A Project Report On

A STUDY OF A COMMODITY MARKET

Undertaken at:

Subm tted n part a! "u!" !!ment o" t#e de$ree o" %ac#e!or o" %u& ne&& Adm n &trat on '%%A( S) S) A$ra*a! Co!!e$e o" Art&+ Commerce and Mana$ement+ ,a-&ar )
Submitted by:

PATEL DARSHANA B
Guided by

MRS. JAYA DAKHWANI.

Academic Year !"#!S$!"#%&

Dec!arat on:
I, the undersigned Patel Darshana B., a student of T.Y.BBA of S.S Agrawal college of Arts, o!!erce and "anage!ent, #a$sari hereby declare that all the research and infor!ation in the %ro&ect re%ort on ''ST(DY )* A )"")DITY "A+,-T. is entirely outco!e of !y own efforts and it has not been sub!itted either in %art or whole to any other uni$ersity or institute for any %ur%ose.

Date/

Patel Darshana B. T.Y.BBA 0*inance1 +oll #o/2 13

Ackno*!ed$ment
The %ro&ect re%ort on 4ST(DY )* A )"")DITY "A+,-T. was

ta5en in %artial fulfill!ent of BBA. 6ere I wish to e7%ress !y sincere than5fulness to those %eo%le who hel%ed !e throughout !y %ro&ect wor5. *irst of all, I would li5e to than5s Dr.(.T Desai, the director of S.S Agrawal ollege 8 "rs.9iashali Pare5h, the %rinci%al of our college, for allowing !e to undergo !y %ro&ect wor5. I a! greatly than5ful to "rs.:aya Da5hwani, the %ro&ect guides whose encourage!ent, guidance and teaching has gi$en a new insight of the %ro&ect. And finally !y sincere than5s goes to !y fa!ily, friend who has hel%ed !e in !y %ro&ect, without their blessing and su%%ort this %ro&ect !ight not be successful.

Patel Darshana B.

E.ECUTI/E SUMMARY
)ne of the interesting de$elo%!ents in financial !ar5et o$er the last 1< to 3= years has been the growing %o%ularity of deri$ati$es. In !any situations, both hedgers and s%eculators find it !ore attracti$e to trade a deri$ati$e on an asset, co!!odity than to trade asset and co!!odity itself. So!e co!!odity deri$ati$es are traded on e7changes. In this re%ort I ha$e included history of co!!odity !ar5et. Than I ha$e included co!!odity !ar5et in India. And after that I ha$e discussed the !echanis! of trading in co!!odity !ar5et in India. In this re%ort I ha$e ta5en a first loo5 at forward, futures and o%tions contract and other ris5 !anage!ent instru!ents. Than after I ha$e discuss the !ain co!%onents of future co!!odity trading li5e contract si>e, what actual !argin is and deli$ery syste! etc. There are !ainly three ty%es of traders/ hedgers, s%eculators and arbitrageurs. In the ne7t section I discuss about the two !a&or co!!odity e7changes in India that is " ? A#D # D-?. 6ow they are wor5ed for de$elo%ing this co!!odity !ar5et in India. And I ha$e also gi$en the list of other co!!odity e7changes in India. Put @ call ratio 0P@ of %ut to calls traded. )ne can use %ut@call ratio as !ar5et indicator .Then after I ha$e discussed about the %resent scenario of co!!odity !ar5et in India. In the ne7t I ha$e tried to analy>e the trading %attern and in$est!ent %attern of co!!odity traders and other in$estors. This I ha$e done through the hel% of Auestionnaire, which contains 1< Auestions. )n the basis of different +atio1 is a !ar5et senti!ent indicator that shows the relationshi% between the nu!bers

charts %re%ared, I ha$e at the end gi$en the research findings and conclusion.

I,DE.
Sr ,o 1 3 ; B < C D E F 1= 11 13 1; ,ame o" C#apter Title %age ollege certificate Pro&ect co!%letion certificate Declaration Ac5nowledg!ent Tab!e o" content Industry %rofile o!%any %rofile +esearch "ethodology Data analysis and Inter%retation *inding 8 onclusion Bibliogra%hy Anne7ure Pa$e ,o D 1= DB DF F1 FB F<

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INTRODUCTION

I,TRODUCTIO,
Instability of co!!odity %rices has always been a !a&or concern of the %roducers as well as the consu!ers in an agriculture do!inated country li5e India. *ar!ersG direct e7%osure to Price fluctuationsH for instance, !a5es it too ris5y for !any far!ers to in$est in otherwise Profitable acti$ities. There are $arious ways to co%e with this %roble!. A%art fro! increasing the stability of the !ar5et, $arious factors in the far! sector can better !anage their acti$ities in an en$iron!ent of unstable %rices through deri$ati$e !ar5ets. These !ar5ets ser$e a ris5 2shifting function, and can be used to loc5 2in %rices instead of relying on uncertain %rice de$elo%!ents. There are a nu!ber of co!!odity2lin5ed financial ris5 !anage!ent instru!ents,which are used to hedge %rices through for!al co!!odity e7changes, o$er 2the2counter0)T 1 !ar5et and through inter!ediation by financial and s%eciali>ed institutions who e7tend ris5 !anage!ent ser$ices. 0See (# TAD, 1FFE for a co!%rehensi$e sur$ey of instru!ents1 These instru!ents are forward, futures and o%tion contracts, swa%s and co!!odity lin5ed 2bonds. Ihile for!al e7changes facilitate trade in standardi>ed contracts li5e futures and o%tions, other instru!ents li5e forwards and swa%s are tailor !ade contracts to suit to the reAuire!ent of buyers and sellers and are a$ailable o$er2the counter .In general, these instru!ents are classified based on the %ur%ose for which they are %ri!arily used for %rice hedging, as %art of a wider !ar5eting strategy, or for %rice hedging in co!bination with other financial deals. Ihile forward contracts and )T o%tions are trade related instru!ents, futures, e7change traded o%tions and swa%s between ban5s and custo!ers are %ri!arily %rice hedging instru!ents. In the case of swa%s between inter!ediaries and
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%roducers, and co!!odity lin5ed loans and bonds 0 J8BS1 %rice hedging are co!bined with financial deals. *orwards contracts are !ostly )T agree!ents to %urchase or sell a s%ecific a!ount of a co!!odity on a %redeter!ined future date at a %redeter!ined %rice. The ter!s and conditions of a forward contract are rigid and both the %arties are obligated to gi$e and ta5e %hysical deli$ery of the co!!odity on the e7%iry of contract. The holders of forward contracts face s%ot 0ready1 %rice ris5. Ihen the %re$ailing s%ot %rice of the underlying co!!odity is higher than the agreed %rice on e7%iry of the contract, the buyer gains and the seller looses. The futures contracts are refined $ersion of forwards by which the %arties are insulated fro! bearing s%ot ris5 and are traded in organi>e e7changes. Both forwards and futures contracts ha$e s%ecific utility to co!!odity %roducers, !erchandisers and consu!ers. A%art fro! being a $ehicle for ris5 transfer a!ong hedgers and fro! hedgers to s%eculators, futures !ar5ets also %lay a !a&or role in %rice disco$ery.

T0po!o$0 o" r &k mana$ement n&trument&

The %rice ris5 refers to the %robability of ad$erse !o$e!ents in %rices of co!!odities, ser$ices or assets. Agricultural %roducts, unli5e others, ha$e an added ris5. "any of the! being ty%ically seasonal would attract only lower %rice during the har$est season. The forward and futures contracts are efficient ris5 !anage!ent tools, which insulate buyers, and sellers fro! une7%ected changes in future %rice !o$e!ents. These contracts enable the! to loc52in the %rices of the %roducts well in ad$ance. "oreo$er, futures %rices gi$e necessary indications to %roducers and consu!er s about the li5ely future ready %rice and de!and and su%%ly conditions of the co!!odity traded. The cash !ar5et or ready deli$ery !ar5et on the other hand is a ti!e2tested !ar5et syste!, which is used in all for!s of business to transfer title of goods.

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COMPANY PROFILE

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COMPA,Y PROFI1E
2)3 ,AME OF T4E COMPA,Y
"A+IADI S6A+-S 8 *I#A# - JTD.

2)5 1O6O OF T4E COMPA,Y

2)7 /ISIO, OF T4E COMPA,Y

8To be a *or!d c!a&& " nanc a! &er- ce& pro- der b0 arran$ n$ a!! conce -ab!e " nanc a! &er- ce& under one roo" at a""ordab!e pr ce t#rou$# co&t9e""ect -e de! -er0 &0&tem& and ac# e-e or$an c $ro*t# n bu& ne&& b0 add n$ ne*er ! ne& o" bu& ne&&):

2)2 COMPA,Y PROFI1E:

"arwadi Sales and *inance P. Jtd. started in the year 1FFB when acAuired !e!bershi% of #ational Stoc5 -7change of India Jtd. That was the ti!e when Go$t. had &ust started liberali>ation. a%ital !ar5et

13

being at the base of e$ery thing else was a!ong the first few sectors ta5en u% for liberali>ation and align!ent with global bench!ar5s. #S- was therefore a result of Go$ern!entGs %olicy to !oderni>e stoc5 !ar5et and gi$e our in$estors a cost 2 effecti$e trading and settle!ent syste! They enter into the stoc5 !ar5et coincided with Go$ern!entKs initiati$e to gi$e a !ode! stoc5 e7change. "arwadi had then $ery %resciently felt that this de$elo%!ent would change the $ery structure and content of the !ar5et. Then, when De%ository syste! was introduced to auto!ate the settle!ent syste!, we beca!e the first or%orate DP in 1FFE to bring this conce%t to in$estorKs doorste% in Saurashtra. "arwadi had $ery early on seen that the future lay in the ability to networ5 and use technology to its fullest %ossible e7tent. +elying on your &udg!ent, we used technology e7tensi$ely which resulted in efficient client ser$icing. It also saw the synergy that lay in %ro$iding a bouAuet of ser$ices under one roof. It is this reali>ation that led us in the year 3==; to go for !e!bershi% of #ational Je$el o!!odity -7changes, which were set u% as %art of Go$tKs %olicy to bring co!!odity "ar5et on %ar with the ca%ital !ar5et in ter!s of integrity and %ractices. They bold initiati$es starting with our &ourney fro! ca%ital !ar5et u% to co!!odities !ar5et has gi$en us synergies in o%erations, enabling us to %ass on the ad$antage to custo!ers. As an organi>ation, ha$e achie$ed a leaderKs %osition by ensuring total satisfaction of custo!ers through world class ser$ices. (tili>e ultra !odern technology for ti!ely, sea!less and accurate data %rocessing. Proacti$ely see5 custo!erGs feedbac5 in i!%ro$ing u%on our

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ser$ice deli$ery !odes. Pro!%tly res%ond to custo!er issues in order to !a7i!i>e clientGs satisfaction.

2) ; 4IRARC4Y STRUCTURE

2)< COMPA,Y I,FORMATIO,:

#a!e/ "arwadi Shares 8 *inance Jtd. 6ead )ffice/ "arwadi *inancial enter #r. ,athiawad Gy!5hana Dr. +adha5rishnana +oad +a&5ot L ;C= ==1 .-.)./ "r. :eya5u!ar A. S. Directors/ "r. ,etan "arwadi "r. De$en "arwadi "r. Sandee% "arwsadi General "anager/ "r. 6areshbhai "aniar -2"ail/ s!arwadiMhot!ail.co! Ieb Site/ www.!arwadionline.co!

2)= COMPA,Y>S MI1ESTO,E:

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3??5: "arwadi Shares And *inance P$t. Jtd. was incor%orated 3??<: Beca!e a cor%orate !e!ber of national Stoc5 -7change of India. 3??@: Beca!e a !e!ber of Saurashtra ,utch Stoc5 -7change. 3???: Jaunched De%ository ser$ices of De%ository Partici%ant under #ational Securities De%ository Jtd. 5AAA: o!!enced Deri$ati$e Trading after obtaining registration as a learing and Trading "e!ber in #S5AA7: 0" BPJ1 beca!e a cor%orate !e!ber of The #ational o!!odity and Deri$ati$es -7change of India Jtd. 5AA2: Beca!e a cor%orate !e!ber of The Stoc5 -7change, "u!bai. 5AA2: Jaunched De%ository Ser$ices of De%ository Partici%ant under entral De%ository Ser$ices 0India1 Jtd. 5AA<: "S*PJ con$erted to Public Ji!ited 0"arwadi Shares And *inance Ji!ited1

2)@ MEM%ERS4IP:
Cap ta! Market: #ational Stoc5 -7change of India Jtd. Bo!bay Stoc5 -7change Jtd. Saurashtra2,utch Stoc5 -7change Jtd. )$er2the2 ounter -7change of India Jtd. Commod t e& Der -at -e&: #ational o!!odity 8 Deri$ati$es -7change Jtd. "ulti o!!odity -7change of India Jtd. Depo& tor0 Operat on&: #ational Securities De%ositories Jtd. 0#SDJ1
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entral De%ository Ser$ices 0India1 Jtd.

2)? SER/ICES OF MARBADI:

Stock brok n$: ash "ar5et Deri$ati$es Trading "argin Trading Internet Trading

Commod t e& %rok n$: o!!odities *utures *inancing Against o!!odities Depo& tor0 Ser- ce: #SDJ DSJ IPO Sub&cr pt on Ser- ce& Mutua! Fund Product& Port"o! o mana$ement In&urance Ser- ce& Cua! tat -e Re&earc# n Stock D Commod t e&

2)3A Product& D Ser- ce& o""er&:

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EEu t0 D Der -at -e&: an loo5 for an easy and con$enient way to in$est in eAuity and ta5e %ositions in the futures and o%tions !ar5et using their research and tools. To start trading in -Auity, all you need to do is o%en an online trading account. You can call the! and they will ha$e their re%resentati$e !eet you. You can get hel% o%ening the account and get guidance on how to trade in -Auity. Commod t0: You can enter the whole new world of co!!odity futures. In$estors loo5ing for a *ast2%aced dyna!ic !ar5et with e7cellent liAuidity can #)I trade in o!!odity *utures "ar5et. The o!!odity -7change is a Public "ar5et foru! and anyone can %lay in these $ital the o!!odity "ar5ets. "arwadi o!!odity Bro5er 0P1 Jtd can certainly be your %oint of entry to o!!odity "ar5ets. "arwadi is a registered trading2cu!2clearing !e!ber of # D-? and " ?. Internet Trad n$ "a5ing the right trade at the right ti!eN -2Bro5ing ser$ice, which brings you e7%erience of online buying and selling of shares with &ust a clic5. A detail resource li5e li$e Auotes, charts, research and ad$ice hel%s you ta5e %ro%er decisions. Their robust ris5 !anage!ent syste! and 13E bit encry%tion gi$es you a co!%lete security about !oney, shares, and transaction docu!ents. IPA: "arwadi offer bidding for all boo5ed bills IP)s being floated through #S- networ5."arwadi offer ser$ices to custo!er such as ad$ises on the !ini!u! lot to a%%lied incase of refer and details and data to be furnished

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into IP) for!."arwadi scri%ts e$en fill u% the for! for related clients "arwadi offer bidding ser$ices at all !a&or location in Saurashtra and ,utch there by enabled the interline in$estors to subscribes Aualitati$e IP)s.

Mutua! Fund&: Transact in a wide range of "utual *unds. "utual *unds are an attracti$e !eans of Sa$ing ta7es and di$ersifying your in$est!ent %ortfolio. So if you are loo5ing to in$est in !utual funds, "arwadi offers you a host of !utual fund choices under one roofH bac5ed by in2de%th infor!ation and research to hel% you in$est s!artly. PMS: an you analy>e the %rices of 1,<== shares e$ery !orningO an you afford to ga!bleO )nly on the reco!!endations fro! your friends and the infor!ation o$erload fro! !aga>ines and financial dailiesO And, of course, !ore i!%ortantly, if you ha%%en to be a 6igh #et worth Indi$idual, do you ha$e the ti!e to &udge which ad$ice is reliable, authentic and has the least chance of failureO Iith "arwadi P"S, you can be assured that your in$est!ents are in safe handsN Gi$e your %ortfolio the e7%ert edge to s!oothly steer towards wealth creation. Ca&# Market Ser- ce&: "arwadi also %ro$ide * 8 ) !ar5et to all clients in to entire Saurashtra and ,utch region, Ihich they co$er through, distributed co$er. "arwadi offer cash !ar5et trading ser$ices for the both retail and in station clients at all the certain Saurashtra and ,utch where %laced either a branch or franchise or sub bro5er.
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2)33 T4E COMP1ETE I,/ESTME,T DESTI,ATIO,:

It %ro$ides co!%rehensi$e range of in$est!ent ser$ices. ThatGs ad$antage of ha$ing all the ser$ices in$estor need under one roof.

Stock brok n$: It offers co!%lete range of %re2trade and %ost2trade ser$ices on the BSand the #S-. Ihether an in$estor co!e into its con$eniently en$iron!ent, or issue instruction o$er the Phone, its highly trained tea! and so%histicated eAui%!ent ensure s!ooth transactions and %ro!%t ser$ices. E9%rok n$ and Beb9%a&ed Ser- ce&: It is one of the offers online trading on site www.!arwadionline.co!, high bandwidth leased lines, secure ser$ices and a custo!s2built user interface gi$e you an international standards trading e7%erience. It also gi$es regular trading hours, and access to infor!ation, analysis of infor!ation, and a range of !onitoring tools. Trad n$ Term na!&9Mone0 pore EFpre&&: It offer its sub2bro5er and a%%ro$ed@authori>ed user fully eAui%%ed trading ter!inals2 "oney %ore -7%ress, at the location of in$estors choice. It is fully functional ter!inal, with a $ariety of hel%ful features li5e !ar5et watch, order entry, order confir!ation, charts, and trading calls, all a$ailable in resi>able windows. And it can be o%erated through the 5eyboard using *1 for buy, *3 for sell. Depo& tor0 Part c pant Ser- ce&:

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It offers DP ser$ices !ean hassle2free, s%eedy settle!ents. It is de%ository %artici%ants with #SDJ and DSJ. Prem um Re&earc# Ser- ce&: Its research tea! offers a %ac5age of fee2based ser$ices, including daily technical analysis, research re%orts, and ad$ice on clients e7isting in$est!ents. It is research beyond des5 and co!%any2%ro$ider re%orts. If you ha$e an eAuity %ortfolio, you 5now that the %ace of life in the world of stoc5s and shares is frantic. "anaging your %ortfolio !eans you ha$e to ta5e fir!, infor!ed decisions, and Auic5lyN

2)35 %RA,C4ES:
"arwadi has s%read throughout Gu&arat state with our 3E branches and now ta5ing on Pan 2 India !antle with branches, now ha$ing co!e u% in 6yderabad, hennai Bangalore, Pune, #asi5, ,olha%ur and Delhi. "ore out2of2Gu&arat branches are on the an$il in order to be a cons%icuous %layer at national le$el. As on today they are ser$ing about D<,=== clients s%read out o$er <<B %in code locations through a networ5 of about ;== inter!ediaries such as sub2bro5ers, franchisees and authori>ed %ersons.

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Also other branches of "arwadi in different cities li5eP.. Ah!adabad A!reli Anand Baroda Bha$nagar Bhu& Delhi Dhora&i Dhangadhra Gondal Gandhidha! :a!nagar :unagadh ,eshod "ana$adar "itha%ur "u!bai )5ha Porbandar Surat Surendranagar 9era$al

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;) A%OUT T4E COMMODITY

;)3 I,TRODUCTIO,
,ee%ing in $iew the e7%erience of e$en strong and de$elo%ed econo!ies of the world, it is no denying the fact that financial !ar5et is e7tre!ely $olatile by nature. Indian financial !ar5et is not an e7ce%tion to this %heno!enon. The attendant ris5 arising out of the $olatility and co!%le7ity of the financial !ar5et is an i!%ortant concern for financial analysts. As a result, the logical need is for those financial instru!ents which allow fund !anagers to better !anage or reduce these ris5s. The e!ergence of the !ar5et for deri$ati$e %roducts, !ost notably forwards, futures and o%tions, can be traced bac5 to the willingness of ris52 a$erse econo!ic agents to guard the!sel$es against uncertainties arising out of fluctuations in asset %rices. By their $ery nature, the financial !ar5ets are !ar5ed by a $ery high degree of $olatility. Through the use of deri$ati$e %roducts, it is %ossible to %artially or fully transfer %rice ris5s by loc5ingLin asset %rices. As instru!ents of ris5 !anage!ent, these generally do not influence the fluctuations in the underlying asset %rices. 6owe$er, by loc5ing2in asset %rices, deri$ati$e %roducts !ini!i>e the i!%act of

33

fluctuations in asset %rices on the %rofitability and cash flow situation of ris52a$erse in$estors .

;)5 COMMODITIES
)rgani>ed futures !ar5et e$ol$ed in India by the setting u% of QBo!bay otton Trade Association Jtd.Q in 1ED<. In 1EF;, following wides%read discontent a!ongst leading cotton !ill owners and !erchants o$er the functioning of the Bo!bay otton Trade Association, a se%arate association by the na!e QBo!bay otton -7change Jtd.Q was constituted. *utures trading in oilseeds was organi>ed in India for the first ti!e with the setting u% of Gu&arati 9ya%ari "andali in 1F==, which carried on futures trading in groundnut, castor seed and cotton. Before the Second Iorld Iar bro5e out in 1F;F se$eral futures !ar5ets in oilseeds were functioning in Gu&arat and Pun&ab. A three2%ronged a%%roach has been ado%ted to re$i$e and re$itali>e the !ar5et. *irstly, on %olicy front !any legal and ad!inistrati$e hurdles in the functioning of the !ar5et ha$e been re!o$ed. *orward trading was %er!itted in cotton and &ute goods in 1FFE, followed by so!e oilseeds and their deri$ati$es, such as groundnut, !ustard seed, sesa!e, cottonseed etc. in 1FFF. A state!ent in the first e$er #ational Agriculture Policy, issued in :uly, 3=== by the go$ern!ent that futures trading will be encouraged in increasing nu!ber of agricultural co!!odities was indicati$e of welco!e change in the go$ern!ent %olicy towards forward trading. Secondly, strengthening of infrastructure and institutional ca%abilities of the regulator and the e7isting e7changes recei$ed %riority. Thirdly, as the

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e7isting e7changes are slow to ado%t refor!s due to legacy or lac5 of resources, new %ro!oters with resources and %rofessional a%%roach were being attracted with a clear !andate to set u% de!ateriali>ed, technology dri$en e7changes with nationwide reach and ado%ting best international %ractices. The year 3==; !ar5ed the real turning %oint in the %olicy fra!ewor5 for co!!odity !ar5et when the go$ern!ent issued notifications for withdrawing all %rohibitions and o%ening u% forward trading in all the co!!odities. This %eriod also witnessed other refor!s, such as, a!end!ents to the -ssential o!!odities Act, Securities 0 ontract1 +ules, which ha$e reduced bottlenec5s in the de$elo%!ent and growth of co!!odity !ar5ets. )f the countryKs total GDP, co!!odities related 0and de%endent1 industries constitute about roughly <=2C= R, which itself cannot be ignored. "ost of the e7isting Indian co!!odity e7changes are single co!!odity %latfor!sH are regional in nature, run !ainly by entities which trade on the! resulting in substantial conflict of interests, o%aAue in their functioning and ha$e not used technology to scale u% their o%erations and reach to bring down their costs. But with the strong e!ergence of/ #ational "ulti2 co!!odity -7change Jtd., Ah!edabad 0#" -1, "ulti -7change Jtd., "u!bai 0" ?1, #ational o!!odity o!!odities and Deri$ati$es

-7change, "u!bai 0# D-?1, and #ational Board of Trade, Indore 0#B)T1, all these shortco!ings will be addressed ra%idly. These e7changes are e7%ected to be role !odel to other e7changes and are li5ely to co!%ete for trade not only a!ong the!sel$es but also with the e7isting e7changes. The current !indset of the %eo%le in India is that the o!!odity e7changes are s%eculati$e 0due to non deli$ery1 and are not !eant for actual users. )ne
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!a&or reason being that the awareness is lac5ing a!ongst actual users. In India, Interest rate ris5s, e7change rate ris5s are acti$ely !anaged, but the sa!e does not hold true for the co!!odity ris5s. So!e additional i!%edi!ents are centered on the safety, trans%arency and ta7ation issues)

;)7 B4Y COMMODITIES MARKETG

India has $ery large agriculture %roduction in nu!ber of agri2 co!!odities, which needs use of futures and deri$ati$es as %rice2ris5 !anage!ent syste!. *unda!entally %rice you %ay for goods and ser$ices de%end greatly on how well business handle ris5. By using effecti$ely futures and deri$ati$es, businesses can !ini!i>e ris5s, thus lowering cost of doing business. o!!odity %layers use it as a hedge !echanis! as well as a !eans of !a5ing !oney. *or e.g. in the bullion !ar5ets, %layers hedge their ris5s by using futures -uro2Dollar fluctuations and the international %rices affecting it. *or an agricultural country li5e India, with %lethora of !andis, trading in o$er 1== cro%s, the issues in %rice disse!ination, standards, certification and warehousing are bound to occur. o!!odity "ar5et will ser$e as a suitable alternati$e to tac5le all these %roble!s efficiently.

;)2 COMMODITY FUTURES:

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o!!odity futures are si!%ly the standard futures contracts traded through e7change. These contracts ha$e their res%ecti$e co!!odity as underlying asset and deri$e the dyna!ics fro! it. Such contracts allow the %artici%ant to buy and sell certain co!!odity at a certain %rice for future deli$ery. *utures trading is a natural outgrowth of the %roble! of !aintaining a year2round su%%ly of seasonal %roducts li5e agriculture cro%s. The best thing about a co!!odity futures contract is that it is generally le$eraged gi$ing o%%ortunity to all ty%es of in$estors to %artici%ate. haracteristically, such a contract has an e7%iry and deli$ery attached with it.

;); B4Y TRADE I, COMMODITIESG

3) % $ market9d -er&e opportun t e& India, a country with a %o%ulation of o$er one billion, has an econo!y based on agriculture, %recious !etals and base !etals. Thus, trading in co!!odities %ro$ides lucrati$e !ar5et o%%ortunities for a wider section of %artici%ants of di$erse interests li5e in$estors, arbitragers, hedgers, traders, !anufacturers, %lanters, e7%orters and i!%orters. 5) 6et to t#e &ore o!!odity trading has been a brea5through in e7%anding the in$est!ent fro! in$esting in a !etal co!%any to trading in !etal itself. 7) 4u$e potent a! o!!odity e7changes see a tre!endous daily turno$er of !ore than +s.1<,=== cores. This gi$es a lunge %otential to !ar5et %artici%ant to !a5e %rofits. 2) EFp!o tab!e "undamenta!
3C

The funda!ental for co!!odity trading is si!%le 4%rice is a function of de!and and su%%ly. so is hedging, by ta5ing a%%ro%riate contract. This !a5es things really easy to understand and e7%loit. ;) Port"o! o d -er& " er o!!odity futures deri$e their %rices fro! the underlying co!!odity and co!!odity %rices cannot beco!e >ero. %ortfolio di$ersifier. o!!odity has a global %resence and their %rices !o$e with global econo!ics and hence, itGs a good

;)< AD/A,TA6E OF FUTURES TRADI,6

*utures trading re!o$e the hassles and costs of settle!ent and storage for traders who do not want custody. Though, the !ost lucrati$e ele!ent of futures trading is that it allows in$estors to %artici%ate and trade at no!inal costs at a !uch lesser a!ount/ #o longer need to %ut the whole a!ount for tradingH only the !argin is reAuired. #o sales ta7 is a%%licable if the trade is reAuired off. Sales ta7 is a%%licable only if a trade results in deli$ery. Traders can short sell. If a trader buys an eAui$alent contract bac5 before the contract e7%ires, he will be able to %rofit fro! a falling %rice. This is difficult in s%ot !ar5eters because it reAuires the seller to borrow the co!!odity. It is ne7t to i!%ossible for retail in$estors in case of so!ething li5e gold. All %artici%ants trade e7actly the sa!e notional right i.e. those defined on the standard contract, so the !ar5et grows dee%er and !ore liAuid in the standard futures contract than in s%ot bullion where different Aualities of bullion e7it, each of which has different %rices. Greater liAuidity %ro$ides a

3D

reliable real2ti!e %rice so!ething which is absolutely not a$ailable in the )T bullion !ar5et.

;)= C4ARACTERISTICS OF FUTURES TRADI,6

A Q*utures ontractQ is a highly standardi>ed contract with certain distinct features. So!e of the i!%ortant features are as under/ *uturesG trading is necessarily organi>ed under the aus%ices of a !ar5et association so that such trading is confined to or conducted through !e!bers of the association in accordance with the %rocedure laid down in the +ules 8 Bye2laws of the association. It is in$ariably entered into for a standard $ariety 5nown as the Qbasis $arietyQ with %er!ission to deli$er other identified $arieties 5nown as Qtenderable $arietiesQ. The units of %rice Auotation and trading are fi7ed in these contracts, %arties to the contracts not being ca%able of altering these units. The deli$ery %eriods are s%ecified. The seller in a futures !ar5et has the choice to decide whether to deli$er goods against outstanding sale contracts. In case he decides to deli$er goods, he can do so not only at the location of the Association through which trading is organi>ed but also at a nu!ber of other %re2s%ecified deli$ery centers. In futures !ar5et actual deli$ery of goods ta5es %lace only in a $ery few cases. Transactions are !ostly sAuared u% before the due date of the contract and contracts are settled by %ay!ent of differences without any %hysical deli$ery of goods ta5ing %lace.

;)@ COMMODITY DERI/ATI/ES I, I,DIA

3E

o!!odity deri$ati$es ha$e a crucial role to %lay in the %rice ris5 !anage!ent %rocess es%ecially in any agriculture do!inated econo!y. Deri$ati$es li5e forwards, futures, o%tions, swa%s etc are e7tensi$ely used in !any de$elo%ed and de$elo%ing countries in the world. The "ercantile -7changeH hicago hicago Board of TradeH #ew Yor5 "ercantile Sidney *utures

-7changeH International Petroleu! -7change, JondonH Jondon "etal -7changeH Jondon *utures and )%tions -7changeH o!!odity -7changeH ,uala Ju!%ur *utures -7changeH Bei&ing -7changeH Singa%ore International "onetary -7changeH The Singa%ore o!!odity -7change H the Buenos hina o!!odity Aires Grain -7changeH Shanghai "etals -7changeH

o!!odity -7change, etc are so!e of the

leading co!!odity e7changes in the world engaged in trading of deri$ati$es in co!!odities. 6owe$er, they ha$e been utili>ed in a $ery li!ited scale in India Although India has a long history of trade in co!!odity deri$ati$es, this seg!ent re!ained underde$elo%ed due to go$ern!ent inter$ention in !any co!!odity !ar5ets to control %rices. The go$ern!ent controls the %roduction, su%%ly and distribution of !any agricultural co!!odities and only forwards and futures trading are %er!itted in certain co!!odity ite!s. *ree trade in !any co!!odity ite!s is restricted under the -ssential ontracts 0+egulation1 Act, 1F<3. The first co!!odity e7change was set u% in India by Bo!bay otton Trade Association Jtd., and for!al organi>ed futures trading started in cotton in 1ED<. SubseAuently, !any e7changes ca!e u% in different %arts of the country for futures trade in $arious co!!odities. The Gu&arati 9ya%ari "andali ca!e into e7istence in 1F==, which has underta5en futures trade in
3F

o!!odities Ac, 1F<, and forward and

futures contracts are li!ited to certain co!!odity ite!s under the *orward

oilseeds first ti!e in the country. The

alcutta 6essian -7change Jtd and

-ast India :ute Association Jtd were set u% in 1F1F and 1F3D res%ecti$ely for futures trade in raw &ute. In 1F31, futures in cotton were organi>ed in "u!bai under the aus%ices of -ast India otton Association. "any e7changes ca!e u% in the agricultural centers in north India before world war bro5e out and engaged in wheat futures until it was %rohibited. The e7changes in 6a%ur, "u>affarnagar, "eerut, Bhatinda, etc were established during this %eriod. The futures trade in s%ices was firs organi>ed by IPSTA in ochin in 1F<D. *utures in gold and sil$er began in "u!bai in 1F3= and continued until the go$ern!ent %rohibited it by !id21F<=s. Jater, futures trade was altogether banned by the go$ern!ent in 1FCC in order to ha$e control on the !o$e!ent of %rices of !any agricultural and essential co!!odities. )%tions are though %er!itted now in stoc5 !ar5et, they are not allowed in co!!odities. The co!!odity o%tions were traded during the %re2inde%endence %eriod. )%tions on cotton were traded until the along with futures were banned in 1F;F. 6owe$er, the go$ern!ent withdrew the ban on futures with %assage of *orward ontract 0+egulation1 Act in 1F<3. After the ban of futures trade !any e7changes went out of business and !any traders started resorting to unofficial and infor!al trade in futures. )n reco!!endation of the ,husro o!!ittee in 1FE= go$ern!ent reintroduced futures on so!e selected co!!odities including cotton, &ute, %otatoes, etc. *urther in 1FF; the go$ern!ent of India a%%ointed an e7%ert co!!ittee on forward !ar5ets under the chair!anshi% of Prof. ,.#. ,abra and the re%ort of the co!!ittee was sub!itted in 1FFB which reco!!ended the reintroduction of futures already banned and to introduce futures on !any !ore co!!odities including sil$er. In tune with the ongoing econo!ic liberali>ation, the #ational Agricultural Policy 3=== has
;=

en$isaged e7ternal and do!estic !ar5et refor!s and dis!antling of all controls and regulations in agricultural co!!odity !ar5ets. It has also %ro%osed to enlarge the co$erage of futures !ar5ets to !ini!i>e the wide fluctuations in co!!odity %rices and for hedging the ris5 e!erging fro! %rice fluctuations. In line with the %ro%osal !any !ore agricultural co!!odities are being brought under futures trading. In India, currently there are 1< co!!odity e7changes acti$ely underta5ing trading in do!estic futures contracts, while two of the!, $i>., India Pe%%er and S%ice Trade Association 0IPST1, ochin and the Bo!bay o!!odity -7change 0B -1 Jtd. ha$e been recently u%graded to international e7changes to deal in international contracts in %e%%er and castor oil res%ecti$ely. Another E e7changes are %ro%osed and so!e of the! are e7%ected to start o%eration shortly. There are B e7changes, which are s%ecifically a%%ro$ed for underta5ing forward deals in cotton. "ore detailed account of these e7changes has been %resented. The %ro%osed study is %ri!arily based on the $isit of se$en leading e7changes $i>., IPST ochin, which deal in do!estic and international contracts in %e%%erH B - Jtd., a "ulty2co!!odity international e7change where futures in castor oil, castor seed, sunflower oil, +BD Pal!olein etc are tradedH The -ast India otton Association 0-I A1 Jtd., Bo!bay, which is a s%eciali>ed e7change dealing in forwards and futures in cottonH South India otton Association 0SI A , oi!batore which deals in forward o!!odity contracts in cottonH offee *utures -7change India Jtd., 0 )*-I1

Bangalore which underta5es coffee futures tradingH ,an%ur

-7change 0, -1 which deals with futures contracts in !ustard oil and gurH and The ha!ber of o!!erce, 6a%ur which underta5es futures trading in gur and %otatoes.
;1

;)? MEC4A,ICS OF FUTURES TRADI,6

*utures are a seg!ent of deri$ati$e !ar5ets. The $alue of a futures contract is deri$ed fro! the s%ot 0ready1 %rice of the co!!odity underlying the contract. Therefore, they are called deri$ati$es of s%ot !ar5et. The buying and selling of futures contracts ta5e %lace in organi>ed e7changes. The !e!bers of e7changes are authori>ed to carryout trading in futures. The trading !e!bers buy and sell futures contract for their own account and for the sac count of non2trading !e!bers and other clients. All other %ersons interested to trade in futures contracts, as clients !ust get the!sel$es registered with the e7change as registered non2!e!bers.

;)3A B4AT IS A COMMODITY FUTURE E.C4A,6EG

-7change is an association of !e!bers, which %ro$ides all organi>ational su%%ort for carrying out futures trading in a for!al en$iron!ent. These e7changes are !anaged by the Board of Directors, which is co!%osed %ri!arily of the !e!bers of the association. There are also re%resentati$es of the go$ern!ent and %ublic no!inated by the *orward "ar5ets o!!ission. The !a&ority of !e!bers of the Board ha$e been chosen fro! a!ong the !e!bers of the Association who ha$e trading and business interest in the e7change. The chief e7ecuti$e officer and his tea! in day2to2day ad!inistration assist the Board. There are different classes of !e!bers who ca%itali>e the e7change by way of %artici%ation in the for! of eAuity, ad!ission fee, security de%osits, registration fee etc.

;3

a) Ord nar0 Member&:

They are the %ro!oters who ha$e the right to

ha$e own Laccount transactions without ha$ing the right to e7ecute transactions in the trading ring. They ha$e to %lace orders with trading !e!bers or others who ha$e the right to trade in the e7change. b) Trad n$ Member&: These !e!bers e7ecute buy and sell orders in the

trading ring of the e7change on their account, on account of ordinary !e!bers and other clients. c) Trad n$9cum9C!ear n$ Member&: They ha$e the right to trade and

also to %artici%ate in clearing and settle!ent in res%ect of transactions carried out on their account and on account of their clients. d) In&t tut ona! C!ear n$ Member&: trading rights. e) De& $nated C!ear n$ %ank: It %ro$ides ban5ing facilities in res%ect of They ha$e the right to %artici%ate in

clearing and settle!ent on behalf of other !e!bers but do not ha$e the

%ay2in, %ayout and other !onetary settle!ents. The co!%osition of the !e!bers in an e7change howe$er $aries. In so !any e7changes there are e7clusi$e clearing !e!bers, bro5er !e!bers and registered non 2!e!bers in addition to the abo$e category of !e!bers.

;)33 B4AT IS COMMODITY FUTURES CO,TRACTG

*utures contracts are an i!%ro$ed $ariant of forward contracts. They are agree!ents to %urchase or sell a gi$en Auantity of a co!!odity at a %redeter!ined %rice, with settle!ent e7%ected to ta5e %lace at a future date.
;;

Ihile forward contracts are !ainly o$er2the2counter and tailor2!ade which %hysical deli$ery futures settle!ent standardi>ed contracts whose transactions are !ade in for!al e7changes through clearing houses and generally closed out before deli$ery. The closing out in$ol$es buying a different ti!es of two identical contracts for the %urchase and sale o the co!!odity in Auestion, with each canceling the other out. The futures contracts are standardi>ed in ter!s of Auality and Auantity, and %lace and date of deli$ery of the co!!odity. The co!!odity futures contracts in India as defined by the *" has the following features/ 'a( Trading in futures is necessarily organi>ed under the aus%ices of a recogni>ed association so that such trading is confined to or conducted through !e!bers of the association in accordance with the %rocedure laid down in the +ules and Bye2laws of the association. 'b( It is in$ariably entered into for a standard $ariety 5nown as the 4basis $ariety. with %er!ission to deli$er other identified $arieties 5nown as 4tender able $arieties.. 'c( The units of %rice Auotation and trading are fi7ed in these contracts, %arties to the contracts not being ca%able of altering these units. 'd( The deli$ery %eriods are s%ecified. 'e( The seller in a futures !ar5et has the choice to decide whether to deli$er goods against outstanding sale contracts. In case he decides to deli$er goods, he can do so not only at the location of the Association through which trading is organi>ed but also at a nu!ber of other %re2s%ecified deli$ery centers. '"( In futures !ar5et actual deli$ery of goods ta5es %lace only in a $ery few cases.

;B

Transactions are !ostly sAuared u% before the due date of the contract and contracts are settled by %ay!ent of differences without any %hysical deli$ery of goods ta5ing %lace. The ter!s and s%ecifications of futures contracts $ary de%ending on the co!!odity and the e7change in which it is traded. The !a&or ter!s and conditions of contracts traded in si7 sa!%le e7changes in India. These ter!s are standardi>ed and a%%licable across the trading co!!unity in the res%ecti$e e7changes and are fra!ed to %ro!ote trade in the res%ecti$e co!!odity *or e7a!%le, the contract si>e is i!%ortant for better !anage!ent of ris5 by the custo!er. It has i!%lications for the a!ount of !oney that can be gained or lost relati$e to a gi$en change in %rice le$els. I also affect the !argins reAuired and the co!!ission charged. Si!ilarly, the !argin to be de%osited with the clearing house has i!%lications for the cash %osition of custo!ers because it bloc5s cash for the %eriod of the contract to which he is a %arty the strength and wea5nesses of contract s%ecifications are discussed under constraints and %olicy o%tions.

;)35 B4O ARE T4E PARTICIPA,TS I, FUTURES MARKETG

Broadly, s%eculators who ta5e %ositions in the !ar5et in an atte!%t to benefit fro! a correct antici%ation of future %rice !o$e!ents, and hedgers who transact in futures !ar5et with an ob&ecti$e of offsetting a %rice ris5 on the %hysical !ar5et for a %articular co!!odity !a5e the futures !ar5et in that co!!odity. Although it is difficult to draw a line of distinction between hedgers and s%eculators, the for!er category consists of !anufacturing co!%anies, !erchandisers, and far!ers. "anufacturing

;<

co!%anies who use the co!!odity as a raw !aterial buy futures to ensure its uninterru%ted su%%ly of guaranteed Auality at a %redeter!ined %rice, which facilitates i!!unity against %rice fluctuations. Ihile e7%orters in addition to using the %rice disco$ery !echanis! for getting better %rices for their co!!odities see5 to hedge against their o$erseas e7%osure by way of loc5ing2in the %rice by way of buying futures contracts, the i!%orters utili>e the liAuid futures !ar5et for the %ur%ose of hedging their outstanding %osition by way of selling futures contracts. *utures !ar5et hel%s far!ers ta5ing infor!ed decisions about their cro% %attern on the basis of the futures %rices and reduces the ris5 associated with $ariations in their sales re$enue due to un%redictable future su%%ly de!and conditions. Abo$e all, there are a large nu!ber of bro5ers who inter!ediate between hedgers and s%eculators create the !ar5et for futures contracts.

;)37 COMMODITY ORDERS

The buy and sell orders for co!!odity futures are e7ecuted on the trading floor where floor bro5ers congregate during the trading hours sti%ulated by the e7change. The floor bro5ers@trading !e!bers on recei%t of orders fro! clients or fro! their office trans!its the sa!e to others on the trading floor by hand signal and by calling out the orders 0in an o%en outcry syste! they would li5e to %lace and %rice. After trade is !ade with another floor bro5er who ta5es the o%%osite side of the transaction for another custo!er or for his own account, the details of transactions are %assed on to the clearing house through a transaction sli% on the basis o which the clearinghouse $erifies the !atch and adds to its records.

;C

*ollowing the e7%eriences of stoc5 e7changes with electronic screen based trading co!!odity e7changes are also !o$ing fro! outdated o%en outcry syste! to auto!ated trading syste!. "any leading co!!odity e7changes in the world including hicago "ercantile -7change 0 "-1, hicago Board of Trade 0 B)T1, International Petroleu! -7change 0IP-1, Jondon, ha$e already co!%uteri>ed the trading acti$ities. In India, coffee futures e7change, Bangalore has already %ut in %lace the screen based trading and !any others are in the %rocess of co!%uteri>ation. To add to !oderni>ation efforts, the Bo!bay o!!odity -7change 0B -1 has initiated for a co!!on electronic trading %latfor! connecting all co!!odity e7changes to conduct screen based trading. In electronic trading, trading ta5es %lace through a centrali>ed co!%uter networ5 syste! to which all buy and sell orders and their res%ecti$e %rices are 5eyed in fro! $arious ter!inals of trading !e!bers. The deal ta5es %lace when the central co!%uter finds !atching %rice Auotes for buy and sell. The entire %rocedural ste%s in$ol$ed in electronic trading beginning fro! %lacing the buy@sell order to the confir!ation of the transaction ha$e been shown in figure 23.1 below.

;D

Order and EFecut on "!o*& n e!ectron c "uture trade

;)32 RO1E OF C1EARI,6 4OUSE

learinghouse is the organi>ational set u% ad&unct to the futures e7change which handles all bac52office o%erations including !atching u% of each buy and sell transactions, e7ecution, clearing and re%orting of all transactions, settle!ent of all transactions on !aturity by %aying the %rice difference or by arranging %hysical deli$ery, etc., and assu!es all counter%arty ris5 on behalf of buyer and seller. It is i!%ortant to understand that the futures !ar5et is designed to %ro$ide a %ro7y for the ready 0s%ot1 !ar5et and thereby acts as a %ricing !echanis! and not as %art of, or as a substitute for, the ready !ar5et. The buyer or seller of futures contracts has
;E

two o%tions before the !aturity of the contract. *irst, the buyer 0seller1 !ay ta5e 0gi$e1 %hysical deli$ery of the co!!odity at the deli$ery %oint a%%ro$ed by the e7change after the contract !atures. The second o%tion, which distinguishes futures fro! forward contracts is that, the buyer 0seller1 can offset the contract by selling 0buying1 the sa!e a!ount of co!!odity and sAuaring off his %osition. *or sAuaring of a %osition, the buyer 0seller1 is not obligated to sell 0buy1 the original contract. Instead, the clearinghouse !ay substitute any contract of the sa!e s%ecifications in the %rocess of daily !atching. As deli$ery ti!e a%%roaches, $irtually all contracts are settled by offset as those who ha$e bought 0long1 sell to those who ha$e sold 0short1. This offsetting reduces the o%en %osition in the account of all traders as they a%%roach the !aturity date of the contract. The contracts, if any, which re!ain unsettled by offset until !aturity date are settled by %hysical deli$ery. The clearinghouse %lays a !a&or role in the %rocess e7%lained abo$e by inter!ediating between the buyer and seller. There is no clearinghouse in a forward !ar5et due to which buyers and sellers face counter%arty ris5. In a futures e7change all transactions are routed through and guaranteed by the clearinghouse which auto!atically beco!es a counter%art to each transaction. It assu!es the %osition of counter%art to both sides of the transaction. It sells contract to the buyer and buys the identical contract fro! the seller. Therefore, traders obtain a %osition $is 2S2 $is the clearing house. It ensures default ris52free transactions and %ro$ides financial guarantee on the strength of funds contributed by its !e!bers and through collection of !argins 0discussed in section 3.;1, !ar5ing2to2!ar5et all outstanding contracts, %osition li!its i!%osed on traders, fi7ing the daily %rice li!its and settle!ent guarantee fund.

;F

The organi>ational structure and !e!bershi% reAuire!ents of clearinghouses $ary fro! one e7change to the other. The Bo!bay o!!odity -7change and inde%endent cor%orations ochin %e%%er e7change ha$e set u% se%arate 0na!ely, Pri!e o!!odities learing learing o!!odities or%oration of

or%oration of India Jtd, and *irst

India Jtd., res%ecti$ely1 for handling clearing and guarantee of all futures transactions in the res%ecti$e e7changes. Ihile coffee e7change has clearing house as a se%arate di$ision of the e7change, !any other e7changes li5e ha!ber of o!!erce, 6a%urH ,an%ur o!!odity -7change and cotton e7change in Bo!bay run in2house clearinghouse as %art of the res%ecti$e e7changes. The clearing and guaranty are !anaged in these e7changes by a se%arate co!!ittee 0nor!ally called the learing 6ouse o!!ittee1. The !e!bershi% in the clearinghouse reAuires ca%ital contribution in the for! of eAuity, security de%osit, ad!ission fee, registration fee, guarantee fund contribution in addition to net worth reAuire!ent de%ending on its organi>ational structure. *or e7a!%le, in the Bo!bay o!!odity -7change the !ini!u! ca%ital reAuire!ent for !e!bershi% in its clearinghouse as a%%licable to trading2cu!2clearing !e!bers is +s.<=,=== each toward eAuity and security de%osit, +s. <== as annual subscri%tion, and additionally, !e!bers are reAuired to ha$e net worth of +s.; la5hs. Si!ilarly, coffee e7change %rescribed +s.< la5h each towards eAuity and guarantee fund contribution and +s.B=,=== towards ad!ission fee for a trading2cu!2clearing !e!ber. 6owe$er, in e7changes where clearing house is a %art of the e7change the %ay!ent reAuire!ents are lower. *or e7a!%le, ,an%ur o!!odity -7change %rescribed only +s.3<,==,=== +s.1=== and +s.<== res%ecti$ely towards security de%osit, registration fee and annual fee for a clearing cu!2trading !e!ber. *or
B=

ensuring financial integrity of the e7change and for counter%arty ris5 2free trade %osition 0e7%osure1 li!its ha$e been i!%osed on clearing !e!bers. These li!its which are stringent in so!e cases and are liberal in other cases are nor!ally lin5ed to the !e!bersG contribution towards eAuity ca%ital or security de%osit or a co!bination of both and settle!ent guarantee fund .In Bo!bay o!!odity -7change the e7%osure li!it of a clearing !e!ber is the su! of <= ti!es the face $alue of contribution to eAuity ca%ital of the clearinghouse and ;= ti!es the security de%osit the !e!ber has !aintained with the clearinghouse. Ihile coffee e7change %rescribes the li!it of E= ti!es the su! of !e!berGs eAuity in$est!ent and the contribution to the guarantee fund, the cotton e7change, Bo!bay, has sti%ulated a liberal e7%osure li!it on o%en %ositions. It has a li!it of 3== and 1<== units 0recall that one contract unit is eAui$alent to F;.< Auintals res%ecti$ely for co!%osite and institutional !e!bers. The ochin %e%%er e7change has fi7ed a net e7%osure li!it of C= units 0eAui$alent to 1<== Auintals1 for do!estic contract and F= units 0eAui$alent to 33<= Auintals1 for international contract. "oreo$er, setting u% of settle!ent guarantee fund ensures enough financial strength in case the clearinghouse faces default. The ,an%ur o!!odity -7change !aintains a trade guarantee fund with a cor%us of +s.1== la5hs while the coffee e7change in addition to a guarantee fund the e7change has substituted itself as %arty to clear all transactions. Yet another chec5 on the %ossible default is through %rescribing !a7i!u! %rice fluctuation on any trading day, which hel%s li!it the %robable %rofit@loss fro! each unit of transaction. The rele$ant data on %er!itted %rice li!it has been %resented. Its clear fro! the table that the !a7i!u! %rofit@loss %otential fro! trade in each contract unit $aries fro! as low as +s. E== for %otato futures in ha!ber of o!!erce, 6a%ur
B1

to as high as +s. 1<,=== in %e%%er e7change,

ochin. Si!ilarly, gi$en the

%er!issible o%en %osition of 3== units for a trading2cu!2clearing !e!ber and !a7i!u! %rice fluctuation of +s. 1<= %er 1== 5g for cotton futures in the cotton e7change, Bo!bay, the !a7i!u! %otential loss@%rofit in a trading day wor5s out to be +s.3E.=< la5hsN

Mar$ n&
"argins 0also called clearing !argins1 are good 2faith de%osits 5e%t with a clearinghouse usually in the for! of cash. There are two ty%es of !argins to be !aintained by the trader with the clearinghouse/ initial !argin and !aintenance or $ariation !argins. Initial !argin is a fi7ed a!ount %er contract and does not $ary with the current $alue of the co!!odity traded. "argins are de%osited with the clearing house in ad$ance against the e7%ected e7%osure of the trading !e!ber on his account and on account of the clients. The !e!ber who e7ecutes trade for the! in turn collects this a!ount fro! the clients. Generally, the !argin is %ayable on the net e7%osure of the !e!ber. #et e7%osure is the su! of gross e7%osure 0buy Auantity or sale Auantity, whiche$er is higher, !ulti%lied by the current %rice of the contract1 on account of trades e7ecuted through hi! for each of his clients and gross e7%osure of trades carried out on his own account. 6owe$er, for sAuaring2off transactions carried out only at the clientsG le$el, fresh !argins are not reAuired. The !argin is refundable after the client liAuidates his %osition or after the !aturity of the contract. "aintenance !argin which usually ranges fro! C= to E= %er cent of initial !argin is also reAuired by the e7change. 9ariation !argin is to

B3

co!%ensate the ris5 borne by the clearinghouse on account of %rice $olatility of the co!!odity underlying the contract to which it is a counter%arty. A debit in the !argin account due to ad$erse !ar5et conditions and conseAuent change in the $alue of contract would lead to initial !argin falling below the !aintenance le$el. The clearinghouse restores initial !argin through !argin calls to the client for collecting $ariation !argin. In case of an increase in $alue of the contract, !ar5ing to !ar5et ensures that the holder gets the %ay!ent eAui$alent to the difference between the initial contract $alue and its change o$er the lifeti!e of the contract on the basis of its daily %rice !o$e!ents. If the !e!ber is not able to %ay the $ariation !argin, he is bound to sAuare off his %osition or else the clearinghouse will be liAuidating the %osition. The !argins ha$e i!%ortant bearing on the success of futures. As they are no interest bearing de%osits %ayable to the clearinghouse u%2front wor5ing ca%ital of any trading entity gets bloc5ed to that e7tent. Ihile a higher !argin reAuire!ent %re$ents traders fro! %artici%ating in trading, a lower !argin !a5es the clearinghouse $ulnerable to any default due to its wea5 financial strength otherwise. Internationally, !any de$elo%ed e7changes !aintain a low !argin on %ositions due to their better financial strength along with !assi$e $olu!e of trade resulting in large inco!e accruing to the!. 6owe$er, this has not been the case with !any e7changes in India. *or e7a!%le, as shown in table 3.3 the initial !argin liability for transacting the !ini!u! lot si>e in %e%%er is +s.;=, === for do!estic contracts and (ST ;13.<= for international contracts .Si!ilarly, the $olu!e of transactions. These clearinghouses deal in !any e7changes in India is abys!ally low !a5ing their e7istence financially un$iable. "ost of the e7changes in additions to 5ee%ing !andatory !argins !aintain a settle!ent
B;

guarantee fund. The fund set u% with the contribution fro! !e!bers of clearing house is used for guaranteeing financial %erfor!ance of all !e!bers. This fund absorbs losses not co$ered by !argin de%osits of the defaulted !e!ber. The clearinghouse ensures this by settling the default transactions by %ro%erly co!%ensating the traders %aying the a!ount of difference at the closing out rate.

Mean n$ o" Der -at -e&

The ter! QDeri$ati$eQ indicates that it has no inde%endent $alue, i.e. its $alue is entirely Qderi$edQ. A derivative is a financial instru!ent, which deri$es its $alue fro! so!e other financial %rice. This 4other financial %rice. is called underlying. The !ost co!!on underlying assets include stoc5s, bonds, co!!odities, currencies, li$estoc5, interest rates and !ar5et inde7es. A wheat far!er !ay wish to contract to sell his har$est at a future date to eli!inate the ris5 of a change in %rices by that date. The %rice for such a contract would ob$iously de%end u%on the current s%ot %rice of wheat. Such a transaction could ta5e %lace on a wheat forward !ar5et. 6ere, the wheat forward is the 4deri$ati$e. and wheat on the s%ot !ar5et is 4the underlying.. The ter!s 4deri$ati$e contract., 4deri$ati$e %roduct., or 4deri$ati$e. are used interchangeably. There are two broad ty%es of deri$ati$es/ F nanc a! der -at -e&/ 2 6ere the underlying includes treasuries, bonds, stoc5s, stoc5 inde7, foreign e7change etc.

BB

Commod t0 der -at -e&/ L 6ere the underlying is a co!!odity such as wheat, cotton, %e%%ers, tur!eric, corn, soybeans, rice crude oil etc
.

;)3; TYPES OF DERI/ATI/ES

A deri$ati$e security can be defined as a security whose $alue de%ends on the $alues of other underlying $ariables. 9ery often, the $ariables underlying the deri$ati$e securities are the %rices of traded securities. An e7a!%le of a si!%le deri$ati$e contract/ +ohan buys a futures contract. 6e will !a5e a %rofit of +ss. 13== if the %rice of Infosys rises by +s. 13==. If the %rice is unchanged +a! will recei$e nothing. If the stoc5 %rice of Infosys falls by +s. 1=== he will lose +s. 1===. As we can see, the abo$e contract de%ends u%on the %rice of the Infosys scri%, which is the underlying security. Si!ilarly, futures trading has already started in Sense7 futures and #ifty futures. The underlying security in this case is the BS- Sense7 and #S- #ifty. T#ere are ba& ca!!0 2 t0pe& o" Der -at -e& and Future&: *orwards *utures )%tions Swa%s

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3) FORBARD CO,TRACT A forward contract is an agree!ent to buy or sell an asset on a s%ecified date for a s%ecified %rice. )ne of the %arties to the contract assu!es a long %osition and agrees to buy the underlying assed on a certain s%ecified future date for a certain s%ecified %rice. The other %arty assu!es a short %osition and agrees to dell the asset on the sa!e date for the sa!e %rice. )ther contract details li5e deli$ery date, %rice and Auantity are negotiated bilaterally by the %arties to the contract. The forward contracts are nor!ally traded outside the e7changes. T#e &a! ent "eature& o" "or*ard contract& are: They are bilateral contracts hence e7%osed to counter2%arty ris5. -ach contract is custo! designed, and hence is uniAue in ter!s of contract si>e, e7%iration date and the asset ty%e and Auality. The contract %rice is generally not a$ailable in %ublic do!ain. )n the e7%iration date, the contract has to be settled by deli$ery of the asset. it has to co!%ulsorily go to the sa!e counter %arty, which often results in high %rice being charged.
BC

1 m tat on o" "or*ard market: *orward !ar5et world2wide are afflicted by se$eral %roble!s/ Jac5 of centrali>ation IlliAuidity ounter%arty ris5 In the first two of these, the basic %roble! is that of too !uch fle7ibility and generality. The forward !ar5et is li5e a real estate !ar5et in that any two consenting adults can for! contracts against each other. This often !a5es the! design ter!s of the deal which are $ery con$enient in that s%ecific situation, but !a5es the contracts non2tradable. ounter%arty ris5 arises fro! the %ossibility of default by any one %arty to the transaction. Ihen one of the two sides to the transaction declares ban5ru%tcy, the other suffers. -$en when forward !ar5et trade standardi>ed contracts, and hence a$oids the %roble! of illiAuidity, still the counter%arty ris5 re!ains $ery serious issue. I!!u&trat on Sahil wants to buy a Ja%to%, which costs +s ;=,=== but he has no cash to buy it outright. 6e can only buy it ; !onths hence. 6e, howe$er, fears that %rices of la%to% will rise ; !onths fro! now. So in order to %rotect hi!self fro! the rise in %rices Sahil enters into a contract with the la%to% dealer that ; !onths fro! now he will buy the la%to% for +s ;=,===. Ihat Sahil is doing is that he is loc5ing the current %rice of a JAPT)P for a forward contract. The forward contract is settled at !aturity. The dealer will deli$er the asset to Sahil at the end of three !onths and Sahil in turn will %ay cash eAui$alent to the JAPT)P %rice on deli$ery. FUTURES CO,TRACT
BD

*utures !ar5ets were designed to sol$e the %roble!s that e7ist in forward !ar5et. A futures contract is an agree!ent between two %arties to buy or sell an asset at a certain ti!e in the future at a certain %rice. But unli5e forward contracts, the futures contracts are standardi>ed and e7change traded. So, the counter %arty to a future contract is the clearing cor%oration of the a%%ro%riate e7change. To facilitate liAuidity in the futures contracts, the e7change s%ecifies certain standard features of the contract. It is a standardi>ed contract with standard underlying instru!ent, a standard Auantity and Auality of the underlying instru!ent that can be deli$ered, 0or which can be used for reference %ur%oses in settle!ent1 and a standard ti!ing of such settle!ent. *uture contracts are often settled in cash or cash eAui$alents, rather than reAuiring %hysical deli$ery of the underlying asset. A futures contract !ay be offset %rior to !aturity by entering into an eAual and o%%osite transaction. "ore than FFR of futures transaction is offset this way. T#e &tandard Hed tem& n a "uture& contract are: Uuantity of the (nderlying. Uuality of the (nderlying. The date and !onth of deli$ery. The units of %rice Auotation and !ini!u! %rice change. Jocation of settle!ent. D &t nct on bet*een "uture& and "or*ard& contract&: *orward contracts are often confused with futures contracts. The confusion is %ri!arily because both ser$e essentially the sa!e econo!ic functions of allocating ris5 in the %resence of future %rice uncertainty. 6owe$er futures are a significant i!%ro$e!ent o$er the forward contracts

BE

as they eli!inate counter%arty ris5 and offer !ore liAuidity. The distinction between futures and forwards are su!!ari>ed below/

OPTIO,S CO,TRACT )%tion !eans se$eral things to different %eo%le. It !ay refer to choice or alternati$e or %ri$ilege or o%%ortunity or %reference or right. To ha$e o%tion is nor!ally regarded good. )ne is considered unfortunate without any o%tions. )%tions are $aluable since they %ro$ide %rotection against unwanted, uncertain ha%%enings. They %ro$ide alternati$es to bail out fro! a difficult situation. )%tions can be e7ercised on the ha%%ening of certain e$ents. )%tions !ay be e7%licit or i!%licit. Ihen you buy insurance on your house, it is an e7%licit o%tion that will %rotect you in the e$ent there is a fire or a theft in your house. If you own shares of a co!%any, your liability is li!ited. Ji!ited liability is an i!%licit o%tion to default on the %ay!ent of debt.

BF

)%tions ha$e assu!ed considerable significance in finance. They can be written on any asset, including shares, bonds, %ortfolios, stoc5 indices currencies, etc. They are Auite useful in ris5 !anage!ent. 6ow are o%tions defined in financeO Ihat gi$es $alue to o%tionsO 6ow are they $aluedO An o%tion is a contract that gi$es the buyer the right, but not the obligation, to buy or sell an underlying asset at a s%ecific %rice on or before a certain date. An o%tion, &ust li5e a stoc5 or bond, is a security. It is also a binding contract with strictly defined ter!s and %ro%erties. *or e7a!%le, that +ohit disco$er a bungalow that +ohit lo$e to %urchase. (nfortunately, +ohit wonKt ha$e the cash to buy it for another three !onths. +ohit tal5 to the owner and negotiate a deal that gi$es +ohit an o%tion to buy the bunglow in three !onths for a %rice of +s.3=,==,===. The owner agrees, but for this o%tion, +ohit %ay a %rice of +s.<=,===.

. T0pe& o" Opt on& T#ere are t*o t0pe& o" opt on&: Ca!! Opt on&/ 2 It gi$es the holder the right to buy an asset at a certain %rice within a s%ecific %eriod of ti!e. alls are si!ilar to ha$ing a long %osition on a stoc5. Buyers of calls ho%e that the stoc5 will increase substantially before the o%tion e7%ires. Put Opt on/ 2 It gi$es the holder the right to sell an asset at a certain %rice within a s%ecific %eriod of ti!e. Puts are $ery si!ilar to ha$ing a short %osition on a stoc5. Buyers of %uts ho%e that the %rice of the stoc5 will fall before the o%tion e7%ires.

<=

Part c pant& n t#e Opt on& Market There are four ty%es of %artici%ants in o%tions !ar5ets de%ending on the %osition they ta5e/ 1. Buyers of calls 3. Sellers of calls ;. Buyers of %uts B. Sellers of %ut Peo%le who buy o%tions are called holders and those who sell o%tions are called writersH further!ore, buyers are said to ha$e long %ositions, and sellers are said to ha$e short %ositions. 6ere is the i!%ortant distinction between buyers and sellers/ all holders and %ut holders 0buyers1 are not obligated to buy or sell. They ha$e the choice to e7ercise their rights if they choose. all writers and %ut writers 0sellers1, howe$er, are obligated to buy or sell. This !eans that a seller !ay be reAuired to !a5e good on a %ro!ise to buy or sell. Term no!o$0 A&&oc ated B t# T#e Opt on& Market) Opt on Pr ce/ 2 )%tion %rice is the %rice, which the o%tion buyer %ays to the o%tion seller. It is also referred to as the o%tion %re!iu!. EFp rat on Date/ 2 The date s%ecified in the o%tions contract is 5nown as the e7%iration date, the e7ercise date, the stri5e date or the !aturity. Str ke Pr ce/ 2 The %rice s%ecified in the o%tions contract is 5nown as the stri5e %rice or the e7ercise %rice. 1 &ted Opt on&/ 2 An o%tion that is traded on a national o%tions e7change such as the #ational Stoc5 -7change is 5nown as a listed o%tion. These

<1

ha$e fi7ed stri5e %rices and e7%iration dates. -ach listed o%tion re%resents a %redeter!ined nu!ber of shares of co!%any stoc5 05nown as a contract1. In9t#e9mone0 Opt on/ 2 An in2the2!oney 0IT"1 o%tion is an o%tion that would lead to a %ositi$e cash flow to the holder if it were e7ercised i!!ediately. A call o%tion on the inde7 is said to be in2the2!oney when the current inde7 stands at a le$el higher than the stri5e %rice 0i.e. s%ot %rice V stri5e %rice1. If the inde7 is !uch higher than the stri5e %rice, the call is said to be dee% IT". In the case of a %ut, the %ut is IT" if the inde7 is below the stri5e %rice. At9t#e9mone0 Opt on/ 2 An at2the2!oney 0AT"1 o%tion is an o%tion that would lead to >ero cash flow if it were e7ercised i!!ediately. An o%tion on the inde7 is at2the2!oney when the current inde7 eAuals the stri5e %rice 0i.e. s%ot %rice W stri5e %rice1. Out9o"9t#e9mone0 Opt on/2 An out2of2the2!oney 0)T"1 o%tion is an o%tion that would lead to a negati$e cash flow when e7ercised i!!ediately. A call o%tion on the inde7 is out2of2the2!oney when the current inde7 stands at a le$el, which is less than the stri5e %rice 0i.e. s%ot %rice X stri5e %rice1. If the inde7 is !uch lower than the stri5e %rice, the call is said to be dee% )T". In the case of a %ut, the %ut is )T" if the inde7 is abo$e the stri5e %rice. De%ending on when an o%tion can be e7ercised, it is classified in on of the following two categories/ Amer can Opt on&/ 2 A!erican o%tions are o%tions that can be e7ercised at any ti!e (% to the e7%iration date. "ost e7change2traded o%tions are A!erican. European Opt on&/ 2 -uro%ean o%tions are o%tions that can be e7ercised only on the e7%iration date itself. -uro%ean o%tions are easier to analy>e
<3

than A!erican o%tions, and %ro%erties of an A!erican o%tion are freAuently deduced fro! those of its -uro%ean counter%art.

TRADI,6 I, OPTIO,S
If one buys an o%tion contract he is buying the o%tion, or QrightQ to trade a %articular underlying instru!ent at a stated %rice. An o%tion that gi$es you the right to e$entually !a5e a %urchase at a %redeter!ined %rice is called a QcallQ o%tion. If you buy that right it is called a long callH if you sell that right it is called a short call. An o%tion that gi$es you the right to e$entually !a5e a sale at a %redeter!ined %rice is called a Q%utQ o%tion. If you buy that right it is called a long %utH if you sell that right it is called a short %ut. Trad n$ n Ca!! Su%%ose a call o%tion with an e7ercise@stri5e %rice eAual to the %rice of the underlying 01==1is bought today for %re!iu! +e.1. Profit @ Joss for a Jong all.

At e7%iry, if the securityGs %rice has fallen below the stri5e %rice, the o%tion will be allowed to e7%ire worthless and the %osition has lost +e.1. This is the !a7i!u! a!ount that you can lose because an o%tion only in$ol$es the

<;

right to buy or sell, not the obligation. In other words, if it is not in your interest to e7ercise the o%tion you donGt ha$e to and so if you are an o%tion buyer your !a7i!u! loss is the %re!iu! you ha$e %aid for the right. If, on the other hand, the securityGs %rice rises, the $alue of the o%tion will increase by +e1 for e$ery +e.1 increase in the securityGs %rice abo$e the stri5e %rice 0less the initial +e.1cost of the o%tion1. #ote that if the %rice of the underlying increases by +e.1, the o%tion %urchaser brea5s e$en 2 brea5e$en is reached when the $alue of the o%tion at e7%iry is eAual to the initial %urchase %rice. *or our call o%tion, the brea5e$en %rice is 1=1. If the %rice of the security is greater than 1=1, the call buyer !a5es !oney. Profit@Joss for a short call.

6ere %rofit is li!ited to the %re!iu! recei$ed for selling the right to buy at the e7ercise %rice 2 again +e.1. *or e$ery +e.1 rise in the %rice of the underlying security abo$e the e7ercise %rice the o%tion falls in $alue by +e.1. 6ere again, the brea5e$en %oint is 1=1.

<B

Trad n$ n Put: onsider that a %ut o%tion with an e7ercise@stri5e %rice eAual to the %rice of the underlying 01==1 is bought today for %re!iu! +e.1 Profit@Joss gra%h for a Jong Put)

<<

At e7%iry the %ut is worth nothing if the securityGs %rice is !ore than the stri5e %rice of the o%tion but, as with the long call, the o%tion buyerGs loss is li!ited to the %re!iu! %aid. The brea5e$en for this o%tion is FF, so the %ut %urchaser !a5es !oney if the underlying security is %riced below FF at e7%iry.

Profit@Joss gra%h for a short %ut.

<C

6ere %rofit is li!ited to the %re!iu! recei$ed for selling the right to sell at the stri5e %rice. *or e$ery +e.1 fall in the %rice of the underlying security below the stri5e %rice the o%tion falls in $alue by +e.1. 6ere again, the brea5e$en %oint is FF.

SBAP CO,TRACT:
Swa%s are si!ilar to futures and forwards contracts in %ro$iding hedge against financial ris5. A swa% is an agree!ent between two %arties, called counter %arties, to trade cash flows o$er a %eriod of ti!e. Swa%s arrange!ents are Auite fle7ible and are useful in !any financial situation. Two !ost %o%ular swa%s are currenc0 &*ap& and ntere&t9rate &*ap&) These two swa%s can be co!bined when interest on loans in two currencies are swa%%ed. The de$elo%!ent of swa%s in the eighties is a significant de$elo%!ent. The interest rate and currency swa% !ar5ets enable fir!s to arbitrage are differences between ca%ital !ar5ets. They !a5e use of their co!%arati$e ad$antage of borrowing in their do!estic !ar5et and arranging swa%s for interest rates or currencies that they cannot easily access.

<D

3) Intere&t rate &*ap&/ 2 These entail swa%%ing only the interest related cash flows between the %arties in the sa!e currency. Currenc0 &*ap&/ 2 These entail swa%%ing both %rinci%al and interest between the %arties, with the cash flows in one direction being in a different currency than those in the o%%osite direction.

COMMODITY FUTURES EXCHANGES

T4E PROFI1E A,D RE6U1ATORY E,/IRO,ME,T T#e Pro" !e o" Future& EFc#an$e& 'mcF and ncdeF(

;)3< O-er- e* o" MC. " ? an inde%endent and de2!utulised !ulti co!!odity e7change has %er!anent recognition fro! Go$ern!ent of India for facilitating online trading, clearing and settle!ent o%erations for co!!odity futures !ar5ets across the country. ,ey shareholders of " ? include *inancial Technologies 0I1 Jtd., State Ban5 of India 0IndiaGs largest co!!ercial ban51 8 associates, *idelity International, #ational Stoc5 -7change of India Jtd. 0#S-1, #ational Ban5 for Agriculture and +ural De$elo%!ent 0#ABA+D1, 6D* Ban5, SBI Jife Insurance o. Jtd., (nion Ban5 of India, anara Ban5, Ban5 of India, Ban5 of Baroda and or%oration Ban5. 6eadAuartered in "u!bai, " ? is led by an e7%ert !anage!ent tea! with dee% do!ain 5nowledge of the co!!odity futures !ar5ets. Through the integration of dedicated resources, robust technology and scalable infrastructure, since ince%tion " ? has recorded !any first to its credit. Inaugurated in #o$e!ber 3==; by Shri "u5esh A!bani, hair!an 8 "anaging Director,

<E

+eliance Industries Jtd, " ? offers futures trading in the following co!!odity categories/ Agri o!!odities, Bullion, "etals2 *errous 8 #on2 ferrous, Pulses, )ils 8 )ilseeds, -nergy, Plantations, S%ices and other soft co!!odities. " ? has built strategic alliances with so!e of the largest %layers in co!!odities eco2syste!, na!ely, Bo!bay Bullion Association, Bo!bay "etal -7change, Sol$ent -7tractorsK Association of India, Pulses I!%orters Association, Shet5ari Sanghatana, (nited Planters Association of India and India Pe%%er and S%ice Trade Association. Today " ? is offering s%ectacular growth o%%ortunities and ad$antages to a large cross section of the %artici%ants including Producers @ Processors, Traders, or%orate, +egional Trading enters, I!%orters, -7%orters, oo%erati$es, Industry Associations, a!ongst others " ? being nation2wide co!!odity e7change, offering !ulti%le co!!odities for trading with wide reach and %enetration and robust infrastructure, is well %laced to ta% this $ast %otential.

;)3= / & on and M && on

The $ision of " ? is to re$olutioni>e the Indian co!!odity !ar5ets by e!%owering the !ar5et %artici%ants through inno$ati$e %roduct offerings and business rules so that the benefits of futures !ar5ets can be fully reali>ed .)ffering Kun%aralleled efficienciesK, Kunli!ited growthK and Kinfinite o%%ortunitiesK to all the !ar5et %artici%ants.

Commod t e&

<F

6o!d+ 6o!d 4,I+ 6o!d M+ I96o!d+ S !-er+ S !-er 4,I+ S !-er M Ca&tor O !+ Ca&tor Seed&+ Coconut Cake+ Coconut O !+ Cotton&eed+ Crude Pa!m O !+ 6roundnut O !+ Kapa& a K#a!! 'Cotton&eed O !cake(+Mu&tardIRape&eed O !+ Mu&tard Seed 'S r&a(+ R%D Pa!mo!e n+ Re" ned So0 O !+ Re" ned Sun"!o*er O !+ Se&ame Seed+ So0mea!+ So0 Seed& Cardamom+ Jeera+ Pepper+ Red C# !! A!um num+ Copper+ 1ead+ , cke!+ Spon$e Iron+ Stee! F!at+ Stee! 1on$ '%#a-na$ar( Stee! 1on$ '6ob nd$ar#(+ T n+ K nc Cotton 1on$ Stap!e + Cotton Med um Stap!e+ Cotton S#ort Stap!e+ Cotton Yarn+ Kapa& C#ana+ Ma&ur+ Tur+ Urad+ Ye!!o* Pea&+ %a&mat R ce+ Ma He+ R ce+ Sarbat R ce+ B#eat %rent Crude O !+ Crude O !+ Furnace O ! M dd!e Ea&t Sour Crude O!

C=

Arecanut+ Ca&#e* Kerne!+ Rubber 4 $# Den& t0 Po!0et#0!ene '4DPE(+ Po!0prop0!ene 'PP(+ P/C 6uar Seed+ 6uar $um+ 6urc#aku+ Ment#a O !+ Potato+ Su$ar

;)3@ %ene" t& to Part c pant&

The !ar5 of a true e7change !ar5et is that it %ro$ides eAual o%%ortunities to all %artici%ants without any bias. This is the central belief of " ? and towards that it shall be our endea$or to %ro$ide all our %artici%ants with eAually rewarding o%%ortunities. " ? would har!oniously !eet the reAuire!ents of all the sta5eholders in the co!!odity ecosyste! in the !ost i!%artial !anner.

%ene" t& to Indu&tr0 6edging the %rice ris5 associated with futures contractual co!!it!ents. S%aced out %urchases %ossible rather than large cash %urchases and its storage. -fficient %rice disco$ery %re$ents seasonal %rice $olatility. Greater fle7ibility, certainty and trans%arency in %rocuring co!!odities would aid ban5 lending. *acilitate Infor!ed lending

C1

 6edged %ositions of %roducers and %rocessors would reduce the ris5 of default faced by ban5s Jending for agricultural sector would go u% with greater trans%arency in %ricing and storage. o!!odity -7changes to act as distribution networ5 to retail agri2finance fro! Ban5s to rural households. Pro$ide trading li!it finance to Traders in co!!odities -7changes. %ene" t& to EFc#an$e Member& Access to a huge %otential !ar5et !uch greater than the securities and cash !ar5et in co!!odities. " ? would le$erage on the $ast e7%erience of #S- in the ca%ital !ar5ets and #ABA+D for its strong %resence in the rural agricultural !ar5ets +obust, scalable, state2of2art technology de%loy!ent. "e!ber can trade in !ulti%le co!!odities fro! a single %oint, on real ti!e basis. Traders would be trained to be +ural Ad$isors and o!!odity S%ecialists and through the! !ulti%le rural needs would be !et, li5e ban5 credit, infor!ation disse!ination, etc..

;)3? OPERATIO,
Trad n$ The trading syste! of " ? is state2of2the2art, new generation trading %latfor! that %er!its e7tre!ely cost effecti$e o%erations at !uch greater efficiency. The -7change entral Syste! is located in "u!bai, which !aintains the entral )rder Boo5. -7change "e!bers located across

C3

the country are connected to the central syste! through 9SAT or any other !ode of co!!unication as !ay be decided by the -7change fro! ti!e to ti!e. The -7change would gradually also consider %ro$iding an internet based access. The controls in the syste! are syste! dri$en reAuiring !ini!u! hu!an inter$ention. The -7change "e!bers %laces orders through the Traders Ior5 Station 0TIS1 of the "e!ber lin5ed to the -7change, which !atches on the entral Syste! and sends a confir!ation bac5 to the "e!ber. R &k Mana$ement The !acro ob&ecti$e of " ?Ks +is5 "anage!ent Syste! is to financially secure the !ar5et%lace and its %artici%ants at all ti!es, without increasing the o%erational cost or co!%liance o$erheads of !ar5et %artici%ants. So!e of the basic %ara!eters of +is5 "anage!ent are as follows/ R &k Mana$ement parameter& +eal2ti!e "argining. Uuantity 0%osition1 li!its. -7%osure li!its lin5ed to $alue of outstanding %ositions and the ca%ital De%loyed. Daily Joss Ji!its. Daily Price Ji!its. S%ecial "argins. Settle!ent The learing and Settle!ent Syste! of the -7change is syste! dri$en and rule based.

C;

C!ear n$ %ank Inter"ace -7change !aintains electronic interface with its with the learing Ban5. All "e!bers of the -7change are ha$ing their -7change o%erations account learing Ban5. All debits and credits are affected electronically through such accounts only. De! -er0 and F na! Sett!ement All contracts on !aturity are for deli$ery. " ? s%ecifies tender and deli$ery %eriods. *or e7a!%le, such %eriods can be fro! Eth wor5ing day till the 1<th day of the !onth L where 1<th is the last trading day of the contract !onth 2 as tender and@or deli$ery %eriod. A seller or a short o%en %osition holder in that contract !ay tender docu!ents to the -7change e7%ressing his intention to deli$er the underlying co!!odity. -7change would select fro! the long o%en %osition holder for the tendered Auantity. )nce the buyer is identified, seller has to initiate the %rocess of gi$ing deli$ery and buyer has to ta5e deli$ery according to the deli$ery schedule %rescribed by the -7change.

<)5A TEC4,O1O6Y ED6E

-7change !ar5ets and o%erations will undergo a %aradig! shift in their beha$ior and would be increasingly dri$en for %ro$iding integrated %rocesses and ser$ices to the trading co!!unity. "oreo$er, -7changes today need to deli$er highest le$els of ser$ice bac5ed by strong technology to bring increased %artici%ation at lowest %ossible costs .It is here that " ? gets the strategic ad$antage of ha$ing *inancial Technologies 0India1 Jtd. as its technology %artner for deli$ering technologically ad$anced solutions to !ar5et %artici%ants. *TIJKs %ro$en class of end2to2end -7change Trading technologies addressing Trading @Sur$eillance @
CB

learing and Settle!ent

o%erations would deli$er a cutting2edge to the " ? Trade Jife Pre2Trade, Trade and Post2Trade o%erations

ycle i.e.

,CDE. PROFI1E

;)53 PROFI1E
#ational o!!odity 8 Deri$ati$es -7change Ji!ited 0# D-?1 is a or%oration of India

%rofessionally !anaged online !ulti co!!odity e7change %ro!oted by I I I Ban5 Ji!ited 0I I I Ban51, Jife Insurance 0JI 1, #ational Ban5 for Agriculture and +ural De$elo%!ent 0#ABA+D1 and #ational Stoc5 -7change of India Ji!ited 0#S-1. Pun&ab #ational Ban5 0P#B1, +ISIJ Ji!ited 0for!erly the redit +ating Infor!ation oo%erati$e Ji!ited Ser$ices of India Ji!ited1, Indian *ar!ers *ertili>er

0I** )1 and anara Ban5 by subscribing to the eAuity shares ha$e &oined the initial %ro!oters as shareholders of the -7change. # D-? is the only co!!odity e7change in the country %ro!oted by national le$el institutions. This uniAue %arentage enables it to offer a bouAuet of benefits, which are currently in short su%%ly in the co!!odity !ar5ets. The institutional %ro!oters of # D-? are %ro!inent %layers in their res%ecti$e fields and bring with the! institutional building e7%erience, trust, nationwide reach, technology and ris5 !anage!ent s5ills.

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# D-? is a %ublic li!ited co!%any incor%orated on A%ril 3;, 3==; under the o!%anies Act, 1F<C. It obtained its ertificate for o!!ence!ent of Business on "ay F, 3==;. It has co!!enced its o%erations on Dece!ber 1<, 3==;. # D-? is a nation2le$el, technology dri$en de2!utuali>ed on2line co!!odity e7change with an inde%endent Board of Directors and %rofessionals not ha$ing any $ested interest in co!!odity !ar5ets. It is co!!itted to %ro$ide a world2class co!!odity e7change %latfor! for !ar5et %artici%ants to trade in a wide s%ectru! of co!!odity deri$ati$es dri$en by best global %ractices, %rofessionalis! and trans%arency. *orward "ar5et o!!ission regulates # D-? in res%ect of futures trading in co!!odities. Besides, # D-? is sub&ected to $arious laws of the land li5e the o!%anies Act, Sta!% Act, ontracts Act, *orward o!!ission 0+egulation1 Act and $arious other legislations, which i!%inge on its wor5ing. # D-? is located in "u!bai and offers facilities to its !e!bers in !ore than <<= centers throughout India. The reach will gradually be e7%anded to !ore centers. # D-? currently facilitates trading of B< co!!odities 2 Seed, hana, hilli, offee 2 Arabica, ashew, astor offee 2 +obusta, o!!on

Parboiled +ice, o!!on +aw +ice, otton Seed )ilca5e, rude Pal! )il, -7%eller "ustard )il, Groundnut 0in shell1, Groundnut -7%eller )il, Grade A Parboiled +ice, Grade A +aw +ice, Guar gu!, Guar Seeds, Guar, :eera, :ute sac5ing bags, Indian 3E !! Indian ;1 !! Bold, "ediu! Sta%le otton, "entha )il , "ulberry Green otton , ocoons , otton , Je!on Tur, "aharashtra Jal Tur, "asoor Grain

"ulberry +aw Sil5 , +a%eseed 2 "ustard Seed, Pe%%er, +aw :ute, +BD
CC

Pal!olein, +efined Soy )il , +ubber, Sesa!e Seeds, Soy Bean, S%onge Iron, Sugar, Tur!eric, (rad 0Blac5 "at%e1, 92DFD ,a%as, Iheat, Yellow Peas, Yellow +ed "ai>e, Yellow Soybean "eal, -lectrolytic athode, "ild Steel Ingots, S%onge Iron, Gold, Sil$er, Brent facilitated. o%%er rude )il,

*urnace )il. At subseAuent %hases trading in !ore co!!odities would be

,CDE. PRODUCTS
Agro Products

Ca&#e* Ca&tor Seed C#ana C# !! Co""ee L Arab ca Co""ee L Robu&ta Common Ra* R ce Common Parbo !ed R ce Crude Pa!m O ! Cotton Seed O !cake EFpe!!er Mu&tard O ! 6rade A Parbo !ed R ce 6rade A Ra* R ce 6roundnut ' n &#e!!( 6roundnut EFpe!!er O ! 6uar $um 6uar Seed& 6ur Jeera Jute &ack n$ ba$& 1emon Tur Ind an Parbo !ed R ce Ind an Ra* R ce Ind an 5@ mm Cotton Ind an 73 mm Cotton Ma#ara&#tra 1a! Tur Ma&oor 6ra n %o!d Med um Stap!e Cotton Ment#a O ! Mu!berr0 6reen Cocoon& Mu!berr0 Ra* S !k Mu&tard Seed Pepper Ra* Jute Rape&eed9Mu&tard Seed O !cake R%D Pa!mo!e n Re" ned So0 O ! Rubber Se&ame Seed& So0abean Su$ar Ye!!o* So0bean Mea! Turmer c Urad /9=?= Kapa& B#eat Ye!!o* Pea& Ye!!o* Red Ma He
Base Meta s

E!ectro!0t c Copper Cat#ode M !d Stee! In$ot&

Prec!ous Meta s

6o!d S !-er

Re$u!at on o" Commod t0 Future& "erchandising and stoc5holding of !any co!!odities in India ha$e always been regulated through $arious legislations li5e the -ssential o!!odities Act, 1F<< 0- A, 1F<<1 and *orward ontracts 0+egulation1 Act, 1F<3,

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0* +A, 1F<31 and Pre$ention of Blac5 !ar5eting and "aintenance of Su%%lies of o!!odities Act, 1FE=. The - A, 1F<< gi$es %owers to control %roduction, su%%ly, distribution, etc. of essential co!!odities for !aintaining or increasing su%%lies and for securing their eAuitable distribution and a$ailability at fair %rices. (sing the %owers under the - A, 1F<< $arious "inistries@De%art!ents of the issued control orders for regulating entral Go$ern!ent ha$e %roduction@distribution@Auality

as%ects@!o$e!ent etc. %ertaining to the co!!odities which are essential and ad!inistered by the!. The * +A, 1F<3 %ro$ided for ;2tier regulatory syste! for co!!odity futures trading in India/ 'a( An association recogni>ed by the Go$ern!ent of India on the reco!!endation of *orward "ar5et o!!ission, 'b( The *orward "ar5ets o!!ission and 'c( The entral Go$ern!ent Stoc5 e7changes and futures !ar5ets being a %art of the (nion list their regulation is the res%onsibility of the central go$ern!ent. All ty%es of forward contracts in India are go$erned by the %ro$isions of the * +A, 1F<3. The Act di$ides co!!odities into three categories with reference to e7tent of regulation. 'a( The co!!odities in which futures trading can be organi>ed under the aus%ices of recogni>ed association, 'b( The co!!odities in which futures trading is %rohibited and 'c( The free co!!odities which are neither regulated nor %rohibited. Ihile o%tions in goods are %rohibited by the * +A, 1F<3, the ready deli$ery contracts re!ain outside its Pur$iew. The ready deli$ery contract as defined by the Act is the one which %ro$ides for the deli$ery of goods and %ay!ent
CE

of a %rice therefore, either i!!ediately or within a %eriod not e7ceeding ele$en days after the date of the contract. All ready deli$ery contracts where the deli$ery of goods and@or %ay!ent for goods is not co!%leted within ele$en days fro! the date of the contract are forward contracts. The Act classified forward contracts into two/ 'a( S%ecific deli$ery contracts and 'b( )ther than s%ecific deli$ery contracts or futures contracts. S%ecific deli$ery contract !eans a forward contract which %ro$ides for the actual deli$ery of s%ecific Aualities or ty%es of goods during a s%ecified ti!e %eriod at a %rice fi7ed thereby or to be fi7ed in the !anner thereby agreed and in which the na!es of both the buyer and the seller are !entioned. The s%ecific deli$ery contracts are of two ty%es/ transferable and non2 transferable. The distinction between the transferable s%ecific deli$ery 0TSD1 contracts and non 2 transferable s%ecific deli$ery 0#TSD1 contracts is based on the transferability of the rights or obligations under the contract. *orward trading in TSD and #TSD contracts are regulated by the go$ern!ent. As %er the section 1< of the * +A, 1F<3 e$ery forward contract in notified goods 0currently ;C co!!odity ite!s1 which is entered into e7ce%t those between !e!bers of a recogni>ed association or through or with any such !e!ber is treated as illegal or $oid 0see a%%endi7 I for the list1. As %er the section 1D011 of the Act, E3 ite!s are %rohibited for forward contract 0see a%%endi7 II for the list1. The section 1E011 of the Act e7e!%ts the #TSD contracts fro! the regulatory %ro$isions. 6owe$er, o$er the years the regulatory %ro$isions of the Act were a%%lied to the #TSD contracts and DF co!!odity ite!s are currently %rohibited for #TSD contracts under section 1D of the Act 0see a%%endi7 III for the list1. "oreo$er, another 1< co!!odity ite!s are brought under the regulatory
CF

%ro$isions of the section 1< of the Act out of which trading in the #TSD contract has been sus%ended in 13 ite!s 0see a%%endi7 I9 for the list1. At %resent, the #TSD contracts in cotton, raw &ute and &ute goods are %er!itted only between, through or with the !e!bers of the associations s%ecifically recogni>ed for the %ur%ose. SubseAuent to the re%ort of the *orward "ar5ets 05nown as the ,abra o!!ittee on o!!ittee1 sub!itted in 1FFB the

go$ern!ent has so far %er!itted futures trading in nearly ;< co!!odities under the aus%ices of 3; co!!odity e7changes located in different %arts of the country. The co!!odities in which futures trading is %er!itted are/ %e%%er, tur!eric, gur, castor seed, 6essian, &ute sac5ing, cotton, %otato, castor oil soybeans and its oil and ca5e, coffee, !ustard seed and its oil and oilca5e, ground nut and its oil, sunflower oil, co%ra@coconut and its oil and oilca5e, cottonseed and its oil and oilca5e, 5a%as, +BD %al!olein, rice bran and its oil and oilca5e, sesa!e seed and its oil and oilca5e, safflower seed and its oil and oilca5e, and sugar. This list !ay get enlarged with the re%eal of - A, 1F<< and with further liberali>ation of far! sector as en$isaged in the #ational Agricultural Policy, 3=== and the (nion Budget, 3==32=;. The e7changes are reAuired to get %rior a%%ro$al of the *" for o%ening of each contract in co!!odities which are notified under the rele$ant sections in * +A 1F<3. +egulation is essential es%ecially in a %ri$ate ownershi% and !ar5et oriented syste! to ensure the necessary chec5s and balances in the syste!. 6owe$er, stringent and continuous regulation for long %eriod of ti!e would do no good to the syste!. The initial stringent regulation should ensure that a fool%roof and growth oriented control syste! in ter!s of set u% of the e7change and its sound !anage!ent, a clearinghouse which can
D=

%ro!ote trade and its financial integrity, sound and facilitating contract ter!s and conditions, etc. is in %lace. The e7changes are already assu!ed to be self2regulatory agencies. Their role !ust get strengthened further along with *" regulationG. ;) After assessing the !ar5et situation and ta5ing into account the reco!!endations !ade by the Board of Directors of the -7change, the *" %rescribes $arious regulatory !easures fro! ti!e to ti!e, for %rudential regulation of futures@forward trading. <) (nder a Iorld Ban5 aided Grant Sche!e to su%%ort de$elo%!ent of co!!odity futures !ar5ets in India, a nu!ber of consultancy assign!ents, training %rogra!!es, study tours, office auto!ation of *" etc. ha$e been underta5en. The %ro&ect was successfully co!%leted on ;1st )ctober, 3===. A Plan Sche!e under the 1=th *i$e Year Plan for generating awareness about the acti$ities, !echanis! and benefit of futures trading a!ong far!ers is being i!%le!ented. =) (nder a (SAID Technical o2o%eration %rogra!!ed on o!!odity *utures, the Go$ern!ent of India has entered into an agree!ent with (SAID for ca%acity building in Indian co!!odities deri$ati$es !ar5et. The ca%acity building includes training, se!inars, consultancy studies and $isits to foreign regulators and e7changes. The short ter! co!%onent of this %rogra!!es li5ely to be co!%leted by the end of #o$e!ber, 3==B. @) In enhancing the institutional ca%abilities for futures trading the idea of setting u% of #ational o!!odity -7change0s1 has been %ursued since o!!odity 8 Deri$ati$es 1FFF. Three such -7changes, $i>, #ational "ulti2 o!!odity -7change of India Jtd., 0#" -1, Ah!edabad, #ational
D1

!ini!i>ing its

role as a facilitator !a5ing the e7isting regulation an 'a%%ro%riate

-7change 0# D-?1, "u!bai, and "ulti

o!!odity -7change 0" ?1,

"u!bai ha$e beco!e o%erational. 4#ational Status. i!%lies that these e7changes would be auto!atically %er!itted to conduct futures trading in all co!!odities sub&ect to clearance of bye2laws and contract s%ecifications by the *" . Ihile the #" - Ah!adabad co!!enced futures trading in #o$e!ber, 3==3, " ? and # D-?, "u!bai co!!enced o%erations in )ctober@ Dece!ber, 3==; res%ecti$ely. ?) The Go$ern!ent has %ro%osed to initiate ste%s to integrate the co!!odities !ar5ets and securities !ar5ets. A Ior5ing Grou% set u% in this connection has sub!itted its re%ort to the Go$ern!ent indicating the road !a% for con$ergence of securities and co!!odities deri$ati$es !ar5ets and their regulatory syste!s.

;)55 COMMODITY FUTURES MARKETS I, I,DIA: PRESE,T SCE,ARIO

"a&or refor!s ha$e been initiated in co!!odity futures !ar5ets in India since the last few years. An article1 by this author in this :ournal co!%ared the growth tra&ectories being followed by the co!!odity deri$ati$es !ar5et $is2S2$is the securities deri$ati$es !ar5ets in India at the dawn of the !illenniu!. It was obser$ed that though deri$ati$es trading co!!enced in the securities !ar5et only in :une 3=== it was growing at great s%eed while the co!!odity deri$ati$es !ar5ets which were o%erational for about BE years by then was only gradually wa5ing u%. 6owe$er, subseAuent few years ha$e witnessed !a&or changes in the co!!odity s%ectru! des%ite the se$eral institutional constraints in which co!!odity deri$ati$es !ar5ets still function. o!!odity futures trading in
D3

India was in a state of hibernation for four decades, which was !ar5ed by sus%icion on the benefits of futures trading. This is re%laced by %olicy, institutional and !ar5et acti$is! in the last few years. This is %artly a res%onse to the %redo!inant role being assigned to the !ar5et forces in %rice deter!ination and the conseAuent need for %ro$iding !ar5et2based deris5ing tools. It is also the result of a growing awareness that deri$ati$es trading do %erfor! substantial ris5 !itigating functions to the sta5eholders. This resurgence of interest in co!!odity deri$ati$es is ti!ely since global co!!odity cycle is on the u%swing, and e7%erts ha$e %redicted that we are in the decade of the co!!odities. onco!itant to the newfound %olicy initiati$es the !ar5et has res%onded by setting u% !odern institutions 0#ation2wide "ulti2 o!!odity -7changes, 0#" -1 and ada%ting so!e of the 4best. %ractices such as electronic trading and clearing. The %ro&ections of co!!odity deri$ati$es trading, though widely $ariant in the range of +s.;=2<= trillion and needs to be calibrated with sound assu!%tions, indicate the enor!ous %otential of this sector not only in ter!s of trading but also in ter!s of the o%%ortunities for de$elo%ing $alue2added ser$ices in ter!s of Auality warehousing, gradation and certification ser$ices, financial inter!ediation, !odern !ar5eting %ractices, !odern clearing and settle!ent !echanis!. )nce the !ar5et beco!es liAuid the old co!%laint, that the Indian co!!odity deri$ati$es !ar5ets do not !eet the basic ob&ecti$es of %rice disco$ery 0with !any studies indicating bac5wardation co!!on %lace1 and ris5 !anage!ent !ay also $anish. The !ost i!%ortant changes that ha$e ta5en %lace in the co!!odity futures s%ace were the re!o$al of %rohibition on futures trading in a large nu!ber of co!!odities and the facilitation of setting u% !odern, de!utualised e7changes by the Go$ern!ent of India. These two initiati$es
D;

together are beco!ing instru!ental in changing the contours of the co!!odity futures !ar5ets in India in ter!s of both %artici%ation and %ractices. There are, howe$er, still a nu!ber of obstacles in fully e7%loiting the o%%ortunities a$ailable to the co!!odity ecosyste!. The $iews e7%ressed and the a%%roach suggested in this %a%er is of the author and not necessarily of #S-. 3) 'Securities "ar5et and o!!odity Deri$ati$es "ar5ets L 4+ush. $s. Slow GrowthOG 0#S- #ews, Dece!ber 3==11. A co!%arati$e %rofile of the co!!odity deri$ati$es !ar5ets with that of the nascent securities deri$ati$es !ar5et was !ade since no co!%arison of the Indian deri$ati$es !ar5ets would be useful with any counter %art. This was because of the cheAuered history of Indian co!!odity deri$ati$es trading fro! that of a flourishing !ar5et for!ally started in 1ED< with the setting u% of the Bo!bay otton Association but which went into disre%ute during the 4scarcity decades. of the 1FC=s and D=s. A co!%arison re$ealed that the ra%id strides !ade by the securities deri$ati$es seg!ent in a short s%an was because of its sound institutional fra!e wor5 in the s%ot side while the s%ot !ar5et acted as a drag on the %rogress of the deri$ati$es !ar5ets in co!!odities. 5) The #" -s !ar5ed a !a&or %aradig! shift in the institutional structure and !ar5et architecture of co!!odity futures !ar5ets. Drawing hea$ily fro! the '#S- !odelG in the securities !ar5ets these institutions are e7%ected to unleash a chain of $alue added functions in the co!!odity deri$ati$es !ar5ets as well as in the co!!odity s%ot !ar5et through a host of 'e7tra functionsG they are e7%ected to %erfor!. These include warehouse recei%t based deli$eries which would reAuire transferability and negotiability of warehouse recei%ts and its de2!ateriali>ation, entry of
DB

cor%orate, ban5s, financial institutions and *IIs in co!!odity futures trading, disse!ination of infor!ation relating to the %hysical !ar5ets and %rices, ado%tion of the best technology in trading, clearing and settle!ent and so on. The #" -s ha$e started e7hibiting a %enchant for inno$ations as reflected in their atte!%ts at co2o%ting warehousing agencies, bringing about transferability and de2!ating of warehouse recei%ts account, though in a li!ited !anner 0because of the absence of a legal fra!e wor51 association of ban5s 0for other than trading acti$ities as trading in co!!odities is still %rohibited for ban5s1 4%olling. of %rice infor!ation fro! the s%ot !ar5ets0fro! !andies1co!!ence!ent of e$ening trading session to align do!estic !ar5ets with the global !ar5ets and so on0see -cono!ic Sur$ey 3==;2=B1. 7) Se$eral studies %articularly by :ain 8 #ai5 01FFF1, Tho!as 03==;1, Sahade$an 03==31 etal ha$e indicated that only in a few cases the co!!odity futures !ar5ets %erfor!ed its basic ob&ecti$e of disco$ering efficient %rices. Ihile the studiesG focus were different the general %icture e!erging was that only in the case of co!!odities with reasonable $olu!es of trading, li5e castor seed and %e%%er, the !ar5ets achie$ed the ob&ecti$e of %rice disco$ery to so!e e7tent. 6owe$er, since the !ar5ets in general were too shallow the results were not une7%ected.

D<

RESEARCH METHODOLOGY
DC

<) RESEARC4 MET4ODO1O6Y

<)3 TIT1E OF T4E PROJECT REPORT 8A study on a co!!odity !ar5et.

Re&earc# De& $n:9

3) EFp!orator0 re&earc#: 5) De&cr pt -e re&earc#: *irst an e7%loratory research was conducted to get so!e insights about the to%ic. Secondary data analysis was %erfor!ed. It was followed by Auestionnaire filling. *indings of the e7%loratory

DD

research were regarded as in%ut to further research. This research will be followed by descri%ti$e design.

Data Co!!ect on:9

3( Pr mar0 Data:9 Pri!ary data are those, which are collected a fresh and for through Eue&t onna re, which is filled by res%ondents. 5( Secondar0 data:9 Pri!ary data was collected the first ti!e, and thus they are original data. Secondary data !eans that data which are readily a$ailable fro! !aga>ines, internet, news%a%er etc. 9arious sources used in our research are as follow/ Internet Te7t2boo5

Samp! n$ De& $n:

There are basically two ty%es of sur$ey/ 1. ensus sur$ey and

3. Sa!%le sur$ey.

DE

In this research study Sa!%le sur$ey !ethod is used, because in two !onths ti!e %eriod ensus sur$ey is not %ossible .Sa!%le si>e of this study is ta5en 1== in$estors of #a$sari city. C)7 FIE1DBORK: In order to gather the %ri!ary data associated with !y sur$ey co!!odity traders and go$ern!ent ser$ants o$er a selected hub of areas in #a$sari, i ha$e undergone an e7tensi$e fieldwor5. The basic %ur%ose of the fieldwor5 was, to record res%onses of target %eo%le.

O%JECTI/ES
1. To analy>e the $iews of co!!odity traders. 3. To !a5e understand the %rocess of future co!!odity trading in India. ;. To !a5e 5now the in$est!ent %attern of co!!odity traders 8 %eo%le.

DF

B. To learn awareness of in$estor about co!!odity !ar5et.

E=

1 m tat on
1. This sur$ey restricted to selected area of a na$sari city. 3. The sa!%le si>e for the sur$ey of %eo%le was li!ited to 1== res%ondents, which !ight not be re%resenting the whole %o%ulation. ;. The results are totally deri$ed fro! the res%ondents answers. There !ight be a difference between the actual and %ro&ected results. B. +esearch also de%ends on sur$eyors bias.

E1

DATA ANALYSIS & INTERPRETATIO N

E3

DATA A,A1YSIS A,D I,TERPRETATIO,:9

A$e: A$e 5A97A 5; 7A92A 2; Abo-e 2A 7A

Educat on Cua! " cat on: Cua! " cat on Occupat on: Pro"e&& ona! 5; %u& ne&&man 7A Emp!o0ee o" p-t)&ector 32 Emp!o0ee o" $o-t) &ector 73 Po&t $raduate 2A 6raduate 7; Under $raduate 5;

3) B#ere do 0ou n-e&t 0our &a- n$G Ban5 Stoc5 !ar5et IP) Go$ern!ent Bonds "utual funds Insurance Post2office Gold2sil$er )ther 1DR B1R 3R BR 1=R 1;R 1=R ;R =R

E;

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Bank Stock market IPO Government Bonds Mutual funds Insurance Post-off ce Gold-s lver Ot!er

Interpretat on: *ro! the abo$e chart we can inter%ret that, "ost of the %eo%le i.e. B1R in$est their sa$ings in stoc5 !ar5et, 1DR %eo%le in$est in their sa$ings in ban5, 3R %eo%le in$est their sa$ings in IP),;R %eo%le are in$est their sa$ings in Go$ern!ent bonds.

EB

5) I" 0ou n-e&t n &tock market+ *#ere do 0ou n-e&t 0our &a- n$G -Auity o!!odity Deri$ati$es
"0% 50% 40% 30% 20% 10% 0% #$u t% & ommod t% 'er vat ves

;BR <CR 1=R

Interpretat on: *ro! the abo$e chart we can inter%ret that, ;BR %eo%le in$est their sa$ings in eAuity, !ost of the %eo%le i.e. <CR %eo%le in$est in their sa$ing in o!!odity, 1=R%eo%le in$est their sa$ing in deri$ati$es.

E<

7) 4o* to reac# at n-e&tment dec & onG Self analysis Ti%s fro! -7%ert Ti%s fro! *riends Business channels #ews %a%er )ther 1ER ;CR 1BR 13R 3=R =R

40% 35% 30% 25% 20% 15% 10% 5% 0%

Self anal%s s ( )s from #*)ert ( )s from +r ends Bus ness c!annels ,e-s )a)er Ot!er

Interpretat on: *ro! the abo$e chart we can inter%ret that, !ost of the %eo%le i.e. ;CR %eo%le are !a5ing in$est!ent decision through ti%s fro! e7%ert, 1ER %ersons are de%end on self analysis for in$est!ent decision,1BR %ersons are ta5ing ti%s fro! friends for !a5ing in$est!ent decision, 13R %eo%le are $iew news channels for !a5ing in$est!ent decision and 3=R %eo%le are reading news %a%er for !a5ing in$est!ent decision.

EC

2) B# c# "actor p!a0& a cruc a! Ro!e B#en You Make a Dec & on to In-e&t n Stock MarketG +is5 reduction In$est!ent Je$erage Benefit S%eculati$e !oti$e Arbitrage Benefit
"0% 50% 40% 30% 20% 10% 0% . sk reduct on Investment / evera0e Benef t S )eculat ve mot ve 1r2 tra0e Benef t

13R C=R 1CR ER BR

Interpretat on: *ro! the abo$e chart we inter%ret that, 13R %eo%le belie$e that ris5 reduction is !ain factor behind in$est!ent decision, !ost of the C=R %eo%le belie$e that in$est!ent 0sa$ings1 is the !ain factor for decision !a5ing, 1CR %eo%le are ta5ing decision on the basis of le$erage benefit,

ED

ER %eo%le de%end on s%eculati$e !oti$e and BR %eo%le are de%end on arbitrage benefit for !a5ing in$est!ent decision.

;) Durat on o" attac#ment * t# commod t0 marketG Jess than 1 year 1 to < year "ore than 1= year < to 1= year
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

B3R <=R BR BR

/ess t!an 1 %ear 1 to 5 %ear More t!an 10 %ear 5 to 10 %ear

Interpretat on: *ro! abo$e chart, we can inter%ret that B3R %eo%le are attached with co!!odity !ar5et for less than 1 year, !ostly i.e. <=R %eo%le are attached with it for 1 to < year, BR %eo%le are attached with it for !ore than 1= year and BR %eo%le are attached with co!!odity !ar5et for < to 1= year.

EE

<) B# c# o" t#e "o!!o* n$ product pre"er b0 0ou "or 0our n-e&tmentG "etal ro%s )il ereals 8 Pulse S%ices -nergy Bullions )ther
20% 13% 1"% 14% 12% 10% 3% "% 4% 2% 0%

1ER 3=R 1CR BR BR 1BR 3=R BR

Metal &ro)s Ol &ereals 4 Pulse S ) ces # ner0% Bull ons Ot!er

Interpretat on: *ro! the abo$e chart we can inter%ret that, 1ER %eo%le %refer !etal for in$est!ent, 3=R %eo%le %refer cro%s for in$est!ent, 1CR %eo%le %refer oil for in$est!ent, BR %eo%le %refer cereals 8 Pulse for in$est!ent, BR %eo%le %refer s%ices for in$est!ent, 1BR %eo%le %refer -nergy %roduct for in$est!ent, 3=R %eo%le %refer Bullions %roduct for in$est!ent and BR %eo%le In$est in others.
EF

=) B# c# t0pe o" trad n$ 0ou pre"er to dea! * t#G

SAuare u% "ode Intraday Deli$ery Based 6edging

1=R ;CR BBR 1=

1000% 600% 300% 500% "00% 500% 400% 300% 200% 100% 0%

S$uare u) Mode Intrada% 'el ver% Based 7ed0 n0

Interpretat on: *ro! the abo$e chart we can inter%ret that, 1=R %eo%le %refer sAuare u% !ode, ;CR %eo%le %refer intraday trading, BBR %eo%le %refer deli$ery based trading and 1=R %eo%le %refer hedging for trading.

F=

@) B# c# eFc#an$e 0ou pre"er to dea! * t#G " ? # D-? C3R ;ER

50% "0% 50% 40% 30% 20% 10% 0% M&8 ,&'# 8

Interpretat on: *ro! the abo$e chart we can inter%ret that, C3R %eo%le %refer " ? for dealing, ;ER %eo%le %refer # D-? for dealing.

F1

?) 4o* do 0ou - e* 0our &e!"G Traders S%eculators Short ti!e in$estors

40 35 30 25 20 15 10 5 0 (raders S)eculators S!ort t me nvestors

;C 3C ;E

Interpretat on: *ro! the abo$e chart we can inter%ret that, ;CR %eo%le are $iew the!sel$es as traders, 3C %eo%le $iew the!sel$es as a s%eculator and ;ER %eo%le are $iew the!sel$es as a short ti!e in$estor.

F3

3A)In *# c# o" t#e "o!!o* n$ compan0 0ou *ou!d ! ke to dea! more t meG "arwadi Share5han once%t II*J De$ine2hub ,ar$i
25%

3<R 3BR 1DR 1ER 13R BR

20% Mar-ad 15% S !arek!an &once)t II+/ 10% 'ev ne-!u2 9arv 5%

0%

Interpretat on: *ro! the abo$e chart we can inter%ret that, 3<R %eo%le would li5e to in$est in "arwadi, 3BR %eo%le li5e Share 5han, 1DR %eo%le li5e their in$est!ent.
F;

once%t, 1ER

%eo%le li5e II*J, 13R %eo%le li5e Di$ine hub and BR %eo%le li5e ,ar$i for

FB

FINDINGS & CONCLUSION

F<

FI,DI,6S A,D CO,C1USIO,:9

11 o!!odity deri$ati$es ha$e a crucial role to %lay in the %rice ris5 !anage!ent %rocess. -s%ecially in any agriculture do!inated econo!y. Deri$ati$es li5e forwards, futures, o%tions, swa%s etc are e7tensi$ely used in !any de$elo%ed as well as de$elo%ing countries in the world. 6owe$er, they ha$e been utili>ed in a $ery li!ited scale in India 31 The %roduction, su%%ly and distribution of !any agricultural co!!odities are controlled by the go$ern!ent and only forwards and futures trading are %er!itted in certain co!!odity ite!s. ;1 The !ost things I ha$e seen are that the awareness of future co!!odity trading is still not there. B1 Peo%le who 5nows, they belie$e that o%erators and big %layers in the !ar5et dri$e this future co!!odity !ar5et.

<1 "ost of %eo%leGs feel that the Aualities of the co!!odities are not as %er the reAuire!ent. C1 *or the %rocess of ta5ing or gi$ing deli$ery in future co!!odity !ar5et is lengthy, costly, and reAuired so !any docu!ents.

FC

D1 The o%tion trading is still not allowed in co!!odity !ar5et so the ris5 !anage!ent %rocess is inco!%lete. Because we all 5now that future trading has its own li!its. E1 The account o%ening %rocess of future co!!odity trading is lengthy and reAuires !ore docu!ents. F1 The deli$ery centers of co!!odities are $ery less in India co!%are to other de$elo%ed countries. 1=1 Peo%le still considering that to in$est in co!!odity !ar5et is

$ery ris5y. 111 Peo%le still considering co!!odity !ar5et for s%eculation

rather than business %ur%ose

FD

%I%1IO6RAP4Y
www.!c7india.co! www.ncde7.co! www.co!!odityindia.co! www."arwadionline.co!

FE

A,,E.URE

Cue&t onna re
I Darshana Patel Student of T.Y B B A,S.S Agrawal ollage of Arts, o!!erce and "anage!ent #a$sari,,indly reAuest you to fill u% the Uuestionnaires is on the 4Study of a o!!odity !ar5et. and %artial fulfill!ent for the Degree of 'Bachelor of Business Ad!inistrationG. I will be than5ful for your o2)%eration. 3) 5) 7) 2) ;) <) Educat on: ,ame: Contact ,o: pro"e&& on: A$e: B#ere Do You In-e&t Your Sa- n$G

o Ban5 o Stoc5 "ar5et o IP) o Go$ern!ent Bonds o "utual *unds o Insurance o Post2)ffice o Gold2Sil$er o )ther S%ecify

FF

=) B#ere do 0ou In-e&t 0our I" You In-e&t n Stock Market+ Sa- n$G

o -Auity o o!!odity o Deri$ati$es

E. 4o* You Reac# At In-e&tment Dec & onG

o Self analysis o Ti%s *ro! -7%ert o Ti%s *ro! *riends o Business hannels o #ews Pa%er o )ther0S%ecify1 YYYYYYYYYYYYYYYY
F. B# c# Factor P!a0& a Cruc a! Ro!e *#en You Make a Dec & on to
In-e&t n Stock marketG

o +is5 +eduction o In$est!ent o Je$erage benefit o S%eculati$e !oti$e o Arbitrage Benefit o Jess than 1 Year

3A) Durat on o" Attac#ment * t# Commod t0 MarketG

1==

o 1 to < Year o "ore than 1= Year o < to 1= Year

33) B# c# o" t#e Fo!!o* n$ Product Pre"er b0 0ou "or Your In-e&tmentG

o "etal o ro%s o )il o ereals 8 Pulse

S%ices -nergy Bullions )ther0S%ecify1

13. B# c# T0pe o" Trad n$ 0ou pre"er to Dea! B t#G

o SAuare u% "ode o Intraday o Deli$ery Based o 6edging

37) B# c# eFc#an$e 0ou pre"er to dea! * t#G

o" ? o # D-?

1=1

1B) 4o* do 0ou - e* 0our &e!"G

o Traders o S%eculators o Short Ti!e In$estors

1<) In *# c# o" t#e Compan0 0ou *ou!d ! ke to dea! more T meG

o "arwadi o Sher5han o once%t o II*J o De$ine2hub o ,ar$i

1=3