the four selected states, revealed that even though the markets
are integrated, the LOP does not hold.
Kumar Ranjit (2000) analyzed the relationship between prices of rice in domestic
market (New Delhi) with major rice markets of the world viz., Bangalore and Houston
(USA) by using the co integration approach. The results clearly revealed that all the price
series were not stationary and were not integrated in the long run.
Naik and Jain (2001) studied that on assessing the efficiency of major commodity
futures markets in India using the co integration theory and they concluded that a major
reason for the poor performance of Indian futures market could be the lack of adequate
participation of hedgers in these markets. The management of the exchanges and the
forward markets commission has to find ways to attract hedgers in order to improve the
performance of these markets.
Madlapure (2002) analyzed the business turnover, and operational efficiency of dairy
cooperative societies in Konkan Region, Maharashtra, India. Results reveal that: the
sample cooperative societies have more share capital and borrowings compared to the
progressive societies, but the latter have more accumulated funds; the cooperative
societies do their business with very small working capital but with great efficiency; and
the progressive societies have lower turnover compared to the other societies.
Basab Dasguptha (2004) in his study on the role of commodity future market in spot
price stabilization, production and inventory decisions with reference to India shows the
future price elasticity of production has always been greater or equal to one and
increasing profit by increasing price is not possible. It also shows that the future price
elasticity of inventory was inversely related with the carrying cost. Therefore, on
unnecessary hoarding will increase the carrying cost leading to a lower responsiveness
of inventory to future prices.
Jairatt and Kamboj (2005) reported that the total commodities traded in the agricultural
commodities accounted for nearly 95 per cent during 2002-03, which hovered around
92 per cent in 2004-05. He mentioned that the removal of ban, share of national
commodity exchanges increased from nearly 6 per cent and that of regional exchanges
declined from 94 to 27 per cent during the period.

Aviral Chopra and Blesser (2005) studied the Price Discovery in the Black Pepper Market
in Kerala, India. They explored empirically the incidence of price discovery for black
pepper in spot market, the nearby and the first distant future market by using daily data
employing the method of co integration and directed a cyclic graphs. The study reveals
that price information is discovered in the future market and the results in these three
markets are tied together in one co integration relationship, spot and first distant future
contract do not respond to perturbations in the co integrating on by the near future
contract adjust to shock in the long run relationships hoarding these three market
together.
CONCLUSION
- As majority of Indian investors are not aware of organized commodity market.
- Many of them have wrong impression about commodity market in their minds.
- Concerned authorities have to take initiative to make commodity trading process
easy and simple.
- Along with the government efforts NGOs should come forward to educate the
people about commodity market and to encourage them to invest in to it.
- There is no doubt that in near future commodity market will become hot spot for
Indian farmers rather than spot market.
Figure 1 Figure 2

Figure 3
All the above diagrams shows that there a massive increase in the volume and value of
various commodities which are traded in various commodity exchanges.
Figure 1- It shows the value and share of the major group of commodities traded in the
FY 2012-2013.
Commodities Value(in lakhs crore) %
Energy Product 37.68 22
Agricultural Commodities 21.56 13
Base Metals 32.60 19
Bullion 78.63 46
Total 170.47 100
Figure 3- This diagram shows the annual growth of commodity market in India from
2002-03 to 2010-11.
In Volume: 100 lakh tonnes(Estimated) in 2002-03 to 9,000 lakh tonnes(Estimated) in
2010-11.
In Value: 10,000 crore(Estimated) in 2002-03 to 67,00,000 crore(Estimated) in 2010-11.
It shows that the people have traded a lot through commodity market and earned their
livelihood.

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List of Periodicals
1. Daily
(1.) The Times Of India
(2.) Hindustan Times
(3.) Rajasthan Patrika
(4.) Dainik Bhaskar
(5.) The Economics Times
(6.) The Financial Express
(7.) Business Line
2. Weekly
(1.) Business Week
(2.) Commerce
(3.) Economic and Political Weekly
(4.) Indian Trade Journal

3. Monthly
(1.) RBI – Bulletin
(2.) SBI – Monthly Review
(3.) Indian Journal Of Commerce
4. Yearly
(1.) Economic Survey, New Delhi
(2.) RBI – Annual Reports
(3.) RBI – Report on Currency and Finance
Web-sites:
www.icai.org
www.icsi.edu
www.icwai.org
www.mcxindia.com
www.ncdex.com
www.fmc.com
www.traders-software.com
www.forexpros.com
www.forex-warez.com
www.trading-software-collection.com
www.tradestation-download-free.com
www.google.co.in
www.slideshare.com
www.rapidshare.com

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