Groundnut in Indian Commodity Markets

―Detailed study of groundnut and groundnut oil as
commodities in major commodity exchanges in India‖
Prepared by:
Partha Ghosh
MBA-SYMBIOSIS INTERNATIONAL UNIVERSITY
1
Contents
1. Introduction: ........................................................................................................................6
2. Literature Review: ...............................................................................................................7
History of Commodity Exchanges: ..........................................................................................7
Chicago Board of Trade:..........................................................................................................8
Dalian Commodity Exchange: ............................................................................................... 20
NYSE EURONEXT: ............................................................................................................. 25
NCDEX:................................................................................................................................ 27
MCX: .................................................................................................................................... 29
COMMODITY MARKET:.................................................................................................... 31
Overview of commodities exchanges in India: ....................................................................... 48
General information on groundnut as a commodity: ............................................................... 50
Description: ....................................................................................................................... 50
Overview:.......................................................................................................................... 50
History: ............................................................................................................................. 52
Cultivation pattern: ............................................................................................................ 53
Varieties of groundnut: ...................................................................................................... 53
Groundnut producing countries: ........................................................................................ 54
Production of groundnut in India ....................................................................................... 56
Indian groundnut market: .................................................................................................. 58
Market Influencing Factors................................................................................................ 58
Major trading centers of groundnut: ................................................................................... 59
3. Objectives: ........................................................................................................................ 60
4. Methodology: .................................................................................................................... 61
5. Analysis of Data and Findings: .......................................................................................... 66
Objective b: To study the factors affecting the spot prices of these commodities in the
exchanges. ............................................................................................................................. 66
Table: 5.1 Correlation between NCDEX spot price of groundnut (2007) and CPI (IW) of
groundnut oil in Junagarh (2007): ...................................................................................... 66
mustard oil in Junagarh (2007): ......................................................................................... 67
2
vanaspati in Junagarh (2007): ............................................................................................ 68
Objective c: To find the similarity/ dissimilarity in spot price trends of these commodities in
two major commodity exchanges in India (NCDEX and MCX): ............................................ 71
Table 5.5: Descriptive statistics of the two samples of price data for the year 2007: ........... 71
Table 5.6: Results for the two samples independent t-test: ................................................. 71
Objective d: To suggest a pricing model based on trend and fundamental analysis of prices of
these two commodities: ......................................................................................................... 72
Table 5.7: detailed information about the regression model with time as an independent
variable (X) and prices of groundnut oil futures contract as the dependent variable (Y): .... 73
variable (X) and prices of groundnut seed futures contract as the dependent variable (Y): . 74
Table 5.9: detailed information about the regression model with groundnut oil spot prices as
independent variable (X) and prices of groundnut oil futures contract as the dependent
variable from January 2007 and December 2007 at NCDEX(Y): ....................................... 76
Table 5.10: detailed information about the regression model with groundnut oil spot prices
as independent variable (X) and prices of groundnut oil futures contract as the dependent
variable from January 2007 and December 2007 at MCX(Y):............................................ 77
Objective e: To study the correlation of the futures prices of these commodities with major
futures indices in these markets. ............................................................................................ 79
Table 5.11: correlation analysis of prices of grounut oil futures prices with FUTEXAGRI
(the futures prices based index of NCDEX). ...................................................................... 79
Objective f: To have a qualitative view of the illiquidity of groundnut oil as a commodity in
the exchanges. ....................................................................................................................... 80
Objective g: To measure the accuracy achieved in price matching (spot and futures) of these
two commodities by the stock exchanges. .............................................................................. 80
Table 5.12: correlation results for spot and futures prices of groundnut oil in NCDEX. ..... 80
6. Implications of Results and Findings: ................................................................................ 82
Results and conclusion pertaining to objective b: ................................................................... 82
Results and conclusion pertaining to objective c: ................................................................... 82
Results and conclusion pertaining to objective d: ................................................................... 82
Results and conclusion pertaining to objective e: ................................................................... 83
Results and conclusion pertaining to objective f: .................................................................... 83
Results and conclusion pertaining to objective g: ................................................................... 83
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7. Conclusion: ....................................................................................................................... 84
8. References: ........................................................................................................................ 84
ANNEXURE I .......................................................................................................................... 85
Tables displaying F test results and ANOVA results for the regression models: ..................... 85
Table 3.4: F test and ANOVA results for model ................................................................ 85
Table 3.7: F test and ANOVA results for model: ............................................................... 87
Y = β0.X10+ β1.X9+ β2.X8+ β3.X7+ β4.X6+ β5.X5+ β6.X4+ β7.X3+ β8.X2+ β9.X+ β10 ............ 87
Y = β0.X10+ β1.X9+ β2.X8+ β3.X7+ β4.X6+ β5.X5+ β6.X4+ β7.X3+ β8.X2+ β9.X+ β10 ............ 90
Y = β0.X8+ β1.X7+ β2.X6+ β3.X5+ β4.X4+ β5.X3+ β6.X2+ β7.X+ β8 ...................................... 93
Table 3.10: F test and ANOVA results for model: ............................................................. 96
Y = β0.X9+ β1.X8+ β2.X7+ β3.X6+ β4.X5+ β5.X4+ β6.X3+ β7.X2+ β8.X+ β9 .......................... 96
ANNEXURE 2 ......................................................................................................................... 99
Groundnut (in shell) Product Note ......................................................................................... 99
Authority ........................................................................................................................... 99
Unit of Trading .................................................................................................................. 99
Months Traded In .............................................................................................................. 99
Tick Size ........................................................................................................................... 99
Basis Price......................................................................................................................... 99
Unit for Price Quotation .................................................................................................... 99
Hours of Trading ............................................................................................................... 99
Mark to Market ................................................................................................................. 99
Position limits ................................................................................................................. 100
Margin Requirements ...................................................................................................... 100
Delivery Default Penalty ................................................................................................. 101
Arbitration ....................................................................................................................... 101
Unit of Delivery .............................................................................................................. 101
Delivery Size ................................................................................................................... 101
Delivery Requests ........................................................................................................... 101
Delivery Allocation ......................................................................................................... 102
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Actual Delivery ............................................................................................................... 102
Accredited Warehouse ..................................................................................................... 102
Quality Standards ............................................................................................................ 102
Packaging ........................................................................................................................ 102
Standard Allowances ....................................................................................................... 103
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1. Introduction:
Groundnut is an important crop both for oil and food. It is grown in over 100 countries in the
world and plays an important role in the economy of several countries. About two thirds of the
crop produced in the world is crushed to extract oil and one-third is used to make other edible
products. India accounts for 40 per cent of the world area and 30 per cent of world output of
groundnut.
On the other hand groundnut and groundnut oil is the most illiquid commodity in the commodity
exchanges in India. Therefore the focus of the study is to understand the trade volume of
groundnut as a commodity in commodity exchanges all over the world and gain knowledge
about various factors governing supply, demand and price of these commodities in Indian
market.
The major objective of this project is to understand the functioning of commodity markets and
how derivatives based on underlying (groundnut kernel and groundnut oil in this case) behave in
their price fluctuations depending on certain fundamental factors.
Throughout the report certain features of derivative trading like cross hedging using two
different commodities having high correlation would also be explained using the selected
underlying and major agricultural indices of the markets.
Thus the project is a gateway into the world of commodity using two very unique commodities.
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2. Literature Review:
Various web based literatures have been referred to for gaining an understanding of the
following:
Which are the major commodity exchanges in the world? And what is their nature of
operation?
Which are the major commodity exchanges in India? What is their modus operandi?
What are the essential features of groundnut as a crop and as a commodity?
The first section of the literature review would concentrate the major commodity exchanges in
world, brief history, nature of derivative market. The second part of the literature review would
concentrate on groundnut as a commodity, its cropping pattern, production, major markets and
its significance as a commodity traded in exchange.
History of Commodity Exchanges:
Link: http://www.business.headlinesindia.com/commodity/
Markets for futures trading were developed initially to help agricultural producers and consumers
manage the price risks they faced harvesting, marketing and processing food crops each year.
Today, futures exist not only on agricultural products, but also a wide array of financial, stock
and forex markets.
The world's oldest established futures exchange, the Chicago Board of Trade, was founded in
1848 by 82 Chicago merchants. The first of what were then called "to arrive" contracts were
flour, timothy seed and hay, which came into use in 1849. "Forward" contracts on corn came into
use in 1851 and gained popularity among merchants and food processors.
Meanwhile, what is now the nation's largest futures exchange, the Chicago Mercantile Exchange,
was founded as the Chicago Butter and Egg Board in 1898. At that time, trading was offered in –
you guessed it – butter and eggs.
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In 2007, CME and CBOT officially merged, and are now collectively known as CME group Inc.,
the world's largest and most diverse derivatives exchange.
Other prominent U.S. commodities exchanges were formed before or just after the turn of the
century, and also had their roots in agriculture. At one time, you could trade on the National
Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the
New York Hide Exchange. Small exchanges like these ultimately merged to become the
exchanges we have today.
In the 21st century, online commodity trading has become increasingly popular, and commodity
brokers offer front-end interfaces to trade these electronic-based markets. A commodities broker
may also continue to offer access to the traditional pit-traded, or open-outcry, markets that
established the commodity exchanges.
The major commodity exchanges in world are as follows:
Chicago Board of Trade:
Link: http://www.cbot.com/cbot/pub/page/0,3181,942,00.html#1848
History:
1848
On April 3, 1848, the Chicago Board of Trade (CBOT) was officially founded by 83 merchants
at 101 South Water Street. Thomas Dyer is elected the first president of the CBOT.
1849-50
"To arrive" contracts come into use for future delivery of flour, timothy seed and hay.
1851
The earliest "forward" contract for 3,000 bushels of corn is recorded. Forward contracts gain
popularity among merchants and processors.
1852
The Exchange moves to Clark and South Water streets.
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1856
Rising from an 1851 total of 38 members, 122 new members are admitted in 1856. The
Exchange moves to South Water and LaSalle streets.
1859
Exchange receives charter from State of Illinois. Exchange is mandated to set standards of
quality, product uniformity and routine inspections of grain.
1861
The Civil War begins. CBOT finances formation of three regiments and an artillery battery for
the Union Army. CBOT adopts gold coin as its standard of value.
1865
CBOT formalizes grain trading by developing standardized agreements called "futures
contracts." CBOT also begins requiring performance bonds called "margin" to be posted by
buyers and sellers in its grain markets.
CBOT moves to its first permanent home, Chamber of Commerce Building, on corner of LaSalle
and Washington streets.
1866
First trans-Atlantic cable laid, facilitates communication between Chicago and foreign markets;
transmission of message cut from three days to three hours.
1868
CBOT Board of Directors states any members engaging in a transaction to corner a market
would be expelled from trading.
1870
Early version of octagonal trading pit introduced; present type patented in 1878.
1871-1872
The Great Chicago Fire destroys CBOT's first building and with it all records therein. The
Exchange closed October 9-10, opens two weeks after fire. A 90-ft by 90-ft, wigwam at
Washington and Market streets becomes Exchange's temporary quarters.
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1873
During the Financial Panic of 1873, the CBOT remains open despite large financial institution
failures.
1875
Chicago newspapers voice CBOT's sentiment against state grain inspection, favor Board of
Trade inspection; Exchange felt that state politicians, unfamiliar with grain business and
antagonistic toward grain dealers, were diverting grain from Chicago by misgrading.
1876
First appearance of a "bucketshop" in Chicago (such a shop was dishonest, executing orders and
anticipating profit from market price changes adverse to the customer's interest.)
1877
Futures trading becomes more formalized and "speculators" enter the picture.
1885
As a result of the explosive growth of futures, the CBOT erects a new building at LaSalle Street
and Jackson Boulevard, Chicago's tallest building at the time. It's the city's first commercial
structure with electrical lighting.
1893
The Exchange galleries are opened to the public for first time in honor of World's Columbian
Exposition in Chicago.
1897
Wheat prices rise from 60 cents a bushel to $1.00 and William Jennings Bryan states higher
prices due to crop shortages in India and Europe are not political events.
1909
The CBOT organizes the largest meeting ever of grain exchanges, some 20 exchanges meet at
the Board of Trade in the U.S.
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1912
Under auspices of the CBOT Grain Inspection Committee, improvements are made in inspection
and grading, including civil service examinations.
1914
World War I begins.
1916
War grinds on; corn reaches $1.05 per bushel, highest since Civil War.
1917-20
War makes the market unstable; wheat trades at $3.25 per bushel, highest ever paid for a future
delivery.
Grain trade and railroads nationalized during and for a period after the end of World War I on
November 11, 1918.
1922
The federal government establishes the Grain Futures Administration to regulate grain trading.
1923
The U.S. Supreme Court upholds the Capper-Tincher Act (Grain Futures Act), to eliminate price
manipulation and other trade abuses.
1924
The U.S. government discusses assuming power to set daily trading limits; called by Exchange
President Frank L. Carey a deplorable, unhealthy restriction of supply-demand freedom.
1925
The CBOT Board of Directors is given authority to declare an emergency situation and establish
daily price limits. CBOT has one of its most successful years; 26.9 billion bushels of grain
traded.
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1926
Board of Trade Clearing Corporation founded to guarantee trades made on the CBOT.
1929
Exchange outgrows its building, temporarily relocates to quarters at Clark and Van Buren streets
while new building is erected at the LaSalle and Jackson site.
CBOT seat sells for $62,500, a record at the time.
1930
CBOT moves into 45-story new home at LaSalle and Jackson; building was tallest in Chicago,
dominating skyline.
1936
CBOT launches Soybean futures contracts.
1940
During World War II, Paris falls to the German army and open wheat futures shrink 37 million
bushels in six days of liquidation and prices decline.
1950-51:
The CBOT completes the Soybean complex with the introduction of Soybean Oil and Soybean
Meal futures.
1952
The Exchange joins American Red Cross to obtain blood donors for American forces in Korea.
1956
The CBOT hires its first paid, non-member president. Robert C. Liebenow, 34. He is the
youngest person to hold the post of CBOT president. At the same time, Julius Mayer is elected
the first CBOT Chairman.
12
CBOT introduces the industry's first examination for commodity brokers.
1963
CBOT closes for funeral of President Kennedy on November 25.
1966
CBOT introduces the first examination in the futures industry for commission house
representatives.
1967
New, fast, automatic electronic price display boards are installed on the walls above the trading
floors, replacing chalkboard markers and Morse code telegraph clicks. Price reporting time is cut
to seconds.
1968
Iced broilers, the CBOT's first non-grain related commodity, begins trading.
CBOT names its first public directors: John Hopkins University President Milton S.
Eisenhower; former Bureau of the Budget Director Charles L. Schultze; and Inland Steel
Chairman Joseph I. Block.
1969
CBOT begins trade in first non-grain product, with a Silver futures contract.
On July 29, 1969, Carol J. Ovitz, Assistant Vice President of Mitchell Hutchins & Company,
becomes the first woman member of the Exchange.
1973
Members of the CBOT start Chicago Board Options Exchange (CBOE), the world's first stock
options exchange.
The government establishes the Commodity Futures Trading Commission to regulate the futures
industry.
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1974
CBOT starts trade in 3 Kilo Gold futures on December 31.
1975
CBOT launches first interest rate futures contract, Government National Mortgage Association
futures; sets stage for a huge increase in trading volume, a new era of growth and trading
instruments for futures exchanges around the world.
1977
CBOT launches the U.S. Treasury Bond futures contract; becomes most actively traded contract
in the world.
October 1977, The Prince of Wales visits the CBOT.
1979
CBOT begins trade in 100 troy oz Gold futures on February 20.
1980
CBOT closes Jan 7-8 by CFTC order; to suspend trading after President Carter places embargo
on grain shipments to Soviet Union.
1982
CBOT launches first options on futures contract, for U.S. Treasury Bond futures on October 1.
CBOT completes its annex to the original 1930 building, which houses a new agricultural trading
floor, then the world's largest at 32,000 sq. feet.
Exchange launches 10-Year Treasury Note futures contracts on May 3.
1984
CBOT launches trading in Soybean futures-options.
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1986
The CBOT saluted Vietnam war veterans during their parade down LaSalle Street.
CBOT trade volume tops 100 million contracts for the first time, sets world record.
1987
CBOT markets remain open throughout October stock market crash. The CBOT is the only
major exchange in the world to operate without interruption during the financial crisis.
1988
Fed Fund futures begin trading May 3.
1991
CBOT welcomes President George Bush; first U.S. President to visit the Exchange.
Peggy A. Ogorek is the first woman elected CBOT Director.
1992
CBOT closed April 13-14, due to the Chicago River tunnel flood.
Soviet President Mikhail Gorbachov visit the CBOT on May 7, 1992.
1993
CBOT administers first cash SO2 emission allowance auction for the Environmental Protection
Agency.
1994
CBOT launches Project A, its after-hours electronic trading system for futures and futures-
options.
1995
Members approve trading of agricultural products on Project A during off-exchange hours.
CBOT launches its Internet site.
1996
Vice President Gore is special guest at Exchange's Democratic Senatorial Campaign reception
during 1996 Democratic National Convention in Chicago.
1997
CBOT launches the CBOT Dow Jones Industrial Average Index® futures and options on futures
contracts.
15
CBOT opens the world's largest trading floor, 60,000 sq. ft. for financial futures and futures-
options on February 18, 1997.
1998
On April 3, the CBOT celebrates its 150th Anniversary.
On September 28, the Board of Directors establishes side-by-side open outcry and electronic
trading for financial contracts, providing trading opportunity for those members and firms who
wished to trade on the CBOT‘s electronic trading system during the day.
2001
Chicago's four financial exchanges close on Wednesday, September 12 in recognition of the
tragic events of September 11.
CBOT launches 10-Year Interest Rate Swap futures.
2003
On November 25, 2003, the CBOT transitions to its new electronic trading platform, powered by
LIFFE Connect and its agreement with the Chicago Mercantile Exchange (CME) to provide
clearing and related services for all CBOT products
2005
On March 23, the CBOT successfully launched its Ethanol futures contract.
On April 14, the CBOT announced that an overwhelming 99 percent of the votes were cast in
favor of the CBOT‘s restructuring proposal, which includes the demutualization of the Exchange
into a for-profit, stock-based holding company and for-profit, membership exchange subsidiary.
On June 9, the CBOT celebrated the 75th anniversary of the Exchange‘s landmark building;
CBOT rededicates two statues that once stood at the entrance of the original CBOT building
completed in 1885.
On October 19, CBOT Holdings, Inc. has its Class A common stock listed on the New York
Stock Exchange at a price of $54.00 per share.
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2006
The CBOT announced that the Exchange achieved the highest yearly total volume recorded in its
history, with more than 674 million contracts traded in 2005.
On January 6, 2006, U.S. President George W. Bush toured the CBOT agricultural trading floor,
becoming the second U.S. Chief Executive to visit the Exchange.
On April 26, 2006, the CBOT announced that it will increase global access to its benchmark
Agricultural products by offering trading of CBOT full-sized, physically delivered Agricultural
futures contracts on its electronic trading platform during daytime trading hours. Trading is
expected to begin on August 1, 2006.
August 1, 2006, marked the CBOT's historic launch of electronic agricultural futures trading
side-by-side with the open auction market during daytime trading hours.
On September 26, Singapore Exchange and Chicago Board of Trade commenced the first day of
trade for the Joint Asian Derivatives Exchange (JADE). JADE a market division of SGX
Derivatives Trading Ltd., launched its debut in commodities futures trading with TSR 20 Rubber
futures contract.
On October 17, 2006, the Chicago Mercantile Exchange Holdings Inc. and the CBOT Holdings,
Inc. announced that they signed a definitive agreement to merge the two organizations to create
the most extensive and diverse global derivatives exchange.
On November 7, 2006, the CBOT announced that it successfully launched open auction trading
of its options on Full-sized Gold (100 oz.) and Silver (5,000 oz.) futures contracts.
On December 18, 2006, the CBOT announced that it has successfully launched clearing services
for two new over-the-counter (OTC) Ethanol Calendar Swap contracts with the clearing of 60
contracts last week.
On December 21, 2006, CBOT Holdings and CME Holdings have filed a preliminary joint proxy
and registration statement on Forms S-4 with the U.S. Securities and Exchange Commission
relating to the proposed merger of the two companies.
17
2007
On Janaury 2, 2007, the CBOT announced that it set a new record for annual trading volume,
with 805,884,413 contracts.
CBOT Holdings, Inc. announced its best year in company history, with revenue of $169.3
million for the fourth quarter 2006 on January 31, 2007.
On February 5, 2007, the CBOT launched the electronically-traded DJUSRE Index futures
contract designed to allow market participants to capitalize on changes in the real estate sector of
the stock market.
On February 26, 2007, CBOT Holdings, Inc. announces that it will hold special meetings for the
CME merger vote on April 4.
On March 1, 2007, CBOT Holdings, Inc. filed a brief challenging CBOE's attempt to terminate
Exercise Rights.
On March 15, 2007, CBOT Holdings, Inc. received unsolicited, non-binding proposal letter from
Intercontinental Exchange to merge with CBOT Holdings.
On March 19, 2007, CBOT Board of Directors authorized the company to begin discussions with
Intercontinental Exchange, Inc., relating to ICE's announced proposal.
On March 31, 2007, the CBOT postpones the Special Meeting for the CME merger to give
Board of Directors sufficient time to complete their review of ICE's proposal.
On May 1, 2007, CBOT Holdings, Inc., following its annual meeting of stockholders, announced
that Charles P. Carey was re-elected as a director and reappointed to serve a third two-year term
as Chairman of the Board.
On May 11, 2007, Chicago Mercantile Exchange Holdings Inc. (NYSE, NASDAQ: CME) and
CBOT Holdings, Inc. (NYSE: BOT) announced that they have revised the terms of their
definitive merger agreement and recommendation that CBOT Holdings shareholders vote in
favor of the merger agreement with CME.
On May 15, 2007, CBOT Holdings sets record date for Jul 9 meeting to vote on CME Merger.
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On June 11, 2007, CME and CBOT received Department of Justice Clearance to proceed with
merger.
On June 14, 2007, CBOT Holdings, Inc. (NYSE: BOT) announced that its Board of Directors
had carefully reviewed the revised proposal from IntercontinentalExchange, Inc. (ICE) and
concluded that it is not superior to the revised CME merger agreement.
On June 14, 2007, the CME, CBOT revised the merger agreement to provide increased value and
delivers one-time cash dividend to all CBOT shareholders and guarantee for holders of CBOE
exercise rights.
On July 9, 2007, the Chicago Mercantile Exchange Holdings Inc. (NYSE/Nasdaq: CME) and
Chicago Board of Trade Holdings, Inc. (NYSE: BOT) completed the merger of their companies,
creating the world's largest and most diverse exchange.
Organizational Profile:
The Chicago Board of Trade (CBOT®), established in 1848, is a leading futures and futures-
options exchange. More than 3,600 CBOT member/stockholders trade 50 different futures and
options products at the CBOT by open auction and electronically. Volume at the Exchange in
2006 surpassed 805 million contracts, the highest yearly total recorded in its history.
In its early history, the CBOT traded only agricultural commodities such as corn, wheat, oats and
soybeans. Futures contracts at the Exchange evolved over the years to include non-storable
agricultural commodities and non-agricultural products. In October 2005, the CBOT marked the
30th anniversary of the the Exchange's first financial futures contract, based on Government
National Mortgage Association mortgage-backed certificates. Since that introduction, futures
trading has been initiated in many financial instruments, including U.S. Treasury bonds and
notes, 30-Day Federal Funds, stock indexes, and swaps, to name but a few.
Another market innovation, options on futures, was introduced in 1982. The CBOT added a new
category to its diverse product mix in 2001 with the launch of 100 percent electronic Gold and
Silver futures contracts. Additionally, South American Soybean futures and Ethanol futures, the
Exchange‘s newest products, were introduced in 2005 in response to shifting trends in the global
agricultural economy.
For decades, the primary method of trading at the CBOT was open auction, which involved
19
traders meeting face-to-face in trading pits to buy and sell futures contracts. But to better meet
the needs of a growing global economy, the CBOT successfully launched its first electronic
trading system in 1994. During the last decade, as the use of electronic trading has become more
prevalent, the Exchange has upgraded its electronic trading system several times. Most recently,
on October 12, 2005, the CBOT successfully launched its newly enhanced electronic trading
platform, e-cbot, powered by LIFFE CONNECT®, by introducing a major API upgrade.
Whether trading futures and options on futures through an electronic platform or open auction,
the CBOT‘s primary role is to provide transparent and liquid contract markets for its
member/stockholders and customers to use for price discovery, risk management and investment
purposes. These futures markets also allow speculators throughout the world to interpret
economic data, news and other information and use that information to make decisions about
price and enter the futures markets as investors. Speculators bridge the gap between hedgers‘
bids and offers, thereby making the market more liquid and cost effective.
Dalian Commodity Exchange:

Link: www.dce.com.cn
Structure and function:
The exchange has the deepest liquidity pool among all Chinese Commodity Futures Exchanges.
According to the Futures Industry Association, the bourse has been the largest mainland futures
exchange by volume for eight years, half the domestic market share in 2007, and captures
roughly 2% of global futures market share (including financial futures). A near-tripling in
volumes of its benchmark corn future in 2006 saw the contract leapfrog the DCE soy complex to
become the single-largest product, with the 65m traded, trailing only Nymex WTI Crude in the
global commodity rankings. According to the Futures Industry Association, DCE is the second
largest agricultural futures bourse in the world, with a 29% market share. [1] In 2007, total
trading volume and turnover reached 371 million contracts and RMB 11.97 trillion (1.67 trillion
USD). As of November 2007, the exchange had 194 members – including 180 brokers, with a
reach of more than 160,000 investors. Louis Dreyfus became the first foreign member in June
2006.
20
At present, soybeans, soy meal,soy oil corn, palm oil, linear low density polyethene (LLDPE)
futures are traded on the DCE. The introduction of LLDPE in 2007 also marks the first
petrochemical futures contract in the country.
On August 20, 2007, China officially announced the Northeast Area Revitalization Plan(a
national-level development strategy). In this Plan, the Dalian Commodities Exchange was named
as a key player in developing the fourth economic region in China. The northeast area is a
relatively untapped market space and is traditionally associated with an edge in natural resources
such as crude oil, agricultural land, electricity and coal mining. Shipbuilding, port logistics &
distribution networks, utilities and agriculture are the most notable sectors in the region.
Development:
From the company news release, the leadership will launch the hog/pork belly futures within the
first half of the year 2008, and then, coking coal futures, rice futures within the year.
In addition, DCE intends to increase its support to industries and develop corporate and
institutional client group. As a Deputy to the 11th National People's Congress, Mr. Liu
Xingqiang was calling on the government to allow the establishment of commodity futures funds
in an attempt to draw more institutional investors balance into the country's burgeoning futures
market. Currently Only 5 percent of investors in China's commodity futures markets are
commodity producers and consumers, while the remaining 95 percent are private investors.
He also is encouraging the government to let companies use money they borrow from banks for
hedging in the future market, though not to allow those funds for speculation. DCE shall provide
assistance to members in technology upgrading so as so as to improve their technical trading
system.
The exchange shall intensify its efforts in following areas: a more efficient new commodity
futures approval mechanism, promote the integration of futures transaction and cash transaction;
increase the support of futures market to industries, and strengthen the link between futures
21
market industries; conduct research on and develop option and commodity index futures
products to promote the integration of commodities and financial products.
History:
Dalian Commodity Exchange (DCE) was established on February 28, 1993. Since the
establishment, it has been an important player in the production and circulation of mainland
soybeans. Over the next decade of market ratification, DCE earned a reputation among investors
for its financial integrity with prudent risk management and great market functionality in
international price correlation, transparency and liquidity.
In the first few years after the introduction of commodity markets, new exchanges opened with
wild abandon, and speculative volume ballooned. Soon a directive titled The Notice of Firmly
Curbing the Blind Development of the Futures Market was launched.
In October 1994, the State Council rectified over 50 futures exchanges down to 15 futures
exchanges, delisted 20 futures contracts (leaving 35), began issuing licenses to futures
commission merchants for the first time while lopping their number by over 70%, restricted
trading on foreign futures exchanges, introduced new rules and regulations, and shifted the
control of the exchanges from local governments to regulatory authorities. DCE's market share
then ranked No. 9 in China with Dry kelp as a pilot product.[5] DCE traded soybeans and corn
back then.
Continued abuse in the market brought forth the Second Rectification in 1998, most of the
surviving 15 futures exchanges were restructured, and subsequently closed. Three national level
future exchanges emerged: Shanghai Metal Exchange, Dalian Commodity Exchange, Zhengzhou
Commodity Exchange. The number of futures contracts was cut back further to 12 from 35, and
more brokers were closed, leaving just 175 standing from the early 1990s peak of 1,000. Margins
were standardized and regulations further toughened. Trading on foreign futures exchanges was
further restricted to a small number of large, global entities. Soybeans, soy meal and beer barley
were traded at DCE.
The post-rectification Chinese futures exchanges are financially independent of any government
body. On the one hand, that means they have to make do without the public subsidies of the
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hyper-competitive pre-rectification days (in fact they had to pay back investments made by the
local governments), but on the other hand rising volumes and the more rationalized industry
structure has kept revenues quite healthy.
On July 17, 2000, DCE restarted trading soy meal, the first product listed since the last
tumultuous rectification of China's futures exchanges. Until 2004, soy meal futures had been one
of the most rapidly developing futures contract at China's futures market.
On March 15, 2002, DCE started trading No.1 soybeans futures (Non-GMO soybeans). It
quickly became the largest agricultural futures contract in China and the largest Non-GMO
soybeans futures contract in the world half a year later. According to the Futures Industry
Association, Dalian's soybean futures volume quickly became the second largest in the world. A
cointegration relationship exists for Dalian Commodity Exchange and Chicago Board of Trade
(CBOT) soybean futures prices.
On September 22, 2004, DCE started trading corn futures. On December 22, DCE started trading
No.2 soybeans futures. According to FIA statistics of volume in 2004, DCE ranks No.8 among
international futures exchanges.
On January 9, 2006, DCE started trading soybean oil futures.
On July 31, 2007, linear low density polyethene (LLDPE) futures are traded on the DCE. The
introduction of LLDPE in 2007 marks the first petrochemical futures contract in the country.
On October 29, 2007, RBD palm oil futures are launched on the DCE to complement the current
edible oil futures structure.
China's economy more than doubled in size in the past decade, turning the country into the
world's top user of commodities such as copper, soy and rice. Though the government says it
wants more financial instruments to help companies hedge risks, regulators aim to avoid a repeat
of the 1990s, when speculation caused prices to soar and some contracts to fail.
According to Wang Xue Qin, a noted expert on the Chinese futures market and also the vice
general economist of Zhengzhou Commodities Exchange, in theory, a new contract can be listed
upon approval by the CSRC. In practice, the CSRC won‘t approve a product unless a consensus
23
has been formed by the State Council and almost any ministry or commission that has some
interest in the product. For some products that means over 10 ministries and commissions have
to weigh in before a new contract gets a green light.
Another aspect of the approval process that makes for cautious approval, if one were needed, is
that regulators and others with some tie to the product demand from the exchanges a virtual
guarantee of success. Unlike the western system where the exchanges are free to fail or look
foolish, failure could mean loss of face and career risk for too many parties in China‘s hybrid
system.
According to the management, there will be more new contracts, pending from the favorable
development in terms of types of products, market awareness and quality of participation over
the coming few years, as futures are a key risk hedging component to an economy that is
becoming more market-oriented and subject to global trade.
Realized Price and Predicted Price: Futures trading at work:
Commodity Futures form an advanced clearing function for the physical commodity clearing.
Each Futures contract would generate a particular pattern of cash flow and cash commitment at a
given price between the counterparties. In a Futures contract, payments are being made all along
the life of the contract, whenever the Futures price changes. This is called "mark to market".
Concretely, these payments involve additions and subtractions from "margin accounts" held at
the Futures clearinghouse. It is significant that both the long and short side have to put up
margin, because at the moment the contract is entered, both are in a sense equally likely to lose
and so equally likely to have to make a payment to the other side. By means of Margin Calls,
Commodity Futures shifts future imbalances between cash inflows and outflows into the present.
Financial crisis in the present can also arise when these future imbalances get so large that they
disrupt the present.
At any moment, a particular pattern of cash flows and cash commitments resolves itself into a
particular pattern of clearing and settlement. Deficit Agents in the trade will need to borrow cash
from banks today to delay settlement of that Commodity Futures. Of course, banks will not hold
this risk unless they are compensated by an expectation of profit. But by means of credit, current
imbalances are pushed into the future where, hopefully, they can be offset against a pattern of
24
imbalances going the other way. And the elastic availability of such promises to pay are the
essential source of elasticity in the payment system. In some sense, the futures market works just
the opposite from the credit market. The credit market operates to postpone settlement until a
future date or dates, while the futures market operates to accelerate settlement to a present date
or dates.
It is important to emphasize that Futures contracts, like debt contracts, are in zero net supply in
the aggregate economy. One person's long contract is another person's short contract. Further, the
quantity of outstanding contracts, called the open interest, has no tight relation to the quantity of
the underlying. It's an approximate measure of the elasticity of uncertainty relative to the
convergence of price.
NYSE EURONEXT:
Link: http://www.nyse.com/about/1088808971270.htmlOverview
NYSE completed its acquisition of Archipelago Holdings via reverse takeover on March 7, 2006
in a 10 billion USD deal to create the NYSE Group. The NYSE Group became a for-profit
corporation and began trading publicly on its own stock exchange on March 8, 2006 under the
NYX ticker. Owners of the 1,366 NYSE seats received 80,177 shares of NYSE Group stock plus
US$300,000 in cash and US$70,571 in dividends. NYSE Group merged with Euronext on April
4, 2007 to form the first global equities exchange.
Merger of EURONEXT and NYSE Group:
Due to apparent moves by NASDAQ to acquire the London Stock Exchange, NYSE Group
offered 8 billion euros in cash and shares for Euronext on May 22, 2006, outbidding a rival offer
for the European Stock exchange operator from Germany's Deutsche Börse, the German stock
market.[1] Contrary to statements that it would not raise its bid, on May 23, 2006, Deutsche
Börse unveiled a merger bid for Euronext, valuing the pan-European exchange at US$11 billion
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(€8.6bn), €600 million over NYSE Group's initial bid. [2] Despite this, NYSE Group and
Euronext penned a merger agreement, subject to shareholder vote and regulatory approval. The
initial regulatory response by SEC chief Christopher Cox (who was coordinating heavily with
European counterparts) was positive, with an expected approval by the end of 2007.[3] The new
firm, tentatively dubbed NYSE Euronext, would be headquartered in New York City, with
European operations and its trading platform run out of Paris. NYSE CEO John Thain, who
would head NYSE Euronext, intends to use the combination to form the world's first global stock
market, with continuous trading of stocks and derivatives over a 21-hour time span. In addition,
the two exchanges hoped to add Borsa Italiana (the Milan stock exchange) into the grouping. On
June 23, 2007, the Borsa Italiana was however sold to the London Stock Exchange.
Deutsche Börse dropped out of the bidding for Euronext on November 15, 2006, removing the
last major hurdle for the NYSE Euronext transaction. A run-up of NYSE Group's stock price in
late 2006 made the offering far more attractive to Euronext's shareholders. On December 19,
2006, Euronext shareholders approved the transaction by a 98.2% margin. The remainder voted
in favor of the Deutsche Börse offer. Jean-Francois Theodore, the Chief Executive Officer of
Euronext, stated that they expected the transaction to close within three or four months.[6] Some
of the regulatory agencies with jurisdiction over the merger had already given approval. NYSE
Group shareholders gave their approval on December 20, 2006. The NYSE consummated its
US$11 billion takeover of Paris-based exchange operator Euronext NV at ceremonies in the U.S.
and Europe on April 4, 2007.
Locations:
Below is a list of major NYSE Euronext locations:
• Brussels, Belgium — Euronext Brussels
• Paris, France — Euronext Paris
• Amsterdam, Netherlands — Euronext Amsterdam
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• Lisbon, Portugal — Euronext Lisbon
• London, United Kingdom — Euronext.liffe
• Chicago, Illinois, United States of America — NYSE Arca (formerly Archipelago)
• New York City, New York, United States of America — NYSE, Headquarters
• New York City, New York, United States of America — AMEX (To be relocated to
NYSE headquarters)
• San Francisco, California, United States of America — NYSE Arca (formerly Pacific
Exchange)
• Belfast, Northern Ireland part of the NYSE EURONEXT Technologies branch following
the acquisition of Wombat Financial Software which had a Centre of Excellence based in the
City.
NYSE EURONEXT also owns 25% of the Doha Securities Market.
NCDEX:
Profile:
National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed

on-line multi commodity exchange. The shareholders are:
Promoter shareholders: Life Insurance Corporation of India (LIC), National Bank for Agriculture
and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE) .
Other shareholders: Canara Bank, CRISIL Limited (formerly the Credit Rating Information
Services of India Limited), Goldman Sachs, Intercontinental Exchange (ICE), Indian Farmers
Fertiliser Cooperative Limited (IFFCO) and Punjab National Bank (PNB).
NCDEX is the only commodity exchange in the country promoted by national level institutions.
This unique parentage enables it to offer a bouquet of benefits, which are currently in short
supply in the commodity markets. The institutional promoters and shareholders of NCDEX are
27
prominent players in their respective fields and bring with them institutional building experience,
trust, nationwide reach, technology and risk management skills.
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.
NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange with an

independent Board of Directors and professional management - both not having any vested
interest in commodity markets. It is committed to provide a world-class commodity exchange
platform for market participants to trade in a wide spectrum of commodity derivatives driven by
best global practices, professionalism and transparency.
NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of

the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act
and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members about 550 centres throughout
India. The reach will gradually be expanded to more centres.
NCDEX currently facilitates trading of 57 commodities -
Agriculture:
Barley, Cashew, Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta, Crude Palm
Oil, Cotton Seed Oilcake, Expeller Mustard Oil, Groundnut (in shell), Groundnut Expeller Oil,
Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Indian Parboiled Rice, Indian Pusa
Basmati Rice, Indian Traditional Basmati Rice, Indian Raw Rice, Indian 28.5 mm Cotton, Indian
31 mm Cotton, Masoor Grain Bold, Medium Staple Cotton, Mentha Oil, Mulberry Green
Cocoons, Mulberry Raw Silk, Mustard Seed, Pepper, Potato, Raw Jute, Rapeseed-Mustard Seed
Oilcake, RBD Palmolein, Refined Soy Oil, Rubber, Sesame Seeds, Soybean, Sugar, Yellow
Soybean Meal, Tur, Turmeric, Urad, V-797 Kapas, Wheat, Yellow Peas, Yellow Red Maize.
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Metals:
Aluminum, Electrolytic Copper Cathode, Gold, Mild Steel Ingots, Nickel Cathode, Silver,
Sponge Iron, Zinc Ingot.
Energy:
Brent Crude Oil, Furnace Oil. At subsequent phases trading in more commodities would be
facilitated.
MCX:
Overview
Headquartered in the financial capital of India, Mumbai, MCX (www.mcxindia.com) is a

demutualised nationwide electronic multi commodity futures exchange set up by Financial
Technologies with permanent recognition from Government of India for facilitating online
trading, clearing & settlement operations for futures market across the country. The exchange
started operations in November 2003.
Apart from being accredited with ISO 9001:2000 for quality standards, MCX offers futures
trading in 55 commodities as on December 31, 2007, defined in terms of the type of contracts
offered, from various market segments including bullion, energy, ferrous and non-ferrous metals,
oils and oil seeds, cereals, pulses, plantations, spices, plastics and fibres. The exchange strives to
be at the forefront of developments in the commodities futures industry and has forged ten
strategic alliances across the world, including with Tokyo Commodity Exchange, Chicago
Climate Exchange, London Metal Exchange, New York Mercantile Exchange, New York Board
of Trade and Bursa Malaysia Derivatives, Berhad.
Key shareholders:
The Key shareholders in MCX are: State Bank of India and its associates (SBI), National Bank
for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.
(NSE), SBI Life Insurance Co. Ltd., Bank of India (BoI) , Bank of Baroda ( BoB ), Union Bank
29
of India, Corporation Bank, Canara Bank, HDFC Bank,Benett Coleman & Company Limited ,
Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, ICICI Trusteeship Service
Limited, IL&FS Trust Company Limited, Kotak group, Citibank Strategic Holdings Mauritius
Limited, Merrill Lynch Holdings (Mauritius) and Financial Technologies of India Ltd
Trading:
MCX employs state-of-the-art, new generation integrated trading platform that permits faster and
efficient operations in a cost effective manner. The Exchange Central System is located in
Mumbai, and maintains the Central Order Book, which matches the trades on a pre-defined
matching algorithm, and confirms the execution of trades to the members on an online real-time
basis. It has an integrated Surveillance and Settlement System. Exchange members located
across the country are connected to the central system through VSAT, Leased line, Internet or
any other mode of communication as permitted by the Exchange. The Exchange also has a
Disaster Recovery Site
Risk Management:
The central objective of MCX's Risk Management System is to assess and manage the risk of the
market in an expeditious manner to ensure smooth and timely pay-in/ pay-out process of the
Exchange. Some of the basic functions of Risk Management are as follows –
Real-time Margining System at client level
Monitoring of position limits (Quantity)
Capital adequacy norms
Daily price limits
Initial margins
Special margins
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Marked-to-market margin
Delivery period margin
Clearing and Settlement:
The Clearing and Settlement System of the Exchange is system driven and rule based. The
Exchange has its own in-house clearing house, which undertakes to clear each and every trade
and is counter-party for all trades; thus offering novation (zero counter-party risk) to each and
every trade executed on the Exchange
Clearing Bank Interface:
Exchange maintains electronic interface with its Clearing Banks. All members of the exchange
have their Settlement and Client Accounts for exchange operations with the Clearing Bank. All
debits and credits are conducted electronically through Settlement account only.
Delivery and Final Settlement:
All contracts on maturity are for delivery. MCX specifies tender and delivery periods. For
example, such periods can be from the 8th working day till the 15th day of the month - where
15th is the last trading day of the contract month - as tender and/ or delivery period. A seller or a
short open position holder in that contract may tender documents to the exchange expressing his
intention to deliver the underlying commodity. The exchange would then select the buyer from
the long open position holder for the tendered quantity. Once the buyer is identified, seller has to
initiate the delivery process and the buyer has to take delivery according to the delivery schedule
prescribed by the exchange.
COMMODITY MARKET:
The gradual evolution of commodity market in India has been of great significance for our
country's economic prosperity. In the Indian commodity market there are so many verities of
products including agricultural products like rice, wheat, cattle etc; energy products like coal,
31
petroleum, kerosene, gasoline; metals like copper, gold, silver, aluminum and many more. There
are some delicate commodities also such as sugar, cocoa, and coffee, which is perishable, so
cannot be put in stock for long time. The commodity futures exchanges were evolved in 1800
with the sole objective of meeting the demand of exchangeable contracts for trading agricultural
commodities. Nowadays a wide range of agricultural products, energy products, delicate
commodities and metals can be sold under standardized contracts on exchanges prevailing across
the globe. Commodities have gained importance with the development of commodity futures
indexes along with the mobilization of more resources in the commodity market.
Commodity Futures Markets in India:
Agriculture sector in India has always been a major field of government intervention since long
back. Government tries to protect the interests of the poor Indian farmers by procuring crops at
remunerative prices directly from the farmers without involving middlemen in between. This
way Government maintains sufficient buffer stocks and at the same time provides the farmers
safeguard against the fluctuating food crop prices. But government at the same time has
restricted this traditional sector by fixing prices of crops at a particular level and also by
imposing several other restrictions on export and import of agricultural commodities. All these
restrictions prevented this sector to move out its traditional features. So according to many
economists liberalization of this traditional agricultural sector could have been of great benefit to
our economy. But questions will naturally come up about the maintenance of buffer stocks and
provisions of remunerative prices to the farmers. In absence of government's intervention
farmers will not be getting any prior information about the future markets of their products.
Naturally a sudden price crash of food crops will have devastating effects on farmers. Here
comes the significant role of futures market. If the buyers in the commodity market anticipate
shortage of a particular crop in the coming season, future price of that crop will increase now and
this will act as a signal to the farmers who will accordingly plan their seeding decisions for the
next season. In the same way, an increase in future demand of food crops will be reflected in the
today's price in futures market. In this way the system of futures market can be of great help to
the Indian farmers preventing them from being directly exposed to the unexpected price changes
all of a sudden. It also helps towards evolving a better cropping pattern in our country.
32
If the peasants are farming some crop now and are very much concerned that price will crash by
the time the crop comes in, then if there is futures market, they will have the option to sell their
products in it. Price in the future markets being fixed; by selling products in future markets they
get rid of their worries about the about the unexpected price fall. This helps them to take the risk
of innovations, by using new high yielding varieties of seeds, fertilizers and new techniques of
cultivation. Futures Market will act as a smoothing agent between the present and future
commodity market. If the price, which is going to prevail in future, is high compared to what is it
now, then the arbitragers would like to buy the commodities now to sell those in future. The
reverse process is also true. So the existence of a futures market is always good for any
economy. It opens up a new opportunity to people to protect themselves from unexpected risks.
Derivatives Market in India:
Derivative markets can broadly be classified as commodity derivative market and financial
derivatives markets. As the name suggest, commodity derivatives markets trade contracts for
which the underlying asset is a commodity. It can be an agricultural commodity like wheat,
soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. Financial derivatives
markets trade contracts that have a financial asset or variable as the underlying. The most
popular financial derivatives are those, which have equity, interest rates and exchange rates as
the underlying. Financial derivatives are used to hedge the exposure to market risk. The
commodity derivatives differ from the financial derivatives mainly in the following two aspects:
Firstly, due to the bulky nature of the underlying assets, physical settlement in commodity
derivatives creates the need for warehousing. Secondly, in the case of commodities, the quality
of the asset underlying a contract can vary largely.
Some of the major market players in commodities market are: -
Hedgers, Speculators, Investors, Arbitragers
Producers - Farmers
Consumers - refiners, food processing companies, jewelers, textile mills, exporters & importers
33
Commodities Market in India:
India has a long history of futures trading in commodities. In India, trading in commodity futures
has been in existence from the nineteenth century with organised trading in cotton, through the
establishment of Bombay Cotton Trade Association Ltd. in 1875. Over a period of time, other
commodities were permitted to be traded in futures exchanges. Spot trading in India occurs
mostly in regional mandis and unorganised markets, which are fragmented and isolated.
There were booming activities in this market and at one time as many as 110 exchanges were
conducting forward trade in various commodities in the country. The securities market was a
poor cousin of this market as there were not many papers to be traded at that time.
The era of widespread shortages in many essential commodities resulting in inflationary

pressures and the tilt towards socialist policy, in which the role of market forces for resource
allocation got diminished, saw the decline of this market since the mid-1960s. This coupled with
the regulatory constraints in 1960s, resulted in virtual dismantling of the commodities future
markets. It is only in the last decade that commodity future exchanges have been actively
encouraged. However, the markets have been thin with poor liquidity and have not grown to any
significant level.
Indian Policy makers have traditionally coped with the uncertainty and risks associated with
price volatility by resorting to policy instruments which attempted to minimize or eliminate price
volatility - a virtually closed external trade regime, price control, pervasive government controls
on private sector activities extensive market interventions and crop insurance.
Liberalization of Indian economy since 1991 recognised the role of market and private initiative
for the development of the economy. The much maligned market instruments such as the futures
trading were also given due recognition. After some halting efforts since 1994 when Prof. Kabra
Committee submitted its report, the late 1990s spilling into the new millennium, saw some bold
initiatives in the commodity market.
A three-pronged approach has been adopted to revive and revitalise this market. Firstly, on
policy front many legal and administrative hurdles in the functioning of the market have been
removed. Forward trading was permitted in cotton and jute goods in 1998, followed by some
34
oilseeds and their derivatives, such as groundnut, mustard seed, sesame, cottonseed etc. in 1999.
A statement in the first ever National Agriculture Policy, issued in July, 2000 by the government
that futures trading will be encouraged in increasing number of agricultural commodities was
indicative of welcome change in the government policy towards forward trading. Secondly,
strengthening of infrastructure and institutional capabilities of the regulator and the existing
exchanges received priority. Thirdly, as the existing exchanges are slow to adopt reforms due to
legacy or lack of resources, new promoters with resources and professional approach were being
attracted with a clear mandate to set up demutualised, technology driven exchanges with
nationwide reach and adopting best international practices.
The year 2003 marked the real turning point in the policy framework for commodity market
when the government issued notifications for withdrawing all prohibitions and opening up
forward trading in all the commodities. This period also witnessed other reforms, such as,
amendments to the Essential Commodities Act, Securities (Contract) Rules, which have reduced
bottlenecks in the development and growth of commodity markets. Of the country's total GDP,
commodities related (and dependent) industries constitute about roughly 50-60 %, which itself
cannot be ignored.
Most of the existing Indian commodity exchanges are single commodity platforms; are regional
in nature, run mainly by entities which trade on them resulting in substantial conflict of interests,
opaque in their functioning and have not used technology to scale up their operations and reach
to bring down their costs. But with the strong emergence of: National Multi-commodity
Exchange Ltd., Ahmedabad (NMCE), Multi Commodity Exchange Ltd., Mumbai (MCX),
National Commodities and Derivatives Exchange, Mumbai (NCDEX), and National Board of
Trade, Indore (NBOT), all these shortcomings will be addressed rapidly. These exchanges are
expected to be role model to other exchanges and are likely to compete for trade not only among
themselves but also with the existing exchanges.
The recent policy changes and upbeat sentiments about the economy, particularly agriculture,
have created lot of interest and euphoria about the commodity markets. Even though a large
number of the traditional exchanges are showing flat volume, this has not weakened excitement
among new participants. Many of these exchanges have been permitted with a view to extend the
35
culture and tradition of forward trading to new areas and commodities and also to introduce new
technology and practices.
The current mindset of the people in India is that the Commodity exchanges are speculative (due
to non delivery) and are not meant for actual users. One major reason being that the awareness is
lacking amongst actual users. In India, Interest rate risks, exchange rate risks are actively
managed, but the same does not hold true for the commodity risks. Some additional impediments
are centered around the safety, transparency and taxation issues.
Which Commodities are suitable for Future Trading?
The following are some of the key factors, which decide the suitability of the commodities for
future trading:
The commodity should be competitive, i.e., there should be large demand for and supply of the
commodity - no individual or group of persons acting in concert should be in a position to
influence the demand or supply, and consequently the price substantially.
There should be fluctuations in price.
The market for the commodity should be free from substantial government control.
The commodity should have long shelf life and be capable of standardization and gradation.
Need For Futures Trading In Commodities:
Commodity Futures, which forms an essential component of Commodity Exchange, can be

broadly classified into precious metals, agriculture, energy and other metals. Current futures
volumes are miniscule compared to underlying spot market volumes and thus have a tremendous
potential in the near future.
Futures trading in commodities results in transparent and fair price discovery on account of
large-scale participations of entities associated with different value chains. It reflects views and
expectations of a wider section of people related to a particular commodity. It also provides
effective platform for price risk management for all segments of players ranging from producers,
traders and processors to exporters/importers and end-users of a commodity.
36
It also helps in improving the cropping pattern for the farmers, thus minimizing the losses to the
farmers. It acts as a smart investment choice by providing hedging, trading and arbitrage
opportunities to market players. Historically, pricing in commodities futures has been less
volatile compared with equity and bonds, thus providing an efficient portfolio diversification
option.
Raw materials form the most key element of most of the industries. The significance of raw
materials can further be strengthened by the fact that the "increase in raw material cost means
reduction in share prices". In other words "Share prices mimic the commodity price movements".
Industry in India today runs the raw material price risk; hence going forward the industry can
hedge this risk by trading in the commodities market.
Regulatory Body:
The Forward Markets Commission (FMC) is the regulatory body for commodity futures/forward
trade in India. The commission was set up under the Forward Contracts (Regulation) Act of
1952. It is responsible for regulating and promoting futures/forward trade in commodities. The
FMC is headquartered in Mumbai while its regional office is located in Kolkata. Curbing the
illegal activities of the diehard traders who continued to trade illegally is the major role of the
Forward Markets Commission.
Why Commodities Market?
India has very large agriculture production in number of agri-commodities, which needs use of
futures and derivatives as price-risk management system.
Fundamentally price you pay for goods and services depend greatly on how well business handle
risk. By using effectively futures and derivatives, businesses can minimize risks, thus lowering
cost of doing business.
Commodity players use it as a hedge mechanism as well as a means of making money. For e.g.
in the bullion markets, players hedge their risks by using futures Euro-Dollar fluctuations and the
international prices affecting it.
37
For an agricultural country like India, with plethora of mandis, trading in over 100 crops, the
issues in price dissemination, standards, certification and warehousing are bound to occur.
Commodity Market will serve as a suitable alternative to tackle all these problems efficiently.
Problems faced by Commodities Markets in India:
Institutional issues have resulted in very few deliveries so far. Currently, there are a lot of hassles
such as octroi duty, logistics. If there is a broker in Mumbai and a broker in Kolkata,
transportation costs, octroi duty, logistical problems prevent trading to take place. Exchanges are
used only to hedge price risk on spot transactions carried out in the local markets. Also multiple
restrictions exist on inter-state movement and warehousing of commodities.
Risks associated with Commodities Markets:
No risk can be eliminated, but the same can be transferred to someone who can handle it better
or to someone who has the appetite for risk. Commodity enterprises primarily face the following
classes of risks, namely: the price risk, the quantity risk, the yield/output risk and the political
risk. Talking about the nationwide commodity exchanges, the risk of the counter party (trading
member, client, vendors etc) not fulfilling his obligations on due date or at any time thereafter is
the most common risk.
This risk is mitigated by collection of the following margins: -
Initial Margins
Exposure margins
Market to market of positions on a daily basis
Position Limits and Intra-day price limits
Surveillance
Commodity price risks include: -
Increase in purchase cost vis-à-vis commitment on sales price
38
Change in value of inventory
Counter party risk translating into commodity price risk
Key Factors For Success Of Commodities Market:
The following are some of the key factors for the success of the commodities markets: -
How one can make the business grow?
How many products are covered?
How many people participate on the platform?
Strategy, method of execution, background of promoters, credibility of the institution,

transparency of platforms, scalable technology, robustness of settlement structures, wider
participation of Hedgers, Speculators and Arbitrageurs, acceptable clearing mechanism, financial
soundness and capability, covering a wide range of commodities, size of the trade guarantee
fund, reach of the organisation and adding value on the ground. In addition to this, if the Indian
Commodity Exchange needs to be competitive in the Global Market, then it should be backed
with proper "Capital Account Convertibility".
The interests of Indian consumers, households and producers are most important, as these are the
people who are exposed to risk and price fluctuations.
Key Expectations of Commodities Exchanges:
The following are some of the key expectations of the investors‘ trading in any commodity
exchange: -
To get in place the right regulatory structure to even out the differences that may exist in various
fields.
Proper Product Conceptualization and Design.
39
Fair and Transparent Price Discovery & Dissemination.
Robust Trading & Settlement systems.
Effective Management of Counter party Credit Risk.
Self-Regulation to ensure: Overview of Trading and Surveillance, Audit and review of Members,
Enforcement of Exchange rules.
Future Prospects:
With the gradual withdrawal of the government from various sectors in the post-liberalization
era, the need has been felt that various operators in the commodities market be provided with a
mechanism to hedge and transfer their risks. India's obligation under WTO to open agriculture
sector to world trade would require futures trade in a wide variety of primary commodities and
their products to enable diverse market functionaries to cope with the price volatility prevailing
in the world markets. Government subsidy may go down as a result of WTO. The MSP
programme will not be sustainable in such a scenario. The farmer will have to look at ways of
being in a position to trade on commodity exchanges in future. Also, corporates will feel the
pressure to hedge their price risk once the frontiers open up for free trade.
Indian markets have recently thrown open a new avenue for retail investors and traders to
participate: commodity derivatives. For those who want to diversify their portfolios beyond
shares, bonds and real estate, commodity is the best option.
Following are some of the applications, which can utilize the power of the commodity markets
and create a win-win situation for all the involved parties: -
Regulatory Approval / Permission to FII's for trading in the Commodity Markets
FII's are currently not allowed nor disallowed under any law. As, they have added depth to the
equity markets; they will add depth to the commodities markets, since they globally know the
commodities.
Active Involvement of Mutual Fund Industry in India
40
Currently Mutual Funds are prohibited from not using derivatives apart from hedging. Mutual
Funds as investors can invest in gold and get returns as they get from debt instruments, equity
markets. AMFI & SEBI need to collectively work towards the same. Launch of the "Commodity
Funds", by the Mutual Funds in India, can serve as a newer investment avenue for investors.
Permission to Banks for acting as Aggregators and Traders
If institutions join this market, confidence of the investor increases. If a bank like SBI decides to
invest in the market, the confidence of investors in the markets goes up. Banks can on behalf of
the farmer's hedge their risks, and get a fee income. Banks can have limits, which can be set up
by the RBI. This requires a change in the Banking Regulation Act, which will take a long time.
This way it can be a win-win-win situation for the market, the banks, and the farmers.
Active Involvement of Small Regional Stock Exchanges
The existing regional stock exchanges (RSE), which have good trading infrastructure in place but
are having tough time due to tiny volumes, should be used for trading commodities. The skills
and infrastructure of these RSE's will be very useful to get a jump ahead in terms of market
development at low cost.
Newer Avenues for trading in Foreign Derivatives Exchanges
Millions of people in India use gold as a financial asset and are constantly exposed to
fluctuations in the price of gold. Hence from the viewpoint of India's securities industry, it would
be great to trade gold futures globally on foreign derivative exchanges - it would yield higher
revenues as well as raise sophistication.
Steady Transition towards Electronic Warehouse Receipts
Commodity Exchanges in India are expected to contribute significantly in strengthening Indian

Economy to face the challenges of globalisation.
Indian markets are poised to witness further development in the areas of "Electronic Warehouse
Receipts" (similar to Demat Shares), which would facilitate seamless nationwide spot market for
commodities.
41
Impact of WTO Regime:
India being a signatory to WTO may open up the agricultural and other commodity markets
more to the global competition. India's uniqueness as a major consumption market is an
invitation to the world to explore the Indian market. Indian producers and traders too would have
the opportunity to explore the global markets. Price risk management and quality consciousness
are two important factors to succeed in the global competition. Indian companies are allowed to
participate in the international commodity exchanges to hedge their price risk, resultant from
export and import activities of such companies. But due to the compliance issues and
international exchange rules, 90 % of the commodity traders and producers are not in a position
to participate in the international exchanges.
Convergence of Various Markets
In the near future the integration of the international equity, commodities, forex and debt would
enhance the business opportunities. It will also create specialized treasuries and fund houses that
would offer a gamut of services, thus providing comprehensive risk management solutions to
India's corporate and trade community.
Amendments in the Commodities Act and Implementation of VAT
Amendments to Essential Commodities Act and implementation of Value-Added-tax would

enable movement of across states and more unified tax regime, which would facilitate easier
trading in commodities.
Introduction of Options Contract
Options contracts in commodities are being considered and this would again boost the
commodity risk management markets in the country.
Thus, Commodity derivatives as an industry is poised to take-off, which may provide the
numerous investors in this country with another opportunity to invest and diversify their
portfolio.
Strong Emergence of the Yellow Metal - GOLD
42
Interestingly, gold turned out to be the strongest major currency last fiscal (2002-03) as it
outperformed the other major currencies by between 9 and 25 % over the year. The yellow metal
outperformed the major stock indices too. Over the course of the year, gold outperformed the
dollar by 25 %, the yen by 14 % and the pound sterling by 13 %, the euro by 9 %and the Swiss
franc by 7 %.
India being the largest buyer of Gold in International market can be the market leader in respect
of Price discovery and Price formation in International market, if a transparent Gold Exchange at
national level is set up with widespread participation.
Structured Commodity Financing: (Asset-backed Financing)
In Structured Finance, collateral is assigned and an automatic reimbursement procedure is

devised. It can be made available as receivable-backed financing and inventory financing. The
clients retain the economic benefits and risks of ownership by transacting a swap. For successful
implementation of Structured financing in India, the rural banking infrastructure should be made
strong, the government should come across with strong policies and lastly there should be
increased awareness and training amongst common masses.
Launch of "Weather Derivatives", through the commodity exchanges in the near future.
Globally, it is done on a temperature basis, whereas in India it could be done on rainfall basis.
The Road Ahead:
The following 4-step action plan sums up the road ahead for commodity markets in India: -
1. Seeking changes in Banking Regulation
Banking Regulation Act to be modified.
Accreditation of warehouses and quality of products furthers bank lending against commodities.
Change in Priority sector norms.
Lending against commodities to be considered priority sector lending.
Banks to lend against bullion.
43
Need for hallmarking.
2. Changing the face of Warehousing
Electronic warehouse receipt (EWR) to be legally recognized.
EWR to be a negotiable instrument.
Depositories Act to be amended to cover commodities.
SEBI to notify that FMC is regulatory body for dematerialized commodities.
3. Inducing Policy changes
Introduction of options will ably substitute the MSP programme of government.
Permit weather derivatives.
Redefining commodities.
Goods not covered under 'securities'.
Products not covered under SCRA.
Physical delivery not to be mandatory.
4. Budget proposals relating to Commodities
Integration of commodity market with securities market.
Service tax on forward contracts to affect commodity brokers.
Significant omissions in light of other announcements.
Weather derivatives.
Bank investment in commodities. Action Plan: (As suggested by Dr. Kewal Ram - Chairman
FMC)
44
The following steps need to be taken by the exchanges, regulator and the government in order
that this market develops in a robust manner and the benefits flow to the ultimate beneficiaries
like the consumers, processors, exporters and farmers etc. -
To mount a massive awareness programme among the potential beneficiaries about the benefits
and risks of futures trading.
Disseminate futures prices widely so that stakeholders can take informed decisions.
Develop other allied activities such as warehousing, standardisation and gradation, collateral
financing linked to futures markets.
Reforms in physical market to develop efficient and integrated national market.
Make necessary amendments in the FC(R) Act for permitting futures in intangible commodities
and options trading, which are at present prohibited.
Allow participation of mutual funds and financial institutions in the commodity market.
Coordination with other segments of the financial market such as banking, debt and capital
market.
Above all, to upgrade and empower regulator to provide effective and efficient leadership for the
development and regulation of the market.
Comparative Analysis Of Commodity And Equity Markets:
Factors Commodity Markets Equity Markets
Percentage Gold gives 10-15 % returns on the Returns in the range of 15-20 %
Returns conservative basis. on annual basis.
Initial Margins Lower in the range of 4-5-6% Higher in the range of 25-40%
Arbitrage Exists on 1-2 month contracts. Significant Arbitrage

Opportunities There is a small difference in Opportunities exists.
prices, but in case of commodities,
45
which is in large tonnage it makes
a huge difference.
Prices movements based on the

Price movements are purely based
Price Movements expectation of future
on the supply and demand.
performance.
Price changes can also be due to

Price changes are due to policy
Corporate actions, Dividend
Price Changes changes, changes in tariff and
announcements, Bonus shares /
duties.
Stock splits.
Predictability of futures
Predictability of future prices is
performance is reasonably high,
Future not in the control due to factors
which is supplemented by the
Predictability like Failure of Monsoon and
History of management
Formation of El-ninos at Pacific.
performance.
Volatility Lower Volatility Higher Volatility
Securities Securities Transaction Act is not Securities Transaction Act is

Transaction Act applicable to commodity futures applicable to equity markets
Application trading. trading.
Some Interesting Facts:
Commodities in which future contracts are successful are commodities those are not protected
through government policies; (Example: Gold/ Silver/ Cotton/ Jute) and trade constituents of
these commodities are not complaining too. This should act as an eye-opener to the policy
makers to leave pricing and price risk management to the market forces rather than to
administered mechanisms alone. Any economy grows when the constituents willingly accept the
46
risk for better returns; if risks are not compensated with adequate or more returns, economic
activity will come into a standstill.
Worldwide, Derivatives volumes of non-US exchanges in the last decade, has been increasing as
compared to the US Exchanges.
Commodities are less volatile compared to equity market, but more volatile as compared to G-
Sec's.
The basic idea of Commodity markets is to encourage farmers to choose cropping pattern based
on future and not past prices.
Industry in India runs the raw material price risk, going forward they can hedge this risk.
Commodities Exchanges are working with banks to provide liquidity to retail investors against
holdings such as bullion, cotton or any edible oil, much like loan against shares.
Conclusion:
The commodity market is poised to play an important role of price discovery and risk
management for the development of agriculture and other sectors in the supply chain. New issues
and problems will surface as the market evolves. The government, regulator and other
stakeholders will need to be proactive and quick in their responses to new developments. The
globalisation of markets under the WTO regime makes it all the more urgent to develop these
markets to enable our economy, especially agriculture, to meet the challenges of new regime and
benefit from the opportunities unfolding before us.
With risks not being absorbed any more, the idea is to transfer it. As the focus is shifting to
"Manage price change rather than change prices", the commodity markets will play a key
role for the same.
47
Overview of commodities exchanges in India:
Link: http://sify.com/finance/commodities/fullstory.php?id=13428587
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority, which

is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a
statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
The Act Provides, that the Commission shall consist of not less than two but not exceeding four
members appointed by the Central Government out of them being nominated by the Central
Government to be the Chairman thereof Currently Commission comprises three members among
whom Dr. Kewal Ram, IES, is acting as Chairman and Smt. Padma Swaminathan, CSS and Dr.
(Smt.) Jayashree Gupta, CSS, are the Members of the Commission.
The functions of the Forward Markets Commission are as follows:
(a) To advise the Central Government in respect of the recognition or the withdrawal of
recognition from any association or in respect of any other matter arising out of the
administration of the Forward Contracts (Regulation) Act 1952.
(b) To keep forward markets under observation and to take such action in relation to them, as it
may consider necessary, in exercise of the powers assigned to it by or under the Act.
(c) To collect and whenever the Commission thinks it necessary, to publish information
regarding the trading conditions in respect of goods to which any of the provisions of the act is
made applicable, including information regarding supply, demand and prices, and to submit to
the Central Government, periodical reports on the working of forward markets relating to such
goods;
(d) To make recommendations generally with a view to improving the organization and working
of forward markets;
48
(e) To undertake the inspection of the accounts and other documents of any recognized
association or registered association or any member of such association whenever it considerers
it necessary.
The list of exchanges that has been allowed to trade in commodities are
1. Bhatinda Om & Oil Exchange Ltd., Batinda.
2. The Bombay Commodity Exchange Ltd.Mumbai
3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd
4. The Kanpur Commodity Exchange Ltd., Kanpur
5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut
6. The Spices and Oilseeds Exchange Ltd.
7. Ahmedabad Commodity Exchange Ltd.
8. Vijay Beopar Chamber Ltd.,Muzaffarnagar
9. India Pepper & Spice Trade Association. Kochi
10. Rajdhani Oils and Oilseeds Exchange Ltd. , Delhi
11. National Board of Trade. Indore.
12. The Chamber Of Commerce, Hapur
13. The East India Cotton Association Mumbai.
14. The Central India Commercial Exchange Ltd, Gwaliar
15. The East India Jute & Hessian Exchange Ltd,
16. First Commodity Exchange of India Ltd, Kochi
17. Bikaner Commodity Exchange Ltd., Bikaner
18. The Coffee Futures Exchange India Ltd, Bangalore.
49
19. Esugarindia Limited.
20. National Multi Commodity Exchange of India Limited.
21. Surendranagar Cotton oil & Oilseeds Association Ltd,
22. Multi Commodity Exchange of India Ltd
23. National Commodity & Derivatives Exchange Ltd.
24. Haryana Commodities Ltd., Hissar
25. e-Commodities Ltd.
Out of these 25 commodities the MCX, NCDEX and NMCE are large exchanges and MCX is
the biggest among them.
General information on groundnut as a commodity:
Description:
Groundnut is an oilseed derived from the fruit of the groundnut plant. It is referred to as a nut in
general terms but it is not a nut exactly in actual terms, it is a seed rather and is also known by
the name of peanut. The groundnut plant is an annual plant herb that comes from the pea family
of Fabaceae. The plant has feather type leaves; yellow flowers and grows a legume shaped fruit
that has 2 to 3 seeds which develops inside the earth. Also, oil is obtained from the groundnut
seeds that is an excellent source of vitamin E, various fatty acids and carbohydrates and is
largely used as a cooking medium, lighting fuel and food constituent.
Overview:
Groundnut is considered to be the one of the most important oilseed crops in the world. It is
grown in over 100 countries of the world and plays a crucial role in the world economy. The
seeds are a good source of edible oil and proteins present in the groundnut oil cake. The
percentage of oil and protein are extracted from the seed are approximately 55% and 28%
respectively. The oil cake meal left after the extraction of the oil is used as an animal fodder and
fertilizer. The peanut oil is primarily needed as a cooking agent but it also has some industrial
uses like in paint, varnish, lubricating oil, soap, furniture polish etc. the peanut seeds are also
consumed directly in roasted form, as butter, in brittle and candies etc .
50
Groundnut production has reached the mark of around 34 million tons. China followed by India
is the largest producer of this oilseed crop in the world. The groundnut oil production hovers
around 8 million tons annually. These two countries are also responsible for the highest
consumption of groundnut. The list depicting the major groundnut consuming countries is given
below
China
India
Nigeria
United States
European Union
Except European Union, all the countries lie in the list of major groundnut producing countries
as well. European Union countries are the largest consumer of groundnuts where the crop is not
produced. The major demand i.e. around 75% comes from the food sector and the rest from other
sectors.
As European Union is the largest consumer of the oilseed where it is not produced, it has to rely
on imports and that makes the countries in the union the largest importers of groundnut. The
trade done in the world in the context of groundnuts is estimated to about 1 lakh tons per year.
The leading groundnut exporting countries are
Argentina
Senegal
Nigeria
India
United States
China
Vietnam
South Africa
Gambia
51
The countries mentioned above contribute to about 90% of the world exports. Argentina makes
the largest groundnut exporter to the world. The major countries that satisfy their domestic
consumption demand by importing groundnuts are
Belgium
France
Germany
Ireland
Italy
Netherlands
United States
United Kingdom
Sweden
Indonesia
Canada
Malaysia
Singapore
Philippines
Japan
History:
The groundnut plant is believed to have originated in the South American continent, primarily in
the tropical areas of Peru as the archeological records assume. The climate there helped the plant
to grow and develop as a wild plant. But no evidence has been found out regarding the
confirmation of the above assumption. But the domestication of this plant was done in the
valleys of Paraguay only. Groundnut was being cultivated in the new world countries since
2500BC and this was the place where a diversity of the species of groundnut was cultivated.
When Columbus found America, groundnut came in to the contact of the rest of the world. The
Spaniards who explored the southern America encountered with this nut like seed and soon after,
the different varieties of groundnut started to get spread around the world. A type of variety
named ‗Virginia‘ was taken to Mexico first and then to West Africa. Then it moved to the North
America courtesy the West Indies and West Africa in the 17th century. The Peruvian variety was
52
taken to the southeastern Asian regions of China and Philippines by the Spanish ships and
ultimately these foreign beans spread all over Asia. The Spanish variety was taken into Africa
directly by the Portuguese explorers and there it got mixed with the Virginia variety and was
finally introduced into Spain in the 18th century. The latest groundnut variety i.e. Valencia was
taken to the country of Spain from Argentina in the 19th century and then it spread over all the
Europe later.
Cultivation pattern:
Groundnut plant is a tropical plantation, as it requires a hot and humid climate to grow. The basic
factor that affects the performance of the crop is rain or extent of irrigation. It is an essential for a
good yield of groundnut to have high level of rainfall. Groundnut prospers well in a light, sandy
loam soil. The pod needs duration of 4-5 months to ripen. The time at which the crop is to be
harvested also requires proper attention. The groundnut fruits are to be harvested exactly when
they started to get ripe and not anytime else. At the time of harvesting, the whole plant, even the
roots are totally removed from the soil.
The planting season in India starts from May and stays till August. It largely depends on the time
of the arrival of monsoon in the country. The harvesting season starts from September to
January. In India, 2/3rds of the crop is cultivated as a kharif crop and the rest is produced as rabi
crop.
Varieties of groundnut:
There are vast varieties of groundnut that are grown in the world. but the most popular varieties
are mentioned below. All these varieties have different backgrounds, different characteristics and
various other features that differentiate them from each other
1. Spanish group –
Small seeded
Mostly cultivated in South Africa and southeastern and southwestern
America
Includes - Dixie Spanish, Improved Spanish 2B, GFA Spanish, Argentine,
Spantex, Spanette, Shaffers Spanish, Natal Common (Spanish), White
53
Kernel Varieties, Starr, Comet, Florispan, Spanhoma, Spancross and
Wilco I.
2. Runner group –
Better flavor, better roasting characteristics and higher yield

Grown in Georgia, Alabama, Florida, and South Carolina
Includes - Southeastern Runner 56-15, Dixie Runner, Early Runner,
Virginia Bunch 67, Bradford Runner, Egyptian Giant, Rhodesian Spanish
Bunch, North Carolina Runner 56-15, Florunner and Shulamit.
3. Virginia group –
Large seeded, high quality

Found in Virginia, North Carolina, Tennessee and Georgia
Includes - NC 7, NC 9, NC 10C, NC-V 11, VA 93B, NC 12C, VA-C 92R,
Gregory, VA 98R, Perry, Wilson, Georgia Green
4. Valencia group –
Coarse, reddish stem and large foliage

Largely cultivated in New Mexico
5. Tennessee red and tennessee white –
Same as Valencia group except the color of the seed. Rough pods,
irregular pods and having a small number of kernels.
Groundnut producing countries:
Groundnut is one of the vastly produced oilseed crop in the world as it is cultivated in more than
100 countries in the world and that is why it is referred to as a universal crop. The areas in the
tropical belt of the earth enjoy the major share in this groundnut crop production as these type of
weather conditions suit well to it. It is estimated that around 65% of the crop produced in the
world is crushed to extract groundnut oil and the rest is used in making other edible products.
54
The world production of groundnut seeds hovers around 34 million tons per year in the current
scenario. The groundnut oil is produced to an extent of around 8 million tons. The major
producers of groundnut in 2005 along with their production figures are
China (14408500 tons)

India (5900000 tons)
Nigeria(2937000 tons)
United States of America (2112700 tons)
Indonesia (1469000 tons)
Sudan (1200000 tons)
Senegal (820569 tons)
Myanmar (715000 tons)
Argentina (593000 tons)
Vietnam (453000 tons)
Chad (450000 tons)
Ghana (389649 tons)
Congo (368110 tons)
Guinea (300000 tons)
Brazil (291966 tons)
Burkina Faso (245307 tons)
Cameroon (225000 tons)
Egypt (190000 tons)
Mali (163900 tons)
Malawi (161162 tons)
In context of the production of groundnut oil, China again tops the chart with a production of
around 2.5 million tons India following with the production of around 2 million tons. The other
regions where groundnut oil is produced includes sub-Saharan African countries and central and
southern America. The maximum area that is used for the production of this oilseed is bagged by
India with around 8 million hectares that accounts up to 30% share in the total area of around
26.5 million hectares. The country that gets maximum yield from the groundnut crop is USA
55
which has a yield of approximately 3540 Kg/ hectare. The world production has been in the up-
trend since last decade and still, it is rising steadily.
Production of groundnut in India
India has been producing groundnut since it has been introduced in Asia in the 16th century. The
weather in the Indian subcontinent suited well to the crop and India transformed into an
important contributor to the world production. The country ranks 2nd in the world groundnut
production scenario with an annual groundnut seed production of 5.9 million tons and annual
groundnut oil production of 1.5 million tons in 2005. Also, India has the maximum area covered
under groundnut cultivation. The major states in India that are indulged in the production of this
crop along with their production figures are
Gujarat (2.5 million tons)

Tamil Nadu (1 million tons)
Andhra Pradesh (1 million tons)
Karnataka (0.5 million tons)
Maharashtra (0.5 million tons)
Madhya Pradesh
Orissa
Rajasthan
The Indian production and area covered is largely concentrated in the above-mentioned states.
Today, groundnut has a share of approximately 25% in the total Indian oilseed production. But
this share is constantly reducing since India got independent, as it was around 70% in 1950s. A
quick summary of area under cultivation, production and yield of groundnut crop is provided in
the tables below:
56
production in Million Tonnes Area in million hactares
0.00
2.00
4.00
6.00
8.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
9.00
8.00
12.00
10.00
10.00
Table no: 2.2

Table no: 2.1
1950-51 1950-51
1953-54 1953-54
1956-57 1956-57
1959-60
1959-60
1962-63
1962-63
1965-66
1968-69 1965-66
1971-72 1968-69
1974-75 1971-72
1977-78 1974-75
1980-81 1977-78
1983-84
1980-81
India
1986-87
1983-84
57
1989-90
1992-93 1986-87
1995-96 1989-90
Groundnut in India
1998-99 1992-93
2001-02 1995-96
2004-05 1998-99
2007-08*
2001-02
2004-05
Year Wise Area Under Cultivation of
Year Wise Production of Groundnut in

2007-08*
production
Area
The inferences from the above data sets are that:
a. The average production per year had been to the tune of 5.95 million tones.
b. Nevertheless, the variation in average production has been high with a co-efficient
of variation of almost 27%.
Indian groundnut market:
India has been a land where oilseeds have much importance than any other crop. Groundnut
constitutes one of the major oil seed in India. As already mentioned, it accounts to about 25%
share in the total oilseeds production in India. The country produces around 6 million tons of
groundnuts annually; Gujarat being the leader in the production of the crop producing over 40%
of the crop produced India. The groundnut oil production in India hovers around 1.5 million tons
per year. The production of groundnut seed in the country has shown fluctuations quite often
largely due to the monsoon behavior. India places 2nd in the world groundnut consumption list.
The country actually consumes all most all of its groundnut yield produced that is around 30% of
the world‘s total consumption. The main demand of groundnut and derivatives generate from the
western and southern parts of the country.
This consumption pattern of the country contracts the Indian groundnut export size and does not
allow it to gain dominance over the world market even though a high production level. Earlier it
was an important exporter of groundnut and its by-products in 1970s. But with time it lost all its
importance due to its high prices and increasing competitiveness. The Indian exports of
groundnut oil to the world showed a fluctuating trend in the last decade. In 2003-04 India
exported around 1 lakh tons of groundnut oil due to a crop failure in Argentina and Senegal. The
imports in the country are second to none as the production level is quite sufficient for the
domestic demand level in the country.
Market Influencing Factors
Weather conditions in major groundnut producing regions.

Monsoon status in the country.
Price fluctuations of the other competitive edible oils.
International price movements.
58
High consumption in festive seasons and celebrations.
Major trading centers of groundnut:
The major trading centers of groundnut and derivatives in India are
Rajkot (Gujarat)
Ahmedabad (Gujarat)
Gondal (Gujarat)
Junagarh (Gujarat)
Mumbai (Maharashtra)
Indore (Madhya Pradesh)
Delhi
Adoni (Andhra Pradesh)
Also, groundnut is traded in Indian commodity exchanges namely, NCDEX, MCX, NMCE etc.
59
3. Objectives:
1. To have an overview of various commodity exchanges in India and world with

focus on groundnut as a commodity.
2. To study the factors affecting the spot prices of these commodities in the
exchanges.
3. To find the similarity/ dissimilarity in spot price trends of these commodities in
two major commodity exchanges in India (NCDEX and MCX).
4. To suggest a pricing model based on trend and fundamental analysis of prices of
these two commodities.
5. To study the correlation of the futures prices of these commodities with major
futures indices in these markets.
6. To have a qualitative view of the illiquidity of groundnut oil as a commodity in
the exchanges.
7. To measure the accuracy achieved in price matching (spot and futures) of these
two commodities by the stock exchanges.
60
4. Methodology:
Different methodologies were adopted for meeting different objectives. Thus the methodology
adopted for each objective has been separately discussed
The first objective of the project is to have an overview of various commodity exchanges in
world with special focus on agricultural commodities. For reaching this objective, secondary data
and information was referred from various web based sources. The scope of this objective is to
introduce the reader with basic idea about the history and origin of commodity exchanges, the
various commodity exchanges in world and their contribution towards augmenting agricultural
price risk management.
This objective also looks at various specifications of contract as far as groundnut kernel and
groundnut oil is considered. The details of the contract specifications of various exchanges are
appended with the document separately in appendix I.
The second objective is to study the factors affecting the spot prices of these commodities in the
exchanges. For completion of this objective data on spot prices of groundnut oil was collected
from database released by MCX. The data was average annual spot price of groundnut oil in
Junagarh, Gujarat. Data of average annual production was also collected from website of
department of agriculture, government of India (agri.nic.in). Data on groundnut oil export was
also collected from ministry of commerce‘s sources. The following table represents the data
collected:
Table: 4.1
Spot prices (GNO)

Groundnut production Groundnut oil export
Year as released by MCX
(MMT) (MT)
(per 10 Kg)
2008 676.48 9.36 2125.22
2007 487.92 4.86 4301.73
2006 690.40 7.99 727.56
61
The number of data points was very low to generate any model with high degree of accuracy. A
primary model was developed based on groundnut production as independent variable and spot
prices (MCX) as dependent variables. The reason for selecting groundnut production and not
groundnut oil export as an independent variable is the high degree of positive correlation of
groundnut oil spot prices (MCX) with groundnut production.
The following bi-variate correlation matrix shows that the spot prices of groundnut bear very
strong positive correlation with groundnut production. The single tailed p value is 0.116 which
indicates that the ―t‖ value is significant at a significance level of 88.4% and the level of
significance chosen is 95% thus the null hypotheses i.e there is no correlation is accepted. Thus
the limitations of the sample size of 3 proved to be a major constraint. Nevertheless, for
academic purposes we will consider positive correlation and move ahead with groundnut
production as independent variable.
Table 4.2: Correlation between MCX spot prices of groundnut oil and groundnut
production:
Correlations
MCX
groundnut
oil spot groundnut
prices(per production
10 kgs) (MMT)
MCX groundnut oil spot Pearson Correlation 1.000 .935
prices(per 10 kgs) Sig. (1-tailed) . .116
N 3 3
groundnut production Pearson Correlation .935 1.000
(MMT) Sig. (1-tailed) .116 .
N 3 3
62
The primary model that was developed using the data sets of these two variables is as follows:
Y= β1 + β2 × e (-x) where Y = spot prices of groundnut oil (MCX) and β1, β2 are the co-
efficients for the given equation. The details of this model are described below:
Number of observations = 3
Sum of Residuals = -3.41060513164848E-13
Average Residual = -1.13686837721616E-13
Residual Sum of Squares (Absolute) = 209.443969618803
Residual Sum of Squares (Relative) = 209.443969618803
Standard Error of the Estimate = 14.4721791592974
Coefficient of Multiple Determination (R^2) = 0.9918129227
Proportion of Variance Explained = 99.18129227%
Adjusted coefficient of multiple determination (Ra^2) = 0.9836258453
Durbin-Watson statistic = 1.00168476119442
Regression
Variable
Results
Variable Value Standard Error t-ratio Probability (t)
a 688.76496135474 10.5280762728814 65.42172981 0.00973
b -25869.61084682 2350.3874582744 -11.00653033 0.05768
Variance
Analysis
Probability
Source DF Sum of Squares Mean Square F Ratio
(F)
Regression 1 25372.8194970479 25372.8194970479 121.1437 0.05768
Error 1 209.443969618803 209.443969618803
Total 2 25582.2634666667
63
Based on this model; Y= β1 + β2 × e (-x), a data series was generated using Monte
Carlo simulation techniques. The steps involved in the simulation are as follows:
1. Random values of X (groundnut production) were generated.

2. These random values were fitted into the above equation.
3. Values of Y were thus obtained.
4. The new sets of X and Y were plotted against each other to develop a new model.
Thus the objective of this exercise to develop a model to understand the effect of a fundamental
factor like production on prices was reached. The findings of which will be documented in the
next part of the report under the section: findings.
The third objective of this project is to find the similarity/ dissimilarity in spot price trends of
these commodities in two major commodity exchanges in India (NCDEX and MCX). To meet
this objective data was collected from sources of NCDEX and MCX.
These data sets were then plotted against each other to find the level of correlation between
them. The findings of which will be documented in the next part of the report under the section:
findings.
The fourth objective is to suggest a pricing model based on trend and fundamental analysis of
prices of these two commodities.
Theory suggests that the price of futures price of any derivative is reached at using the following
equation: F0 = S0erT this model is based on the assumption that the futures price is dependent on
the cost of making the investment, which is the major compounding factor. It also assumes that
the compounding of the initial principal is done on a continuous basis. Here in this model, F0 is
the futures price and S0 is the spot price on that given day. Now the interesting question is how
this compounding factor is arrived at. To answer this question a models would be developed
using trend analysis and fundamental analysis of futures prices. These models help us look into
deep into the relation between the spot prices and the futures prices apart from the general trend
of the futures prices. This will help in prediction of futures prices based on some fundamental
model. This is important for risk analysis.
64
The methodology adopted is the same as the previous one. The data sets were plotted against
each other and a non linear model was developed. The findings of which will be documented in
the next part of the report under the section: findings.
The fifth objective is to study the correlation of the futures prices of these commodities with
major futures indices in these markets. This objective utilizes the concept of correlation analysis.
The methodology being the bi-variate correlation analysis of data on futures prices of groundnut
oil and groundnut kernel in MCX and NCDEX. The scope of this analysis is to understand the
relation of movement of price in these futures with the movement of prices of major indices. The
scope of this analysis is to help traders in cross-hedging. For example, a trader wants to take
position in groundnut kernel which is a highly illiquid commodity in the market, instead of
taking position in groundnut seed he can take positions in indices which has high correlation
with groundnut kernel prices (returns).
This is thus a quantitative tool to utilize any possibility of cross hedging if possible. The findings
regarding this objective are presented under the section: findings.
The sixth objective is to have a qualitative view of the illiquidity of groundnut oil as a
commodity in the exchanges. The methodology adopted to achieve this objective is qualitative
views expressed by traders.
In depth interview techniques would be adopted. The views of the interviewee would be
expressed in a qualitative manner.
The seventh and final objective is to measure the accuracy achieved in price matching (spot and
futures) of these two commodities by the stock exchanges.
The theoretical background of this objective is to estimate the possibility of arbitrage in case of
contracts specific to these commodities. We know that there is a possibility of arbitrage if there
is mismatch between spot and futures prices. Thus on the delivery day the price of the futures
must match the price of the spot. The efficiency of the markets is determined by its ability to
check arbitrage.
The results of these analyses have been reported in the findings section.
65
5. Analysis of Data and Findings:
The findings and conclusion pertains to specific objectives which were undertaken.
Objective b: To study the factors affecting the spot prices of these commodities in
the exchanges.
Law of demand says that the price of a commodity is directly prportional to its quantity
demanded keeping other factors constant. Thus the obvious factors of spot price fluctuations are
the fluctuations in demand of the commodities (groundnut oil and seed). Now to understand the
quanititative measure as to how the fluctutations in domestic prices of these products affect the
spot prices correlation of consumer price index (IW) data of groundnut oil, mustard oil and
vanaspati for past 12 months in the year of 2007 have been collected. The results of the
correlation analyses are presented in the following table.
*prices are expressed as Rs per 10 Kgs.
groundnut oil in Junagarh (2007):
From the following table it can be seen that the positive correlation between NCDEX spot price
of groundnut (2007) and CPI (IW) of groundnut oil in Junagarh (2007) is low at 0.582.
(p=0.047 being less than 0.05, the H0 is rejected and the alternate hypotheses for positive
correlation is accepted).
Correlations
NCDEX spot CPI groundnut

groundnut oil oil (Junagarh)
NCDEX spot Pearson Correlation 1.000 .582
groundnut oil Sig. (2-tailed) . .047
N 12 12
CPI groundnut Pearson Correlation .582 1.000
oil (Junagarh) Sig. (2-tailed) .047 .
N 12 12
66
mustard oil in Junagarh (2007):
The correlation between NCDEX spot price of groundnut (2007) and CPI (IW) of mustard oil in
Junagarh (2007) is non significant. (p=0.6 is much higher than 0.05 level of significance). Thus
the mustard oil prices doesnot prove to be very significantly related to spot prices of groundnut
oil.
Correlations
NCDEX spot CPI mustatrd

groundnut oil oil (Junagarh)
NCDEX spot Pearson Correlation 1.000 -.169
groundnut oil Sig. (2-tailed) . .600
N 12 12
CPI mustatrd Pearson Correlation -.169 1.000
oil (Junagarh) Sig. (2-tailed) .600 .
N 12 12
67
vanaspati in Junagarh (2007):
High positive correlation between NCDEX spot price of groundnut (2007) and CPI (IW) of
vanaspati in Junagarh (2007) is shown by the analysis of data. The p value of 0.029 also suggests
that the alternate hypothesis of positive correlation between the variables is proved.
Correlations
NCDEX spot CPI vanaspati

groundnut oil (Junagarh)
NCDEX spot groundnut Pearson Correlation 1.000 .628
oil Sig. (2-tailed) . .029
N 12 12
CPI vanaspati (Junagarh) Pearson Correlation .628 1.000
Sig. (2-tailed) .029 .
N 12 12
68
Law of demand also derives that the price of a commodity is inversely proportional to its supply.
Thus the production of groundnut must also be considered to create a model which will give us
the expected annual average value of groundnut oil spot prices given a particular quantity of
groundnut produced in that year.
As discussed in the methodology section the primary regression model that was developed using
annual production data (million metric tonnes) versus average annual spot price of groundnut oil
(-x)
(per 10Kg) was: Y= β1 + β2 × e where Y = spot prices of groundnut oil (MCX) and
β1, β2 are the co-efficients for the given equation. X is the annual production in MMT.
Based on this primary model the secondary model that was developed is as follows:
Y= β0 + β1 × e (x) + β2 × e (-x)
Table 3.4: Details of the regression model for groundnut production versus groundnut spot
prices in NCDEX:
The following table gives us most striking result as the coefficient of determination is 100%.
Thus the dependence of spot prices of groundnut on the production is being empirically
established. And a Durbin-Watson statistic value of 2.08 suggest insignificant amount of
autocorrelation.
69
Number of missing observations = 0
Solver type: Nonlinear
Nonlinear iteration limit = 250
Diverging nonlinear iteration limit =10
Number of nonlinear iterations performed = 16
Residual tolerance = 0.0000000001
Residual Sum of Squares (Absolute) = 1.22054490982467E-13
Residual Sum of Squares (Relative) = 1.22054490982467E-13
Standard Error of the Estimate = 2.88149728395616E-08
The graph of the above model is presented below:
70
Objective c: To find the similarity/ dissimilarity in spot price trends of these
commodities in two major commodity exchanges in India (NCDEX and MCX):
The commodity exchanges are supposed to give full proof market data to their customers. This
service of the commodity exchange benefits the traders in the exchange to determine the prices
of contracts. Thus the spot price data released by the two exchanges must match with each other
to give customers the confidence to rely upon the figures and determine their bid and ask rate.
The similarity/ dissimilarity in the spot prices released by MCX and NCDEX were put to two
sample independent t-test. The significance level was kept at 10%. The results show that the two
samples that were drawn from spot price data of year 2007 have the following descriptive
characteristics.
Table 5.5: Descriptive statistics of the two samples of price data for the year 2007:
Group Statistics
Std. Error
Exchanges N Mean Std. Deviation Mean
Spot prices NCDEX 297 686.6410 65.4810 3.7996
MCX 297 688.2357 67.8664 3.9380
The result obtained from the two sample independent t-test indicates that the two samples have
equal variances. (Levene‘s test for equality of variances assumes a significance level of 5%. Here
the probability at which the F value is significant is 30.3%, thus the H 0 of equal variances of the
two samples can be accepted).
For the second part of the test, that is equality of means we shall thus assume equality of
variances and accept the t statistice value of 0.291 (d.f =592) at a significance level of 77%. Thus
the H0, that the means of the two samples is equal is accepted.
Table 5.6: Results for the two samples independent t-test:

Independent Samples Test
Levene's Test for

Equality of Variances t-test for Equality of Means
95% Confidence
Interval of the
Mean Std. Error Difference
F Sig. t df Sig. (2-tailed) Difference Difference Lower Upper
Spot prices Equal variances
1.061 .303 -.291 592 .771 -1.5947 5.4722 -12.3420 9.1526
assumed
Equal variances
-.291 591.244 .771 -1.5947 5.4722 -12.3420 9.1526
not assumed
71
Scatter plot of spot prices of groundnut released
by NCDEX and MCX in year 2007
900
800
Spot prices in Rs per 10 Kgs
700
600
500 NCDEX
400 MCX
300 Linear (NCDEX)
200 Linear (MCX)
100
0
0 50 100 150 200 250 300 350
Number of price samples = 297
Objective d: To suggest a pricing model based on trend and fundamental analysis of

prices of these two commodities:
Theory suggests that the price of futures price of any derivative is reached at using the following
equation: F0 = S0erT this model is based on the assumption that the futures price is dependent on
the cost of making the investment (r), which is the major compounding factor. It also assumes
that the compounding of the initial principal is done on a continuous basis. Here in this model,
F0 is the futures price and S0 is the spot price on that given day. Now the interesting question is
how this compounding factor is arrived at. To answer this question mathametical models have
been developed using trend analysis and fundamental analysis of futures prices. These models
help us look deep into the relation between the spot prices and the futures prices apart from the
general trend of the futures prices. This will help in prediction of futures prices based on some
fundamental model. This is important for risk analysis.
72
The first regression model is obtained when a trend analysis was conducted on the futures price
data of groundnut oil at NCDEX. The model (tenth order polynomial) that is obtained is
presented below:
Y = β0.X10+ β1.X9+ β2.X8+ β3.X7+ β4.X6+ β5.X5+ β6.X4+ β7.X3+ β8.X2+ β9.X+ β10
variable (X) and prices of groundnut oil futures contract as the dependent variable (Y):
From the following table it can be inferred that the prportion of variance explained by time on
the prices of futures contract of groundnut oil is as high as 90.27%. Nevertheless, the Durbin-
Watson statistic value of 0.12 suggests significant autocorrelation. This lays the scope for
development of much more sophisticated model.
73
The next model is based on the trend analysis of prices of futures contract of groundnut seed in
NCDEX for the contract ending at January 2007 to December 2007. The model that is obtained
is also a tenth order polynomial.
variable (X) and prices of groundnut seed futures contract as the dependent variable (Y):
The following table reveals that the co-efficient of determination achieved using this model is
97.24%. This is quite a good amount of variation that is explained by the independent variable.
Similarly, a Durbin-Watson statistic value of 1.94 indicates minimum interference in the data
due to error variables.
74
Solver type: Linear
Sum of Residuals = 1.37904222015095E-05
Average Residual = 3.72714113554311E-07
75
The second part of the objective is to develop a model based on fundamental factors which
influence the price of futures contract. As we have seen earlier, the futures price of an
agricultural commodity is equal to spot price and a compounding factor which compounds
exponentially with the rate (cost of investment) of investment and the cost of carry since
agricultural commodities are perishable products.
Therefore, the following models are developed for analysing the dependence of spot prices on
the value of futures contract for groundnut oil and seed in NCDEX as well as in MCX.
The first of the fundamental analysis involved plotting the groundnut oil spot prices with
respective futures prices (NCDEX price). The regression equation that was obtained was an
eight order polynomial.
Y = β0.X8+ β1.X7+ β2.X6+ β3.X5+ β4.X4+ β5.X3+ β6.X2+ β7.X+ β8
variable from January 2007 and December 2007 at NCDEX(Y):
Similarly, a Durbin-Watson statistic value of 1.05 indicates large interference in the data due to
error variables.

Sum of Residuals = 1.04613596931813E-05
Average Residual = 4.23536829683453E-08
76
The next model involves spot prices of groundnut oil and the corresponding prices of futures
contract that were released for groundnut oil contracts ending January 2007 to December
2007 at MCX . The model that was obtained is a ninth order polynomial.
Y = β0.X9+ β1.X8+ β2.X7+ β3.X6+ β4.X5+ β5.X4+ β6.X3+ β7.X2+ β8.X+ β9
variable from January 2007 and December 2007 at MCX(Y):
77
Similarly, a Durbin-Watson statistic value of 1.65 indicates medium but significant interference
in the data due to error variables.

78
Objective e: To study the correlation of the futures prices of these commodities with
major futures indices in these markets.
Table 5.11: correlation analysis of prices of grounut oil futures prices with FUTEXAGRI
(the futures prices based index of NCDEX).
The following correlation matrix shows that there is medium level of negetive correlation
between groundnut oil futures prices (NCDEX) and a major market index at NCDEX called the
FUTEXAGRI (This index is constructed using the gross value of futures contract of major
agricultural commodities). The two tailed significance level of 0.000 suggest that the t-statistic
for testing the validity of the bivariate correlation co-efficient (r) is significant at a significance
level of 0.01, which indicates that the null hypothesis of no correlation is rejected. Thus, there is
some correlation between the groundnut oil futures prices and FUTEXAGRI.
Descriptive Statistics
Mean Std. Deviation N

GNO FUTURES 690.4039 69.9814 243
FUTEXAGRI 1496.5569 62.3122 241
Correlations
GNO
FUTURES FUTEXAGRI
GNO FUTURES Pearson Correlation 1.000 -.526**
Sig. (2-tailed) . .000
Sum of Squares and
1185171.4 -552020.727
Cross-products
Covariance 4897.403 -2300.086
N 243 241
FUTEXAGRI Pearson Correlation -.526** 1.000
Sum of Squares and
-552020.7 931874.203
Cross-products
Covariance -2300.086 3882.809
N 241 241
**. Correlation is significant at the 0.01 level (2-tailed).
79
Objective f: To have a qualitative view of the illiquidity of groundnut oil as a
commodity in the exchanges.
The major reasons sited by most of the experts for the groundnut oil futures not being traded in
NCDEX as well MCX are as follows:
1. Low variability in spot prices of the commodity is one of the major reasons that make
both hedgers and speculators undertake position in commodities which has higher
variability thus higher risk to hedge or higher profits to make from speculative activity.
The empirical data collected for the year 2007 support this fact. The co-efficient of
variations in spot prices released by NCDEX and MCX are very low, 9.53 and 9.86
respectively.
2. The next important reason is the uncertainity of availability of contracts caused by irrate
policies of the government. Whenever there is a dearth in production government
prohibits speculative activities in essential commodities which frequently includes
groundnut and sumflower oils.
3. Apart from the major factors, the other factors like absense of pan India delivery centres
and high warehouse charges resulted in fewer volumes of groundnut oil and seed futures
contracts being traded at the commodity exchanges.
Objective g: To measure the accuracy achieved in price matching (spot and futures)
of these two commodities by the stock exchanges.
Matching of prices is a very important phenomenon in any derivative market. The spot prices
must match its near future prices, to avoid any arbitrage.
Table 5.12: correlation results for spot and futures prices of groundnut oil in NCDEX.
The results of the correlation analysis show that the price matching achived by NCDEX is very
high with a high positive correlation of 0.993 and a significance level of 0.01 indicates rejection
of null hypothesis of no correlation.
80
Correlations
NCDEX NCDEX
GNO futures GNO spot
NCDEX GNO futures Pearson Correlation 1.000 .993**
Sig. (2-tailed) . .000
N 247 247
NCDEX GNO spot Pearson Correlation .993** 1.000
N 247 247
**. Correlation is significant at the 0.01 level (2-tailed).
81
6. Implications of Results and Findings:
Results and conclusion pertaining to objective b:
The second objective which was to establish the relation between various factors affecting the
spot prices of groundnut. Empirical evidence was sought for. The correlation results indicate the
following;
1. Mustard oil consumers consume very little groundnut oil to have a significant bearing on
phenomenon like cross elasticity of demand.
2. Vanaspati consumers sometimes complement their oil consumption with groundnut oil.
These two can be seen used as a complementary product in states like Gujarat. The
empirical data proves this with high positive correlation between prices of groundnut oil
and vanaspati prices in Junagarh (Gujarat). Which means the demand for one type of oil
grows with the demand of the other.
Another most important factor affecting the spot prices of groundnut oil is the production of the
crop itself. This is quite obvious, what is not is how to make predictions about prices looking at
the production data. The price model [Y= β0 + β1 × e (x) + β2 × e (-x)] with 100% R2 value and
very little or insignificant auto-correlation would give a scope for determining the future spot
prices based on advanced estimates of crop production released by NSSO ans CSO. This
hopefully can be a valuable tool for further research.
Results and conclusion pertaining to objective c:

As discussed earlier, the commodity exchanges are supposed to give full proof market data to
their customers. This service of the commodity exchange benefits the traders in the exchange to
determine the prices of contracts. Thus the spot price data released by the two exchanges must
match with each other to give customers the confidence to rely upon the figures and determine
their bid and ask rate.
The result of the two samples independent t-test proved that the prices released by both the
exchanges do match. This result would allow an amateur into the derivative market trade without
bothering the reliability of the price figures.
Results and conclusion pertaining to objective d:

The regression models that were developed keeping spot prices of groundnut oil and seed as the
independent variable and futures prices of these commodities as dependent variables have
achieved a certain degree of accuracy. The accuracy of the models is expressed by certain
determinants these are the R2 values of the model the Durbin-Watson* statistic value and the F
test values. Though the models seem to generate a good amount of fit in terms of R 2 values the
usefulness of the models can only be judged looking at the Durbin-Watson statistic values. This
is the statistic which shows the presence of any auto correlation between the error variables. The
gretaer the auto correlation the lesser is the reliability of the model.
82
Thus looking at the information tables of the models redears are requested to interpret the
usefulness of the models. Nevertheless, these kinds of models would certainly help readers to
understand the kind of quantitative relationship that exists between the spot prices and futures
prices. These models can be used predict the values of futures prices or better still, determine the
rate of compounding.
Results and conclusion pertaining to objective e:

The result shows negetive correlation between groundnut oil futures prices and FUTEXAGRI
which is not a tradable derivative contract in NCDEX. The objective of this study is to
empirically prove that if this index is introduced for derivative trading, is there a possibility for
groundnut oil traders to take position in this index to perform cross hedging.
The findings of this empirical test nullify any such possibility.
Results and conclusion pertaining to objective f:

The findings pertaining to the objective are self explanatory.
Results and conclusion pertaining to objective g:

The implication of very high positive correlation shows that the price matching is highly accurate
in our commodity derivative markets. The implication as stated earlier is to negate possibility of
any price arbitrage. This is not due to any control by the exchange itself. This is a normal market
phenomena where the existence of any such price arbitrage possibility itself increases the
demand of such contract and the futures prices shoot up to match the spot prices and vice versa.
The role of the exchange is limited to create enough liquidity in the market to allow a perfect
market condition and help in price discovery. This is the very essence of trading a forward at
exchanges.
83
7. Conclusion:
The following conclusion can be derived out this entire project. Though groundnut is a major
oilseed crop in India, several factors prevent it from being traded in the futures platform and
groundnut farmers are thus not being able to harness the full fledged opportunity that these
futures exchanges offer. Better price discovery, price hedging, easy credit these are advantages
that an exchnage can offer to groundnut farmers. Thus a more liquid groundnut oil and seed
deriavtive market will help these poor farmers.
The next motive for which this project was undertaken was the application of econometric
modelling for determining factors responsible for the movement of prices on these exchanges.
These models can be used by readers to predict prices of futures contract and predict the
behaviour of spot prices as well. Risk mitigation and cross hedging are some of the issues that
will be addressed through these findings.
Thus this project and its findings along with its substantial amount of empirical model building
would find its purpose served.
8. References:
1. www.wikipedia.com
2. www.ncdex.com
3. www.mcxindia.com
4. www.investopedia.com
5. www.nmce.com
6. www.ftkmc.com
7. Options, Futures and Other Derivatives (John.C.Hull)
84
ANNEXURE I
Tables displaying F test results and ANOVA results for the regression models:
Table 3.4: F test and ANOVA results for model Y= β0 + β1 × e (x) + β2 × e (-x)
Variable Value Standard Error t-ratio Prob(t)
1.79319019131964E-
a 688.764961362425 38410033955 0.0
08
-
1.55991008904492E-
b 7.86518689922018E- -0.504207708 0.61487
12
13
3.8991588517952E-
c -25869.6109009708 -663466452.2 0.0
05
68%
Confidence
Intervals
Variable Value 68% (+/-) Lower Limit Upper Limit
1.78924517289874E-
a 688.764961362425 688.764961344533 688.764961380318
08
- -
1.55647828684902E- 7.69959596927005E-
b 7.86518689922018E- 2.34299697677104E-
12 13
13 12
3.89058070232125E-
c -25869.6109009708 -25869.6109398766 -25869.6108620649
05
90%
Confidence
Intervals
2.96826772369141E-
a 688.764961362425 688.764961332743 688.764961392108
08
- -
2.58211917039606E- 1.79560048047404E-
b 7.86518689922018E- 3.36863786031808E-
12 12
13 12
6.45427764737659E-
c -25869.6109009708 -25869.6109655135 -25869.610836428
05
85
95%
Confidence
Intervals
3.54370245608588E-
a 688.764961362425 688.764961326988 688.764961397862
08
- -
3.08269431797057E- 2.29617562804856E-
b 7.86518689922018E- 3.86921300789259E-
12 12
13 12
7.70551772291767E-
c -25869.6109009708 -25869.6109780259 -25869.6108239156
05
99%
Confidence
Intervals

4.67968844228687E-
a 688.764961362425 688.764961315629 688.764961409222
08
- -
4.07089735938053E- 3.28437866945852E-
b 7.86518689922018E- 4.85741604930255E-
12 12
13 12
1.01756348555299E-
c -25869.6109009708 -25869.6110027271 -25869.6107992144
04
ANOVA
table
Source DF Sum of Squares Mean Square F Ratio Prob(F)
Regression 2 1707.55578331296 853.777891656478 1.02827E+18 0
1.22054490982467E- 8.30302659744672E-
Error 147
13 16
Total 149 1707.55578331296
86
Table 3.7: F test and ANOVA results for model:
Regression Variable Results

1.01376713672228E-
a 8.82588878610492E-19 0.870603166 0.38483
18
-3.39828841205586E- 6.4658815476919E-
b -5.255723271 0.0
16 17
-4.90300101311694E- 3.92310463036417E-
c -1.249775745 0.21258
14 14
2.24058375005284E-
d 9.53242675638456E-12 4.254438941 0.00003
12
e 8.78996501187075E-10 5.370967701659E-10 1.636570075 0.10301
-5.71445231628646E- 2.62594953553362E-
f -2.176147043 0.0305
08 08
-5.15224261870306E- 3.08461970213242E-
g -1.670300755 0.09614
06 06
-2.46240901155467E- 1.18860861744625E-
h -2.071673531 0.03935
04 04
-8.84070634780857E- 6.72353418053984E-
i -1.314889775 0.18978
03 03
j 2.06350359972982 0.170194307278203 12.12439848 0.0
k 758.89140304866 3.75760525501393 201.9614493 0.0
68% Confidence Intervals

1.01021895174375E- -1.27630073133259E- 1.89280783035424E-
a 8.82588878610492E-19
18 19 18
-3.39828841205586E- 6.44325096227498E- -4.04261350828336E- -2.75396331582836E-
b
16 17 16 16
-4.90300101311694E- 3.9093737641579E- -8.81237477727484E- -9.93627248959037E-
c
14 14 14 15
2.23274170692766E- 7.2996850494569E- 1.17651684633122E-
d 9.53242675638456E-12
12 12 11
5.3521693147032E- 3.43779569716756E- 1.4142134326574E-
e 8.78996501187075E-10
10 10 09
-5.71445231628646E- 2.61675871215925E- -8.33121102844571E- -3.09769360412721E-
f
08 08 08 08
-5.15224261870306E- 3.07382353317496E- -8.22606615187802E- -2.0784190855281E-
g
06 06 06 06
-2.46240901155467E- 1.18444848728519E- -3.64685749883986E- -1.27796052426948E-
h
04 04 04 04
-8.84070634780857E- 6.70000181090795E- -1.55407081587165E- -2.14070453690061E-
i
03 03 02 03
j 2.06350359972982 0.169598627202729 1.89390497252709 2.23310222693255
k 758.89140304866 3.74445363662138 755.146949412038 762.635856685281
87
1.67383091944216E- -7.91242040831663E- 2.55641979805265E-
a 8.82588878610492E-19
18 19 18
-3.39828841205586E- 1.06758170233941E- -4.46587011439527E- -2.33070670971645E-
b
16 16 16 16
-4.90300101311694E- 6.47743805519429E- -1.13804390683112E- 1.57443704207735E-
c
14 14 13 14
3.69942782971225E- 5.83299892667231E- 1.32318545860968E-
d 9.53242675638456E-12
12 12 11
8.86800477220918E- -7.80397603384242E- 1.76579697840799E-
e 8.78996501187075E-10
10 12 09
-5.71445231628646E- 4.33570527811956E- -1.0050157594406E- -1.3787470381669E-
f
08 08 07 08
-5.15224261870306E- 5.09301559019085E- -1.02452582088939E- -5.92270285122106E-
g
06 06 05 08
-2.46240901155467E- 1.96251168826551E- -4.42492069982017E- -4.99897323289158E-
h
04 04 04 05
-8.84070634780857E- 1.11012272854893E- -1.99419336332979E- 2.26052093768076E-
i
03 02 02 03
j 2.06350359972982 0.281007820747041 1.78249577898278 2.34451142047686
k 758.89140304866 6.20418203655349 752.687221012106 765.095585085213

1.99681712920187E- -1.11422825059138E- 2.87940600781237E-
a 8.82588878610492E-19
18 18 18
-3.39828841205586E- 1.27358468844887E- -4.67187310050473E- -2.12470372360698E-
b
16 16 16 16
-4.90300101311694E- 7.72733919042831E- -1.26303402035453E- 2.82433817731138E-
c
14 14 13 14
4.41327781247908E- 5.11914894390548E- 1.39457045688636E-
d 9.53242675638456E-12
12 12 11
1.05791950819577E- -1.78923007008698E- 1.93691600938285E-
e 8.78996501187075E-10
09 10 09
-5.71445231628646E- 5.17233280014057E- -1.0886785116427E- -5.4211951614589E-
f
08 08 07 09
-5.15224261870306E- 6.07577542729024E- -1.12280180459933E- 9.23532808587179E-
g
06 06 05 07
-2.46240901155467E- 2.34120239378388E- -4.80361140533855E- -1.21206617770782E-
h
04 04 04 05
-8.84070634780857E- 1.32433452754093E- -2.20840516232179E- 4.40263892760076E-
i
03 02 02 03
j 2.06350359972982 0.335231727045876 1.72827187268395 2.3987353267757
k 758.89140304866 7.40135507080093 751.490047977859 766.292758119461
88
2.63184086364471E- -1.74925198503422E- 3.5144297422552E-
a 8.82588878610492E-19
18 18 18
-3.39828841205586E- 1.67860750859629E- -5.07689592065215E- -1.71968090345956E-
b
16 16 16 16
-4.90300101311694E- 1.01847719308884E- -1.50877729440054E- 5.28177091777149E-
c
14 13 13 14
5.81677947351218E- 3.71564728287238E- 1.53492062298967E-
d 9.53242675638456E-12
12 12 11
1.39435692502769E- -5.15360423840618E- 2.27335342621477E-
e 8.78996501187075E-10
09 10 09
-5.71445231628646E- 6.81722758919883E- -1.25316799054853E- 1.10277527291237E-
f
08 08 07 08
-5.15224261870306E- 8.00798120870599E- -1.3160223827409E- 2.85573859000293E-
g
06 06 05 06
-2.46240901155467E- 3.08574683175222E- -5.54815584330688E- 6.2333782019755E-
h
04 04 04 05
-8.84070634780857E- 1.74549670860995E- 8.61426073829091E-
i -0.026295673433908
03 02 03
j 2.06350359972982 0.441841441124942 1.62166215860488 2.50534504085477
k 758.89140304866 9.75511900254165 749.136284046118 768.646522051201
ANOVA results
Regression 10 1112039.77910823 111203.977910823 226.4066538 0
Error 244 119845.287891774 491.169212671205
Total 254 1231885.067
89

-7.10946905109278E- 2.96128829472893E-
a -2.40080274 0.02381
10 10
2.64056038128886E-
b 5.37782760982766E-09 2.036623608 0.05199
09
2.35917364639297E-
c 6.04134628692341E-07 2.560789154 0.0166
07
-4.40060323801972E- 1.89199149596528E-
d -2.325910686 0.02809
06 06
-1.86101649754805E- 6.63525672049825E-
e -2.804739253 0.0094
04 05
4.57553845123374E-
f 1.28704228370136E-03 2.812876118 0.00922
04
7.81206473519442E-
g 2.51696283969861E-02 3.221891939 0.00341
03
4.26477761287686E-
h -0.164102636452476 -3.84785917 0.00069
02
i -1.3957126560415 0.348341330710335 -4.006738601 0.00046
j 11.6782558512385 1.25489533554914 9.306159263 0.0
k 503.576822377472 3.97420861501665 126.7112201 0.0

-
-7.10946905109278E- 3.00215407319619E- -1.0111623124289E-
a 4.10731497789659E-
10 10 09
10
5.37782760982766E- 2.67700011455064E- 2.70082749527701E- 8.0548277243783E-
b
09 09 09 09
6.04134628692341E- 2.39173024271319E- 3.64961604421021E- 8.4330765296366E-
c
07 07 07 07
- -
-4.40060323801972E- 1.9181009786096E-
d 6.31870421662932E- 2.48250225941011E-
06 06
06 06
- -
-1.86101649754805E- 6.72682326324112E-
e 2.53369882387216E- 1.18833417122394E-
04 05
04 04
1.28704228370136E- 4.63868088186076E- 8.23174195515283E- 1.75091037188744E-
f
03 04 04 03
2.51696283969861E- 7.9198712285401E- 3.30894996255262E-
g 0.017249757168446
02 03 02
4.32363154393456E-
h -0.164102636452476 -0.207338951891822 -0.120866321013131
02
i -1.3957126560415 0.353148441074138 -1.74886109711564 -1.04256421496736
j 11.6782558512385 1.27221289117972 10.4060429600588 12.9504687424182
k 503.576822377472 4.02905269390388 499.547769683569 507.605875071376
90
-7.10946905109278E- 5.05077331548967E- -1.21602423665824E- -2.05869573560311E-
a
10 10 09 10
4.50373978632627E- 8.74087823501384E- 9.88156739615393E-
b 5.37782760982766E-09
09 10 09
4.02380657128785E- 2.01753971563556E- 1.00651528582113E-
c 6.04134628692341E-07
07 07 06
-4.40060323801972E- 3.22698069551838E- -7.6275839335381E- -1.17362254250133E-
d
06 06 06 06
-1.86101649754805E- 1.13170938624818E- -2.99272588379623E- -7.29307111299868E-
e
04 04 04 05
7.80403838242426E- 5.06638445458933E- 2.06744612194379E-
f 1.28704228370136E-03
04 04 03
1.33242576123476E- 1.18453707846385E- 3.84938860093337E-
g 2.51696283969861E-02
02 02 02
7.27400469652277E- -9.13625894872484E-
h -0.164102636452476 -0.236842683417704
02 02
i -1.3957126560415 0.594130973659547 -1.98984362970105 -0.801581682381954
j 11.6782558512385 2.14034948431262 9.53790636692591 13.8186053355511
k 503.576822377472 6.77841021377239 496.7984121637 510.355232591245

-7.10946905109278E- 6.08692808981532E- -1.31963971409081E- -1.02254096127746E-
a
10 10 09 10
5.42767186373924E- -4.9844253911587E- 1.08054994735669E-
b 5.37782760982766E-09
09 11 08
4.84928143016075E- 1.19206485676266E- 1.08906277170842E-
c 6.04134628692341E-07
07 07 06
-4.40060323801972E- 3.88898851995663E- -8.28959175797635E- -5.11614718063083E-
d
06 06 06 07
-1.86101649754805E- 1.36387701889841E- -3.22489351644646E- -4.97139478649634E-
e
04 04 04 05
9.40501928651094E- 3.46540355050265E- 2.22754421235245E-
f 1.28704228370136E-03
04 04 03
1.60576990631921E- 4.12273274601783E-
g 2.51696283969861E-02 0.009111929333794
02 02
8.76625038326838E- -7.64401326197923E-
h -0.164102636452476 -0.25176514028516
02 02
i -1.3957126560415 0.716015605275093 -2.11172826131659 -0.679697050766408
j 11.6782558512385 2.57943736222126 9.09881848901726 14.2576932134598
k 503.576822377472 8.16898580816672 495.407836569306 511.745808185639
91
-
-7.10946905109278E- 8.22853178456328E- 1.1190627334705E-
a 1.53380008356561E-
10 10 10
09
-
5.37782760982766E- 7.33732513148735E- 1.2715152741315E-
b 1.95949752165969E-
09 09 08
09
-
6.04134628692341E- 6.55543581123215E- 1.25967820981556E-
c 5.14089524308738E-
07 07 06
08
-
-4.40060323801972E- 5.25727676983872E- 8.56673531819008E-
d 9.65788000785844E-
06 06 07
06
-1.86101649754805E- 1.84373878492485E- -3.7047552824729E- -1.7277712623201E-
e
04 04 04 06
1.28704228370136E- 1.27140486944432E- 1.56374142570408E- 2.55844715314568E-
f
03 03 05 03
2.51696283969861E- 2.17073842796847E- 3.4622441173014E- 4.68770126766709E-
g
02 02 03 02
-
h -0.164102636452476 0.118505375529009 -0.282608011981485 4.55972609234669E-
02
i -1.3957126560415 0.967936055644808 -2.36364871168631 -0.427776600396693
j 11.6782558512385 3.4869776688904 8.19127818234812 15.1652335201289
k 503.576822377472 11.0431334785468 492.533688898926 514.619955856019
ANOVA results
Regression 10 72052.2849472393 7205.22849472393 91.84473217 0
Error 26 2039.70262032826 78.450100781856
Total 36 74091.9875675676
92
Y = β0.X8+ β1.X7+ β2.X6+ β3.X5+ β4.X4+ β5.X3+ β6.X2+ β7.X+ β8

-5.59902351357938E- 1.63217827011855E-
a -34.30399495 0.0
16 17
5.86407703589864E-
b 2.9814772370934E-12 50.84307759 0.0
14
-6.89090603157755E- 4.3947570698227E-
c -156.7983377 0.0
09 11
1.18391849351733E-
d 9.02320050902173E-06 76.21471037 0.0
07
-7.31596813379059E- 1.07816847314385E-
e -67.85551902 0.0
03 04
f 3.75749512036985 0.021005606958521 178.8805783 0.0
g -1192.39014309209 26.586499267132 -44.84946029 0.0
h 213421.257580854 8442.64321902946 25.27896206 0.0
i -16461206.0226317 977678.569013618 -16.83703269 0.0

-5.59902351357938E- 1.62646564617313E- -5.76167007819669E- -5.43637694896206E-
a
16 17 16 16
5.84355276627299E- 2.92304170943067E- 3.03991276475613E-
b 2.9814772370934E-12
14 12 12
-6.89090603157755E- 4.37937542007832E- -6.93469978577834E- -6.84711227737677E-
c
09 11 09 09
1.17977477879002E- 8.90522303114273E- 9.14117798690074E-
d 9.02320050902173E-06
07 06 06
-7.31596813379059E- 1.07439488348785E- -7.42340762213938E- -7.20852864544181E-
e
03 04 03 03
2.09320873341662E-
f 3.75749512036985 3.73656303303569 3.77842720770402
02
g -1192.39014309209 26.493446519697 -1218.88358961179 -1165.89669657239
h 213421.257580854 8413.09396776285 205008.163613091 221834.351548617
i -16461206.0226317 974256.69402207 -17435462.7166537 -15486949.3286096
93
-5.59902351357938E- 2.69521597744675E- -5.86854511132405E- -5.3295019158347E-
a
16 17 16 16
9.68335040937942E- 2.88464373299961E- 3.07831074118719E-
b 2.9814772370934E-12
14 12 12
-6.89090603157755E- 7.25706234939823E- -6.96347665507154E- -6.81833540808357E-
c
09 11 09 09
1.95500460834517E- 8.82770004818722E- 9.21870096985625E-
d 9.02320050902173E-06
07 06 06
-7.31596813379059E- 1.78037959970244E- -7.49400609376084E- -7.13793017382035E-
e
03 04 03 03
3.46865587706058E-
f 3.75749512036985 3.72280856159925 3.79218167914046
02
g -1192.39014309209 43.902286239815 -1236.2924293319 -1148.48785685227
h 213421.257580854 13941.3367475833 199479.920833271 227362.594328437
i -16461206.0226317 1614440.62101219 -18075646.6436438 -14846765.4016195

-5.59902351357938E- 3.21539119213353E- -5.92056263279273E- -5.27748439436602E-
a
16 17 16 16
1.15522317607203E- 2.8659549194862E- 3.0969995547006E-
b 2.9814772370934E-12
13 12 12
-6.89090603157755E- 8.65767142755072E- -6.97748274585306E- -6.80432931730205E-
c
09 11 09 09
2.33231943222914E- 8.78996856579882E- 9.25643245224465E-
d 9.02320050902173E-06
07 06 06
-7.31596813379059E- 2.12399189209339E- -7.52836732299993E- -7.10356894458125E-
e
03 04 03 03
4.13810457082864E-
f 3.75749512036985 3.71611407466157 3.79887616607814
02
g -1192.39014309209 52.37540355625 -1244.76554664834 -1140.01473953584
h 213421.257580854 16632.007141488 196789.250439366 230053.264722342
i -16461206.0226317 1926026.78095683 -18387232.8035885 -14535179.2416748
94
- -
-5.59902351357938E- 4.23811409618981E-
a 6.02283492319836E- 5.17521210396039E-
16 17
16 16
1.52266624314144E- 2.82921061277926E- 3.13374386140754E-
b 2.9814772370934E-12
13 12 12
- -
-6.89090603157755E- 1.14114262075016E-
c 7.00502029365257E- 6.77679176950254E-
09 10
09 09
3.0741627602671E- 8.71578423299502E- 9.33061678504844E-
d 9.02320050902173E-06
07 06 06
- -
-7.31596813379059E- 2.79957225736532E-
e 7.59592535952713E- 7.03601090805406E-
03 04
03 03
5.45431590284957E-
f 3.75749512036985 3.70295196134136 3.81203827939835
02
g -1192.39014309209 69.0345039970348 -1261.42464708912 -1123.35563909505
h 213421.257580854 21922.1673825319 191499.090198322 235343.424963386
i -16461206.0226317 2538640.17230076 -18999846.1949324 -13922565.8503309
ANOVA results
Regression 8 1185914.89310611 148239.361638264 2388.171311 0
Error 238 14773.214930324 62.0723316400166
Total 246 1200688.10803644
95
Y = β0.X9+ β1.X8+ β2.X7+ β3.X6+ β4.X5+ β5.X4+ β6.X3+ β7.X2+ β8.X+ β9

-1.88604785750052E- 2.46681515546585E-
a -0.764567971 0.44646
03 03
b 0.120920535145288 0.147375045027757 0.820495323 0.41403
c -3.40909138627248 3.90457031655549 -0.873102828 0.38486
d 55.4456949747358 60.3683781582228 0.918455931 0.36076
e -572.792246564859 601.946486143803 -0.951566725 0.34378
f 3891.03589853482 4024.72137300907 0.966783918 0.33616
g -17321.6951392161 18075.7892652729 -0.958281538 0.34041
h 48392.8641188205 52603.0408147461 0.919963245 0.35997
i -75850.6822768342 89905.4345289805 -0.843671828 0.40102
j 49681.8479662316 68596.8832058927 0.724258095 0.47073

-1.88604785750052E- 2.46632179243476E- -4.35236964993528E- 5.80273934934241E-
a
03 03 03 04
-2.64250348734634E-
b 0.120920535145288 0.147345570018752 0.26826610516404
02
c -3.40909138627248 3.90378940249218 -7.31288078876466 0.494698016219692
d 55.4456949747358 60.3563044825912 -4.91060950785539 115.801999457327
e -572.792246564859 601.826096846575 -1174.61834341143 29.0338502817154
f 3891.03589853482 4023.91642873447 -132.880530199649 7914.9523272693
g -17321.6951392161 18072.1741074199 -35393.869246636 750.478968203748
h 48392.8641188205 52592.5202065831 -4199.6560877626 100985.384325404
i -75850.6822768342 89887.4534420747 -165738.135718909 14036.7711652405
j 49681.8479662316 68583.1638292515 -18901.31586302 118265.011795483
96

-1.88604785750052E- 4.09836669929097E- -5.98441455679148E- 2.21231884179045E-
a
03 03 03 03
b 0.120920535145288 0.244848899809116 -0.123928364663828 0.365769434954404
c -3.40909138627248 6.48705312392529 -9.89614451019777 3.0779617376528
d 55.4456949747358 100.296023472071 -44.8503284973356 155.741718446807
e -572.792246564859 1000.07389207931 -1572.86613864417 427.281645514456
f 3891.03589853482 6686.67208911728 -2795.63619058245 10577.7079876521
g -17321.6951392161 30031.1162853244 -47352.8114245406 12709.4211461083
h 48392.8641188205 87394.6920096191 -39001.8278907986 135787.55612844
i -75850.6822768342 149368.888926448 -225219.571203282 73518.206649614
j 49681.8479662316 113966.86175827 -64285.0137920386 163648.709724502

-1.88604785750052E- 4.89860153572409E- -6.78464939322461E- 3.01255367822357E-
a
03 03 03 03
b 0.120920535145288 0.29265736441612 -0.171736829270832 0.413577899561409
c -3.40909138627248 7.75369573461589 -11.1627871208884 4.3446043483434
d 55.4456949747358 119.879525346599 -64.4338303718631 175.325220321335
e -572.792246564859 1195.34533218436 -1768.13757874922 622.553085619506
f 3891.03589853482 7992.29170252142 -4101.2558039866 11883.3276010562
g -17321.6951392161 35894.902322979 -53216.5974621951 18573.2071837629
h 48392.8641188205 104459.118449923 -56066.2543311022 152851.982568743
i -75850.6822768342 178534.211887649 -254384.894164484 102683.529610815
j 49681.8479662316 136219.690670262 -86537.8427040302 185901.538636493
97
-1.88604785750052E- 6.48698381432855E- -8.37303167182907E- 4.60093595682803E-

a
03 03 03 03
b 0.120920535145288 0.387552155909493 -0.266631620764205 0.508472691054782
c -3.40909138627248 10.267848561446 -13.6769399477184 6.85875717517348
d 55.4456949747358 158.750724042678 -103.305029067943 214.196419017414
e -572.792246564859 1582.93867461236 -2155.73092117722 1010.1464280475
f 3891.03589853482 10583.809794602 -6692.77389606714 14474.8456931368
g -17321.6951392161 47533.9030308882 -64855.5981701043 30212.2078916721
h 48392.8641188205 138330.216430538 -89937.3523117172 186723.080549358
i -75850.6822768342 236424.32118086 -312275.003457694 160573.638904026
j 49681.8479662316 180389.223766536 -130707.375800305 230071.071732768
ANOVA results
Regression 9 609081.066919412 67675.6741021569 31810.2479 0
Error 93 197.855663112337 2.12748024851976
Total 102 609278.922582524
98
ANNEXURE 2
Groundnut (in shell) Product Note
Authority
Trading of Groundnut (in shell) futures may be conducted under such terms and conditions as
specified in the Rules, Byelaws & Regulations and directions of the Exchange issued from time
to time.
Unit of Trading
The unit of trading shall be 10 MT. Bids and offers may be accepted in lots of 10 MT or
multiples thereof.
Months Traded In
Trading in Groundnut (in shell) futures shall be conducted in the months as specified by the
Exchange from time to time.
Tick Size
The tick size of the price of Groundnut (in shell) shall be Re 0.05 (5 Paisa).
Basis Price
The basis price of Groundnut (in shell) shall be Ex-Warehouse Junagadh (Gujarat), exclusive of
Sales tax/VAT.
Unit for Price Quotation

The unit of price quotation for Groundnut (in shell) shall be in Rupees per 20 kg. The basis for
Groundnut (in shell) traded as Groundnut (in shell) is basis Junagadh (Gujarat), exclusive of
Sales tax/VAT.
Hours of Trading
The hours of trading for futures in Groundnut (in shell) shall be as follows:
Mondays through Fridays – 10.00 AM to 5.00 PM

Saturdays – 10.00 AM to 2.00 PM
Or as determined by the Exchange from time to time. All timings are as per Indian Standard
Timings (IST) Last Day of Trading. Last day of trading shall be 20th calendar day of contract
month, if 20th happens to be a holiday or a Saturday, then the previous working day.
Mark to Market
The outstanding positions in futures contract in Groundnut (in shell) would be marked to market
daily based on the Daily Settlement Price (DSP) as determined by the Exchange.
99
Position limits
Member Level-: 9,000 MT or 15% of Market OI whichever is higher
Client-Level: 3,000 MT
The above limits will not apply to bona fide hedgers as determined by the Exchange. For bona
fide hedgers, the Exchange will, on a case to case basis, decide the hedge limits.
For near month contracts:
The following limits would be applicable from 28 days prior to expiry date of a contract
Member: Maximum of 1,800 MT or 15 % of Market open interest, whichever is higher
Client: Maximum of 600 MT
Both position limits will be subject to NCDEX Regulations and directions from time to time.
Margin Requirements
NCDEX will use Value at Risk (VaR) based margin calculated at 99% confidence interval for
one day time horizon. NCDEX reserves the right to change, reduce or levy any additional
margins including any mark up margin.
Special Margin
Special margin of 5% of the value of the contract will be levied whenever the rise or fall in price
exceeds 20% of the 90 days prior settlement price. The margin will be payable by buyer or seller
depending on whether price rises or falls respectively. The margins shall stay in force so long as
price stays beyond the 20% limit and will be withdrawn as soon as the price is within the 20%
band.
Pre-Expiry Additional Margin
There will be an additional margin imposed for the last 5 trading days, including the expiry date
of the Groundnut (in shell) contract. The additional margin will be added to the normal exposure
margin and will be increased by 3% everyday for the last 5 trading days of the contract.
Delivery Margins
In case of open positions materializing into physical delivery, delivery margins as may be
determined by the Exchange from time to time will be charged. The delivery margins will be
100
calculated based on the number of days required for completing the physical delivery settlement
(the look-ahead period and the risks arising thereof).
Delivery Default Penalty

The penalty structure for failure to meet delivery obligations will be as per circular no.
NCDEX/TRADING-091/2007/235 dated October 4, 2007
Arbitration
Disputes between the members of the Exchange inter-se and between members and constituents,
arising out of or pertaining to trades done on NCDEX shall be settled through arbitration. The
arbitration proceedings and appointment of arbitrators shall be as governed by the Bye-laws and
Regulations of the Exchange.
Unit of Delivery
The unit of delivery for Groundnut (in shell) shall be 10 MT.
Delivery Size
Delivery is to be offered and accepted in lots of 10 MT Net or multiples thereof. A quantity
variation of +/-3 % is permitted as per contract specification.
Delivery Requests
The procedure for Groundnut (in shell) delivery is based on the contract specifications as per
Exhibit 1. During five trading days prior to expiry of the contract (including the date of expiry),
sellers having open positions would be required to indicate delivery information for giving
delivery. Accordingly, the window for acceptance of delivery requests will be open for 3
working Days. Members giving delivery requests for the commodities are not permitted to
square off their open positions. A penalty of 5% of final settlement price on the position squared
off will be levied on the embers violating the same.
NCDEX would thereafter complete the matching process based on the location and by random,
keeping in view the storage capacity of warehouse and
Groundnut (in shell) already deposited / dematerialized for delivery or any other factor(s) that the
Exchange deems appropriate for completion of the matching process.
It may be noted that upon expiry of the contract, if any seller having open position desires to give
physical delivery at a specified delivery center, then the buyer with corresponding open position
as matched by the process put in place by the Exchange, shall be bound to settle by taking
physical delivery. All open positions of those sellers who do not provide required information for
physical delivery shall be settled in cash with penalties.
For Groundnut (in shell), applicable cash settlement penalties currently, is 0.5 % of the Final
Settlement Price.
101
Ten percent (10%) of such penalty amount shall be retained by the Exchange and the balance
ninety percent (90%) shall be paid to the buyers to whom the deliveries could not be made.
Delivery Allocation
The Exchange would then compile all open positions of the members on the last trading day, as
specified in Chapter 1 above. The buyers / sellers who have to receive / give delivery would be
notified on the same day after the close of trading hours. Delivery of Groundnut (in shell) is to be
accepted by buyers at the accredited warehouse where the seller affects delivery in accordance
with the contract specifications.
Actual Delivery
Where Groundnut (in shell) is sold for delivery in a specified month, the seller must have
requisite electronic credit of such Groundnut (in shell) holding in his Clearing Member‘s Pool
Account before the scheduled date of pay in. On settlement the buyer‘s Clearing Member‘s Pool
Account would be credited with the said delivery quantity on pay out. The Clearing Member is
expected to transfer the same to the buyer‘s depository account. However, the buyer must take
actual physical delivery of Groundnut (in shell) before expiry of the validity date as indicated in
the quality test report/Assayer‘s Certificate of the Assayer or get the same revalidated.
Accredited Warehouse
NCDEX has accredited warehouses for receipt and delivery of Groundnut (in shell). Groundnut
(in shell) will be received and delivered only from the NCDEX accredited warehouse. The
details of the NCDEX accredited warehouses are as per Exhibit 2.
The Groundnut (in shell) received at the NCDEX accredited warehouse will be tested and
certified by NCDEX accredited Assayer before acceptance as good delivery in the warehouse.
Likewise, Groundnut (in shell) delivered to buyers will be from the accredited warehouse only.
Quality Standards
The contract quality for delivery of Groundnut (in shell) futures contracts made under NCDEX
Regulations shall be Groundnut (in shell) conforming to the quality specification indicated in the
contract. No lower grade/quality shall be accepted in satisfaction of futures contracts for delivery
except as and to the extent provided in the contract specifications. Delivery of higher grade
would be accepted with premium.
Packaging
Groundnut (in shell) shall be delivered in 35 kg gross basis with a permissible range of +/-1.5 kg
in clean, dry, sound, single, unmended Jute bags in merchantable condition or any other accepted
industry standard material with the mouth of the bag stitched disallowing sweating/spilling.
102
Standard Allowances
Sample weight per validation of quality allowed will be 0.2% on account of sample testing.
At the time of deposit:
The quantity credited will be the actual quantity delivered at the tested moisture level, after
providing for standard allowances on account of sampling.
Weight
The quantity of Groundnut (in shell) received and / or delivered at the NCDEX designated
warehouse would be determined / calculated by the weighbridge / weigh scale at the premises of
the designated warehouse or such other.
103

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Groundnut in Indian Commodity Markets

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―Detailed study of groundnut and groundnut oil as

commodities in major commodity exchanges in India‖

History of Commodity Exchanges:

The major commodity exchanges in world are as follows:

Chicago Board of Trade:

CBOT seat sells for $62,500, a record at the time.

October 1977, The Prince of Wales visits the CBOT.

Dalian Commodity Exchange:

Structure and function:

On January 9, 2006, DCE started trading soybean oil futures.

Realized Price and Predicted Price: Futures trading at work:

Merger of EURONEXT and NYSE Group:

Below is a list of major NYSE Euronext locations:

• Brussels, Belgium — Euronext Brussels

• Paris, France — Euronext Paris

• Amsterdam, Netherlands — Euronext Amsterdam

• London, United Kingdom — Euronext.liffe

• Chicago, Illinois, United States of America — NYSE Arca (formerly Archipelago)

NYSE EURONEXT also owns 25% of the Doha Securities Market.

National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed

NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange with an

NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of

NCDEX currently facilitates trading of 57 commodities -

Headquartered in the financial capital of India, Mumbai, MCX (www.mcxindia.com) is a

Real-time Margining System at client level

Monitoring of position limits (Quantity)

Capital adequacy norms

Daily price limits

Delivery period margin

Clearing and Settlement:

Clearing Bank Interface:

Delivery and Final Settlement:

Commodity Futures Markets in India:

Derivatives Market in India:

Some of the major market players in commodities market are: -

Hedgers, Speculators, Investors, Arbitragers

The era of widespread shortages in many essential commodities resulting in inflationary

Which Commodities are suitable for Future Trading?

There should be fluctuations in price.

Need For Futures Trading In Commodities:

Commodity Futures, which forms an essential component of Commodity Exchange, can be

Why Commodities Market?

Problems faced by Commodities Markets in India:

Risks associated with Commodities Markets:

This risk is mitigated by collection of the following margins: -

Market to market of positions on a daily basis

Position Limits and Intra-day price limits

Commodity price risks include: -

Increase in purchase cost vis-à-vis commitment on sales price

Counter party risk translating into commodity price risk

Key Factors For Success Of Commodities Market:

How one can make the business grow?

How many products are covered?

How many people participate on the platform?

Strategy, method of execution, background of promoters, credibility of the institution,

Key Expectations of Commodities Exchanges:

Proper Product Conceptualization and Design.

Robust Trading & Settlement systems.

Effective Management of Counter party Credit Risk.

Regulatory Approval / Permission to FII's for trading in the Commodity Markets

Active Involvement of Mutual Fund Industry in India

Permission to Banks for acting as Aggregators and Traders

Active Involvement of Small Regional Stock Exchanges

Newer Avenues for trading in Foreign Derivatives Exchanges