Commodity Derivative Market in Nepal 23rd Aug. 2012, Uniglobe college Presentation by:- MBA 1st Trimester -Somnath Kandel -Avash Bhattarai -Baburam Subedi
Contents Introduction History/ global commodity exchange Commodity exchanges in Nepal Proposed structure in Nepal Importance/Advantage of Market Participants of Derivative market Commodity market condition In Nepal Risk of Market Factors affect trading decision Why investors are loosing ? Conclusion
Derivatives It has no independent value. Its value is entirely derived from the value of an underlying asset. The underlying asset can be securities, commodities, bullions and currencies, Livestock or anything else.
To qualify as a commodity Not a complicated manufacturing process Standardized quality Available in large volumes Presence of many competing buyers & sellers It should be unbranded
Types of Derivatives & its Classification Derivatives Forwards Futures Options Swaps Commodities Financial Food Grains Oil Seeds Interest rates Currencies & Allied Products Edible Oil Fiber Crops Indices Bonds Energy Precious Metals Industrial Metals Livestock
CommoditiesAgriculture Base Metals Energy Bullion
History/ global commodity exchange CBOT DCE NYBOT CME LME LIFFE NYMEX TOCOM DGCX MCX SICOM SFE• The history of derivative market began with establishment of According to us report of Oct. 2008, size Chigao Board o f Trade in 1848, USA of derivative market of world was $791• Chicago Mercantile Exchange (CME) established in 1874-USA trillions where as size of share market• New York Mercantile Exchange (NYMEX)-U.S.A• London Metal Exchange (LME)- U.K. was only $37 trillions.• Dalian Commodities Exchange(DCE)-China The size of the derivative market is 11• Dubai Gold and Commodities Exchange (DGCX) -Dubai times greater than the size of world• Sydney Futures Exchange (SFE)-Australia economy.• Multi Commodities Exchange(MCE)-India
Commodity exchanges in Nepal Commodities and Metal Exchange Nepal (COMEN) established in 14 Dec 2006. Mercantile Exchange Nepal Limited(MEX) established in 2008 Nepal Derivative Exchange Limited (ndex) established in Nov 20, 2008 Commodities Future Exchange(CFX) established in June 2011
Proposed Structure Government of Nepal Ministry of Finance Regulator ( Must probably SEBON) Derivative Exchanges Clearing Member (CM)Banking Partner Trading member(TM) Sub-Trading Member Trader/Client Trader/Client
Importance/Advantage ofMarket Alternative in Nepalese Investment portfolio Risk minimization (Hedging Mechanism) Fair Price discovery ( large no. of buyer and seller/ huge volume) High leverage(Margin trading) High liquidity Speculation and arbitraging.
Participants of Derivativemarket Hedgers Investors who attempt to minimize the risk of financial loss from adverse price changes by assuming futures positions opposite to cash positions.
SpeculatorsWho wish to invest on the future movement inthe price of an asset. They use derivatives toget an extra leverage. A speculator will buy andsell in anticipation of future price movements,but has no desire to actually own the physicalcommodity.
Arbitragers They are in the business to take advantage of a discrepancy between prices in two different markets. If , for example, they see the future prices of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in profit.
Commodity market condition InNepal Commodities and Metal Exchange Nepal (COMEN) In the budget of fiscal year 2066/2067, government of Nepal addressed commodity market first time, and lay down the 10% capital gain tax form profit amount. Due to the lack of regulatory body exchanges are doing what ever they want, e.g. there are different commission rate in different exchange of same contract. What is the system of exchange rate between us dollar and NC(because in software price is coated in NC but market is of us dollar) ? There is no fix rule. What is the liquidity position of exchanges(e.g.
Contd.. Todays commodities exchange in Nepal are like the existence of banks without having central bank. What is the TAX paying system (e.g. COMEN tax evasion). People are investing blindly without any research because of which they are loosing the money. No provision of physical delivery.
Factors affect tradingdecision Fundamental Factors Demand & Supply Equation Inflationary pressures Money supply Political events Weather Transportation costs Data announcements Performance of key commodities Technological changes Taxes
Example of fundamental analysis: Factors affects for gold price Price of Crude oil increases= Price of gold increases and vice-versa Inflation increase= Price of gold increases and vice-versa Interest rate rises= Price of gold decrease and vice-versa Overall output increase= Price of gold decrease and vice-versa
Factors affect tradingdecision Technical Factors Charts Trend lines Technical indicators The study of historical price patterns to help forecast futures prices. Market Sentiment Marketpsychology(Fear, greed & emotion)
Why Investors are Loosing? Investment Information x √Information Interaction Investment Interaction
Conclusion Commodity derivative market in Nepal is very young. It is an great alternative for an investor to diversify their portfolio. Market is very volatile. Impatient trader lose a lot. Good trader trade a lot, lose a lot and eventually earn a lot.