12 Zibermr Vol1 Issue 2

ZENITH International Journal of Business Economics & Management Research
Vol.1 Issue 2, Nov 2011, ISSN 2249 8826 Online available at http://zenithresearch.org.in/
AN EMPERICAL INVESTIGATION ON THE INVESTORS PERCEPTION TOWARDS COMMODITIES FUTURES TRADING IN INDIA WITH SPECIAL REFERENCE TO PUDUCHERRY, INDIA
DR. R. T. NIRMAL KUMAR*; MR. BALAJI.K**
*Professor, School of management Studies, Surya Group of Institutions, Anna University Tharamani, Chennai, Tamil Nadu, India. **Assistant Professor, School of management Studies,Surya Group of Institutions, Anna University Tharamani, Chennai, Tamil Nadu, India.
ABSTRACT This paper empirically investigates the Investors Perception towards commodities Futures trading in India. Since 2004, the development of commodity derivatives markets has been impressive. It was observed that though derivatives trading commenced in the securities market only in June 2000 it was growing at great speed while the commodity derivatives markets which were operational for about 48 years by then was only gradually waking up. It is very evident that Institutional players are restricted to participate in Commodities futures trading in India. Thus the major player in Commodities Futures market is the Retail Investors. This study has been taken to identify the Investors perception towards Commodities futures trading and the level of awareness towards Commodities Futures trading. The research design chosen is descriptive. The data was collected using a questionnaire that consists of closed and open ended questions. Convenient sampling method is employed. The statistical analyses were performed by using Chi Square, Weighted average Method, One Way ANOVA and Rank Correlation. This paper also deals with the historical perspective of Commodities Derivatives Market, the scope of strengthening the Commodities derivatives trading and its regulations. The major outcome of this paper is that there is no significant relationship between the Gender and the Category of Investment. There is significant difference between the perceptions and the saving percentage for the commodity futures. Despite a long history of commodity futures trading in the country, futures markets are still viewed with suspicion by many investors. Against such conflicting views, commodity futures markets present a rich research agenda on identifying the retail investors perception towards Commodities Futures trading. KEYWORDS: Investors Perception, Commodities Futures, Financial Engineering. ______________________________________________________________________________ INTRODUCTION Commodity derivative markets have traditionally been a contentious issue at various policy forums across the world, particularly with the imbroglio created by allegations from various corners that they encourage excessive speculation and are therefore responsible for the recent
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commodity price escalation. While this suspicion of excessive speculation in the commodity markets has always been there among policymakers in developing nations like India, it has become more widespread since 2008 in the wake of worldwide inflationary pressures on food and energy. The sudden deflation in the value of various assets underlying different derivatives, which includes commodity derivatives, in the wake of the global meltdown has provoked greater apprehension about the economic utility of futures markets. The suspicion has reached such a high pitch that even the U.S., the biggest proponent of market forces with the most active commodity exchanges in the world, is considering new modes of regulation, and is also investigating the role of commodity derivative trading in the wake of steep rise in prices of wheat, rice, and crude oil. On the other hand, ever since commodity derivative trading was allowed in India in the new millennium, there has always been a hue and cry against such markets, with the alleged notion of excessive speculation. Rather than recognizing the potential economic utility of commodity derivative markets in price discovery and risk management, the government has been more apprehensive about its alleged ill-effects. As a result, over time, a future trading has been subjected to strict regulations, and certain commodities have been inflicted with occasional bans. Thus, while the disutility of the market is yet to be proven, the overcautious behaviour of the government has never really allowed the market to develop and prove its utility. Hence, in the midst of doubts and debates on the utility of commodity futures markets and against the background of conflicting views and vista, there is a need to identify the Investors perception towards commodities market and this presents the agenda for research on commodity futures. RISE OF DERIVATIVES The global economic order that emerged after World War II was a system where many less developed countries administered prices and centrally allocated resources. Even the developed economies operated under the Bretton Woods system of fixed exchange rates.The system of fixed prices came under stress from the 1970s onwards. High inflation and unemployment rates made interest rates more volatile. The Bretton Woods system was dismantled in 1971, freeing exchange rates to fluctuate. Less developed countries like India began opening up their economies and allowing prices to vary with market conditions. Price fluctuations make it hard for businesses to estimate their future production costs and revenues. Derivative securities provide them a valuable set of tools for managing this risk. DEFINITION AND USES OF DERIVATIVES A derivative security is a financial contract whose value is derived from the value of something else, such as a stock price, a commodity price, an exchange rate, an interest rate, or even an index of prices. In the Appendix, I describe some simple types of derivatives: forwards, futures, options and swaps Ashutosh Vashishtha & Satish Kumar International Research Journal of Finance and Economics ISSN 1450-2887 Issue 37 (2010)
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Commodities Futures Contracts: A future contract is an agreement for buying or selling a commodity for predetermined delivery price at a specific future time.Futures are standardized contract that are traded on organized future exchange that ensures performance of the contractsand thus remove the default risk. Dr. Narendar L.Ahuja (2005) Derivatives may be traded for a variety of reasons. A derivative enables a trader to hedge some preexisting risk by taking positions in derivatives markets that offset potential losses in the underlying or spot market. In India, most derivatives users describe themselves as hedgers (FitchRatings, 2004) and Indian laws generally require that derivatives be used for hedging purposes only. Another motive for derivatives trading is speculation (i.e. taking positions to profit from anticipated price movements). In practice, it may be difficult to distinguish whether a particular trade was for hedging or speculation, and active markets require the participation of both hedgers and speculators. A third type of trader, called arbitrageurs, profit from discrepancies in the relationship of spot and derivatives prices, and thereby help to keep markets efficient. Jogani and Fernandes (2003) describe Indias long history in arbitrage trading, with line operators and traders arbitraging prices between exchanges located in different cities, and between two exchanges in the same city. Their study of Indian equity derivatives markets in 2002 indicates that markets were inefficient at that time. They argue that lack of knowledge, market frictions and regulatory impediments have led to low levels of capital employed in arbitrage trading in India. However, more recent evidence suggests that the efficiency of Indian equity derivatives markets may have improved (ISMR, 2004). EVOLUTION OF COMMODITY DERIVATIVE MARKETS Commodity Derivative markets were set up in India in cotton in 1875 and in oilseeds in 1900 at Bombay. Forward trading in raw jute and jute goods started at Calcutta in 1912. Forward Markets in Wheat had been functioning at Hapur since 1913, and in bullion at Bombay, since 1920. In 1919, the government of Bombay passed Bombay Contract Control (War Provision) Act and set up the Cotton Contracts Board. With a view to restricting speculative activity in cotton market, the Government of Bombay issued an Ordinance in September 1939 prohibiting option business. Bombay Options in Cotton Prohibition Act, 1939, later replaced the Ordinance. In 1943, the Defence of India Act was utilized on a large scale for the purpose of prohibiting forward trading in some commodities and regulating such trading in others on an all India basis. In the same year oilseeds forward contracts prohibition order was issued and forward contracts in oilseeds were banned. Similarly orders were issued banning forward trading in food-grains, spices, vegetable oils, sugar and cloth. These orders were retained with necessary modifications in the Essential Supplies Temporary Powers Act 1946, after the Defence of India Act had lapsed. With a view to evolve the unified systems, Bombay enacted the Bombay Forward Contract Control Act, 1947. STRENGTHENING THE SCOPE OF COMMODITY DERIVATIVE TRADING The issue of expanding the scope of commodity derivative trading is apparently normative and value judgmental. This is primarily because of a large group of people who feel that commodity
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derivative trading should not be allowed at all and hence the question of expanding its scope does not arise. However, there are enough strong arguments in favour of strengthening commodity derivatives markets and developing supportive market institutions and awareness. Rutten, L. (2009): Researching Commodity Futures Markets, in Pavaskar, M. (ed.), Effects of Futures Markets on Agricultural Commodities (Mumbai: Takshashila Academia of Economic Research Limited).The role of commodity futures markets becomes even more compelling with India moving toward greater trade liberalization, particularly in the context of agriculture, and getting further exposed to the volatilities of international trade and finance. Commodity futures is a market mechanism that is viable for risk management and price discovery, and such institutions can help bail out the economy from the vagaries of international trade. Ghosh, N. (2008a): Ruthlessness and Generosity of Markets: Futures as Instruments for Combating Agricultural Price Volatility, Commodity Vision, 2(1), 12-18. COMMODITY FUTURES MARKET IN 2009-10 A REVIEW The Indian Commodity Futures Markets continued to grow, despite the suspension of futures trading in a few agricultural commodities. During the year 109 commodities were regulated under the auspices of the recognized Exchanges. During 2009-10, 21 recognized exchanges were functioning. Out of the 109 commodities, regulated by the FMC, in terms of value of trade, Gold, Silver, Copper, Nickel, Zinc, Lead, Guarseed, Soy Oil, Chana, Jeera and Guargum were the prominently traded commodities.
SOURCES: FORWARD MARKETS COMMISSION ANNUAL REPORT 2009-10
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SOURCES: FORWARD MARKETS COMMISSION ANNUAL REPORT 2009-10 Against this backdrop the purpose of this paper is to study on Investors perception towards Commodities futures trading, the level of awareness towards Commodities Futures trading and to analysis the factors considered by investors, which ultimately influence their investments. Empirical research was conducted and the data was collected through survey method. Questionnaire was constructed which consists of close ended questions. Sample size is 200 (Traders trading at Puducherry, Union Territory, India). Convenient sampling method is employed.
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After an in depth review of literature, the statistical analysis were performed by using Percentage Analysis, Chi Square, Weighted average Method, One Way ANOVA and Rank Correlation. FINDINGS AND DISCUSSIONS PERCENTAGE ANALYSIS 40% of the respondents are having good experience in the practice of investment. In commodity futures nearly 40% of the respondents are investing weekly once. 40% of the respondents preferring medium term positions in trading In commodity futures 44% of the respondents have invested 10 20% of their savings. 30% of the respondents are trading in commodity futures through their self research. 56% of the respondent feels that the felicitation fee charged by the company is reasonable. 50% of the respondents feel that the margin requirement charged by the company is high. 70% of the respondents feel that the commodity future trading is good investment option. 30% of the respondents are selected gold as commodity for the investment in future. Most of the respondents are like to do the cash settlements in stead of the physical settlement that is 80%. Investors annual incomes are seem to be between the ranges of 2 3 lakhs. ANALYSIS OF TWO VARIABLES The following hypotheses were taken for testing: By comparison between gender wise and category of investment (Excluding commodities futures) (H0): There is no significant relationship between the gender and category of investment. (H1): There is significant relationship between the gender and category of investment TABLE :I www.zenithresearch.org.in
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Level of significance = 0.05 For testing the Hypothesis
Oi = Observed Frequency, Ei = Expected Frequency EXPECTED VALUE TABLE :II
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TABLE : III
Calculated Value = 3.847 Degree of freedom = (r-1) (c-1) = (2-1) (7-1) Degree of freedom = 6 Table Value = 12.59 www.zenithresearch.org.in
Calculated Value < Table Value 3.847 < 12.59 INFERENCE Since calculated value is less than table value we accepted the (H0) and rejected alternative hypothesis (H1).So there is no significant relationship between the gender and category of investment.
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ONE WAY ANNOVA Comparison made between the perceptions and the saving percentage for the commodity futures. (H0): There is no significant difference between the perceptions and the saving percentage for the commodity futures. (H1):There is significant difference between the perceptions and the saving percentage for the commodity futures. TABLE: IV 0-10% Friends/family Self-research Media Others Total 10 25 24 13 72 10-20% 27 20 19 22 88 20-30% 7 8 2 3 20 Above 30% 8 7 3 2 20 Total 52 60 48 40 200
TABLE: V X1 Friends/family Self-research Media Others Total 10 25 24 13 72 X2 27 20 19 22 88 X3 7 8 2 3 20 X4 8 7 3 2 20 X12 100 625 576 169 1470 X22 729 400 361 484 1974 X32 49 64 4 9 126 X42 64 49 9 4 126 Total 942 1138 950 www.zenithresearch.org.in 666 3696
C.F=T2 /N = 200 2 /16 = 2500 TSS = C.F
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= 3696-2500 = 1196 SSC= ( = (72)2/4+ (88)2/4+ (20)2/4+ (20)2/4-2500 = 3432-2500 = 932 SSE = SST-SSC: = 1196-932 = 264 TABLE: VI ANOVA TABLE C.F
F-table value = 5.95 Calculated value >Tabulated value 14.12 > 5.95 INFERENCE Since the calculate value is greater than the table value. So we reject null hypothesis and accept alternative hypothesis. There is significant difference between the perceptions and the saving percentage for the commodity futures.
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V1=3, v2=12

APPLYING WEIGHTED AVERAGE METHOD TABLE: VII Weightings: 7 Factors 86 Gold Silver 80 51 20 15 16 8 10 39.28 III 56 6 5 4 3 2 1 W.A 8 10 6 40.89 Rank I
No. of Respondents 21 13
Aluminum Barley Crude oil Flakementh Others
21 10 56 20 30
15 13 86 45 21
10 56 21 9 25
51 11 13 11 70
80 45 8 5 20
11 55 10 60 19
12 10 6 50 15
27.32 25.96 40 24.42 30.5
V VI II VII IV
Calculation of Weighted Average: Formula = R1*7 + R2*6+ R3*5+ R4*4 + R5*3+R6*2+R7*1 Total weights Sample Calculation: Group Discussion = 86*7+56*6+21*5+13*4+8*3+10*2+6*1 28 = 40.89 INFERENCE From the above table it is inferred that many investors prefers to take future contract in gold rather than others and the minimum goes for the flakementh. www.zenithresearch.org.in
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APPLYING WEIGHTED AVERAGE METHOD TABLE:VIII Weightings: Factors Market conditions Profits Speculator Hedging 70 80 40 35 21 60 35 20 6 5 4 3 2 1 W.A 15 14 45 30 19 12 50 25 21 44.52 31.19 33.57 Rank VI I V IV
No. of Respondents 30 13 10 40 45 21 20 50
Investment opportunities Arbitrage
45 50
30 30
25 35
30 40
40 20
30 25
37.38 36.90
II III
Calculation of Weighted Average: Formula = R1*6+ R2*5+ R3*4+ R4*3 + R5*2+R6*1 Total weights Sample Calculation: Group Discussion = 70*6+21*5+30*4+45*3+15*2+19*1 21 INFERENCE From the above table it is inferred that futures contract are taken by investors for making profits. Thus profit is considered to be the important factor for taking future contract and Minimum considering factor goes for market condition. www.zenithresearch.org.in
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CORREALATON CO-EFFICIENT By comparing the frequent usage about the commodity futures and type of trade (Ho): There is no significant relation with the frequent usage about the commodity futures and type of trade. (H1): There is significant relation with the frequent usage about the commodity futures and type of trade. TABLE: IX X Y 72 64 80 80 48 56
TABLE:X X 72 80 48 =200 Y 64 80 56 =200 5184 6400 2304 =13888 4096 6400 3136 =13632 Xy 4608 6400 2688 =13696
r= r = +0.733 INFERENCE Since r is +ve there is no significant relation with the frequent usage about the commodity futures and type of trade. This study identifies that a perception lies with majority of investors that future trading will lead to profits and it is not used for other purpose like hedging. The nature of the derivatives instruments are to reduce the risk involved in trading but in real time investors are not taking derivatives trading for reducing their risk involved in trading and profit making is considered to be an important factor for the them. On the other side without focusing the market condition if an investor takes future contract how he/ she will book profit? The above study identified that less
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weights are given towards market condition and it is not considered as an important factor among the investors while taking future contracts. Thus it reveals that without having proper knowledge about derivatives, derivatives instruments many investors are trading. The study further identified that only 30% of the respondents are trading in commodity futures through their self research and majority are looking for sources of information from media, brokers, friends etc. Majority of the investors do not know why and when to take commodities futures contract. The perception about the Commodities futures trading should be drastically redefined, reshaped and repositioned among the retail investors, through constant education, training and awareness program. Thus the FMC has to conduct lot of training program for the investors to strengthen commodities futures trading volume. This training program should cover the basic of commodities futures, how to do analysis for choosing the type of trade (Fundamentally and technically).The retail investors should not drop their hope in futures trading on commodities because they are the major player in the market because financial and foreign institutional investors are prohibited to do trading in Commodities Futures for the long term sustainment of Commodities futures trading FMC has to play pivotal role. On the other side a number of reforms and initiatives are still needed in promoting India as a major futures trading hub in tune to the status of being amongst the top five producers of most of the commodities. In addition India is also a major consumer of bullion and energy products. A resurrected futures market ready to accelerate as a bullet train cannot run on the traditional tracks. Therefore, issues which would facilitate shifting the commodity futures markets on to a modern track are to be tackled on an urgent basis. But at the same time, the FMC and the Union Ministry of Consumer Affairs in India are considering seriously reviving the Bill to amend the FCRA, since it lapsed after the dissolution of the last Lok Sabha. The Bill seeks to not only strengthen, enlarge, and upgrade the FMC, with more regulatory powers, but also legalize options, permit trading in intangibles with cash settlement provisions, and allowing the entry of financial institutions, including foreign financial institutes, in commodity derivative trading business to broaden and deepen the markets. This research paper throws open the lacunae and the pitfalls in Commodities Futures Trading, and how the perception of investors should undergo drastic change. REFERENCES [1]Commodity Research Bureau (2008), The CRB Commodity Yearbook 2008, Hoboken: John Wiley & Sons Inc. [2]Deaton, A. and G. Laroque (1992), On the behaviour of commodities prices, Review of Economic Studies, No. 59, pp. 1-23 [3]Development of Financial Derivatives Market in India- A Case Study International Research Journal of Finance and Economics ISSN 1450-2887 Issue 37 (2010) [4]Govt. of India (1952) Forward Contracts (Regulation) Act, 1952 [5]Government of India Forward Markets Commission, Annual Report 2009-10 [6]Hirani, Kapil (2007), Understanding at:http://kapilhirani.com/News5.php (accessed on May 20,2009) Derivatives, available
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[7] Introduction to derivatives in India, available at: http://business.mapsofindia.com/investmentindustry/introduction-to-derivatives.html(accessed on May 27, 2009). [8]Kannan, R. (2008), Onset of Derivatives Trading in Derivatives market, available at: www.geocities.com/kstability/content/derivatives/first.html (accessed on May 20, 2009). [9]Naik, Gopal and Jain, S.K (1999) A Study on the Performance of Indian Commodity Futures Markets, Indian Institute ofManagement, Ahmedabad. [10]Dr. Narendar L.Ahuja : Commodities Derivatives Regulations and Future prospectus (2005) market in India: Development,
[11]Nair C.K.G: Commodities market Ready for take off? www.nseindia.com [12]Piero Cinquegrana: The Need for Transparency in Commodity and Commodity Derivatives Markets, ECMI Research Report No. 3/December 2008 [13]R.T. Nirmal and Balaji.K, 2011, Derivatives Market in India and the Role of Retail Investors ICBSM 2011, Hyderabad, India [14]S.M. Lokare Commodity Derivatives and Price Risk Management: An Empirical Anecdote from India, Reserve Bank of India Occasional Papers Vol. 28, No. 2, Monsoon 2007 [15]Survey of the World's Commodity Exchanges 2005, UNCTAD Expert Meeting "Enabling small commodity producers in developing countries to reach global markets" [16]Telser, L.G. (1981): Why there are Organised Futures Markets, Journal of Law and Economics, 24, 1-22.
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ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

SOURCES: FORWARD MARKETS COMMISSION ANNUAL REPORT 2009-10

ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

Level of significance = 0.05 For testing the Hypothesis

Oi = Observed Frequency, Ei = Expected Frequency EXPECTED VALUE TABLE :II

ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

C.F=T2 /N = 200 2 /16 = 2500 TSS = C.F

ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

Aluminum Barley Crude oil Flakementh Others

27.32 25.96 40 24.42 30.5

ZENITH International Journal of Business Economics & Management Research

Investment opportunities Arbitrage

ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

ZENITH International Journal of Business Economics & Management Research

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