INDEX

Chapter
No
Topic Page
No.
1 Introduction to Commodity Market 06
2 History of Evolution of Commodity
Markets
10
3 India and the Commodity Market 12
4 International Commodity Exchanges 18
5 How Commodity Market Works? 21
6 How to Invest in a Commodity Market 24
7 Current Scenario in Indian Commodity
Market
29
8 Commodities 34
9 Annexure 44
Summary 52
Bibliography 53









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Chapter 1

Introduction to Commodity Market


What is Commodity?
Any product that can be used for commerce or an article of commerce
which is traded on an authorized commodity exchange is known as commodity. The
article should be movable of value, something which is bought or sold and which is
produced or used as the subject or barter or sale. In short commodity includes all kinds
of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines goods as
every kind of movable property other than actionable claims, money and securities.
In current situation, all goods and products of agricultural (including
plantation), mineral and fossil origin are allowed for commodity trading recognized
under the FCRA. The national commodity exchanges, recognized by the Central
Government, permits commodities which include precious (gold and silver) and non-
ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and
oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea,
rubber and spices. Etc.

What is a commodity exchange?
A commodity exchange is an association or a company or any other body
corporate organizing futures trading in commodities for which license has been granted
by regulating authority.

What is Commodity Futures?
A Commodity futures is an agreement between two parties to buy or sell a
specified and standardized quantity of a commodity at a certain time in future at a price
agreed upon at the time of entering into the contract on the commodity futures
exchange.
The need for a futures market arises mainly due to the hedging function that it
can perform. Commodity markets, like any other financial instrument, involve risk

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associated with frequent price volatility. The loss due to price volatility can be attributed
to the following reasons:

Consumer Preferences: - In the short-term, their influence on price volatility is small
since it is a slow process permitting manufacturers, dealers and wholesalers to adjust
their inventory in advance.

Changes in supply: - They are abrupt and unpredictable bringing about wild
fluctuations in prices. This can especially noticed in agricultural commodities where the
weather plays a major role in affecting the fortunes of people involved in this industry.
The futures market has evolved to neutralize such risks through a mechanism; namely
hedging.

The objectives of Commodity futures: -
Hedging with the objective of transferring risk related to the possession of
physical assets through any adverse moments in price. Liquidity and Price
discovery to ensure base minimum volume in trading of a commodity through
market information and demand supply factors that facilitates a regular and
authentic price discovery mechanism.

Maintaining buffer stock and better allocation of resources as it augments
reduction in inventory requirement and thus the exposure to risks related with
price fluctuation declines. Resources can thus be diversified for investments.
Price stabilization along with balancing demand and supply position. Futures
trading leads to predictability in assessing the domestic prices, which maintains
stability, thus safeguarding against any short term adverse price movements.
Liquidity in Contracts of the commodities traded also ensures in maintaining the
equilibrium between demand and supply.
Flexibility, certainty and transparency in purchasing commodities facilitate bank
financing. Predictability in prices of commodity would lead to stability, which in
turn would eliminate the risks associated with running the business of trading
commodities. This would make funding easier and less stringent for banks to
commodity market players.


Benefits of Commodity Futures Markets:-

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The primary objectives of any futures exchange are authentic price discovery
and an efficient price risk management. The beneficiaries include those who trade in the
commodities being offered in the exchange as well as those who have nothing to do
with futures trading. It is because of price discovery and risk management through the
existence of futures exchanges that a lot of businesses and services are able to function
smoothly.

1. Price Discovery:-Based on inputs regarding specific market information, the
demand and supply equilibrium, weather forecasts, expert views and comments,
inflation rates, Government policies, market dynamics, hopes and fears, buyers
and sellers conduct trading at futures exchanges. This transforms in to
continuous price discovery mechanism. The execution of trade between buyers
and sellers leads to assessment of fair value of a particular commodity that is
immediately disseminated on the trading terminal.

2. Price Risk Management: - Hedging is the most common method of price risk
management. It is strategy of offering price risk that is inherent in spot market by
taking an equal but opposite position in the futures market. Futures markets are
used as a mode by hedgers to protect their business from adverse price change.
This could dent the profitability of their business. Hedging benefits who are
involved in trading of commodities like farmers, processors, merchandisers,
manufacturers, exporters, importers etc.

3. Import- Export competitiveness: - The exporters can hedge their price risk
and improve their competitiveness by making use of futures market. A majority of
traders which are involved in physical trade internationally intend to buy forwards.
The purchases made from the physical market might expose them to the risk of
price risk resulting to losses. The existence of futures market would allow the
exporters to hedge their proposed purchase by temporarily substituting for actual
purchase till the time is ripe to buy in physical market. In the absence of futures
market it will be meticulous, time consuming and costly physical transactions.

4. Predictable Pricing: - The demand for certain commodities is highly price
elastic. The manufacturers have to ensure that the prices should be stable in
order to protect their market share with the free entry of imports. Futures
contracts will enable predictability in domestic prices. The manufacturers can, as
a result, smooth out the influence of changes in their input prices very easily.
With no futures market, the manufacturer can be caught between severe short-
term price movements of oils and necessity to maintain price stability, which
could only be possible through sufficient financial reserves that could otherwise
be utilized for making other profitable investments.

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5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on
farmers in the absence of futures market. There would be no need to have large
reserves to cover against unfavorable price fluctuations. This would reduce the
risk premiums associated with the marketing or processing margins enabling
more returns on produce. Storing more and being more active in the markets.
The price information accessible to the farmers determines the extent to which
traders/processors increase price to them. Since one of the objectives of futures
exchange is to make available these prices as far as possible, it is very likely to
benefit the farmers. Also, due to the time lag between planning and production,
the market-determined price information disseminated by futures exchanges
would be crucial for their production decisions.

6. Credit accessibility: - The absence of proper risk management tools would
attract the marketing and processing of commodities to high-risk exposure
making it risky business activity to fund. Even a small movement in prices can
eat up a huge proportion of capital owned by traders, at times making it virtually
impossible to payback the loan. There is a high degree of reluctance among
banks to fund commodity traders, especially those who do not manage price
risks. If in case they do, the interest rate is likely to be high and terms and
conditions very stringent. This posses a huge obstacle in the smooth functioning
and competition of commodities market. Hedging, which is possible through
futures markets, would cut down the discount rate in commodity lending.

7. Improved product quality: - The existence of warehouses for facilitating
delivery with grading facilities along with other related benefits provides a very
strong reason to upgrade and enhance the quality of the commodity to grade that
is acceptable by the exchange. It ensures uniform standardization of commodity
trade, including the terms of quality standard: the quality certificates that are
issued by the exchange-certified warehouses have the potential to become the
norm for physical trade.








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Chapter 2

History of Evolution of commodity markets

Commodities future trading was evolved from need of assured continuous
supply of seasonal agricultural crops. The concept of organized trading in commodities
evolved in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants
used to store Rice in warehouses for future use. To raise cash warehouse holders sold
receipts against the stored rice. These were known as rice tickets. Eventually, these
rice tickets become accepted as a kind of commercial currency. Latter on rules came in
to being, to standardize the trading in rice tickets. In 19
th
century Chicago in United
States had emerged as a major commercial hub. So that wheat producers from Mid-
west attracted here to sell their produce to dealers & distributors. Due to lack of
organized storage facilities, absence of uniform weighing & grading mechanisms
producers often confined to the mercy of dealers discretion. These situations lead to
need of establishing a common meeting place for farmers and dealers to transact in
spot grain to deliver wheat and receive cash in return.
Gradually sellers & buyers started making commitments to exchange the
produce for cash in future and thus contract for futures trading evolved. Whereby the
producer would agree to sell his produce to the buyer at a future delivery date at an
agreed upon price. In this way producer was aware of what price he would fetch for his
produce and dealer would know about his cost involved, in advance. This kind of
agreement proved beneficial to both of them. As if dealer is not interested in taking
delivery of the produce, he could sell his contract to someone who needs the same.
Similarly producer who not intended to deliver his produce to dealer could pass on the
same responsibility to someone else. The price of such contract would dependent on
the price movements in the wheat market. Latter on by making some modifications
these contracts transformed in to an instrument to protect involved parties against
adverse factors such as unexpected price movements and unfavorable climatic factors.
This promoted traders entry in futures market, which had no intentions to buy or sell
wheat but would purely speculate on price movements in market to earn profit.
Trading of wheat in futures became very profitable which encouraged the
entry of other commodities in futures market. This created a platform for establishment
of a body to regulate and supervise these contracts. Thats why Chicago Board of Trade
(CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and

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Produce Exchanges were born. Agricultural commodities were mostly traded but as
long as there are buyers and sellers, any commodity can be traded. In 1872, a group of
Manhattan dairy merchants got together to bring chaotic condition in New York market
to a system in terms of storage, pricing, and transfer of agricultural products. In 1933,
during the Great Depression, the Commodity Exchange, Inc. was established in New
York through the merger of four small exchanges the National Metal Exchange, the
Rubber Exchange of New York, the National Raw Silk Exchange, and the New York
Hide Exchange.
The largest commodity exchange in USA is Chicago Board of Trade, The
Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York
Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide
there are major futures trading exchanges in over twenty countries including Canada,
England, India, France, Singapore, Japan, Australia and New Zealand.

















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Chapter 3

India and the commodity market


History of Commodity Market in India:-
The history of organized commodity derivatives in India goes back to the
nineteenth century when Cotton Trade Association started futures trading in 1875,
about a decade after they started in Chicago. Over the time datives market developed in
several commodities in India. Following Cotton, derivatives trading started in oilseed in
Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and
Bullion in Bombay (1920).
However many feared that derivatives fuelled unnecessary speculation and
were detrimental to the healthy functioning of the market for the underlying
commodities, resulting in to banning of commodity options trading and cash settlement
of commodities futures after independence in 1952. The parliament passed the Forward
Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the
India. The act prohibited options trading in Goods along with cash settlement of forward
trades, rendering a crushing blow to the commodity derivatives market. Under the act
only those associations/exchanges, which are granted reorganization from the
Government, are allowed to organize forward trading in regulated commodities. The act
envisages three tire regulations: (i) Exchange which organizes forward trading in
commodities can regulate trading on day-to-day basis; (ii) Forward Markets Commission
provides regulatory oversight under the powers delegated to it by the central
Government. (iii) The Central Government- Department of Consumer Affairs, Ministry of
Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority.
The commodities future market remained dismantled and remained
dormant for about four decades until the new millennium when the Government, in a
complete change in a policy, started actively encouraging commodity market. After
Liberalization and Globalization in 1990, the Government set up a committee (1993) to
examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra)
recommended allowing futures trading in 17 commodity groups. It also recommended
strengthening Forward Markets Commission, and certain amendments to Forward
Contracts (Regulation) Act 1952, particularly allowing option trading in goods and
registration of brokers with Forward Markets Commission. The Government accepted

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most of these recommendations and futures trading was permitted in all recommended
commodities. It is timely decision since internationally the commodity cycle is on
upswing and the next decade being touched as the decade of Commodities.
Commodity exchange in India plays an important role where the prices of any
commodity are not fixed, in an organized way. Earlier only the buyer of produce and its
seller in the market judged upon the prices. Others never had a say.
Today, commodity exchanges are purely speculative in nature. Before
discovering the price, they reach to the producers, end-users, and even the retail
investors, at a grassroots level. It brings a price transparency and risk management in
the vital market. A big difference between a typical auction, where a single auctioneer
announces the bids and the Exchange is that people are not only competing to buy but
also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no
one can offer to sell higher than someone elses lower offer. That keeps the market as
efficient as possible, and keeps the traders on their toes to make sure no one gets the
purchase or sale before they do. Since 2002, the commodities future market in India
has experienced an unexpected boom in terms of modern exchanges, number of
commodities allowed for derivatives trading as well as the value of futures trading in
commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity
datives market was virtually non- existent, except some negligible activities on OTC
basis.
In India there are 25 recognized future exchanges, of which there are three
national level multi-commodity exchanges. After a gap of almost three decades,
Government of India has allowed forward transactions in commodities through Online
Commodity Exchanges, a modification of traditional business known as Adhat and
Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three
exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX)
Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National Multi-
Commodity Exchange of India Limited (NMCEIL) Ahmedabad.There are other regional
commodity exchanges situated in different parts of India.



Legal framework for regulating commodity futures in India:-
The commodity futures traded in commodity exchanges are regulated by the
Government under the Forward Contracts Regulations Act, 1952 and the Rules framed

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there under. The regulator for the commodities trading is the Forward Markets
Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs
Food and Public Distribution

Forward Markets Commission (FMC):-
It is statutory institution set up in 1953 under Forward Contracts (Regulation)
Act, 1952. Commission consists of minimum two and maximum four members
appointed by Central Govt. Out of these members there is one nominated chairman. All
the exchanges have been set up under overall control of Forward Market Commission
(FMC) of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX)
National Commodities & Derivatives Exchange Limited (NCDEX) promoted
by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National
Bank of Agriculture and Rural Development (NABARD) and National Stock Exchange of
India Limited (NSC). Punjab National Bank (PNB), Credit Ratting Information Service of
India Limited (CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara
Bank and Goldman Sachs by subscribing to the equity shares have joined the
promoters as a share holder of exchange. NCDEX is the only Commodity Exchange in
the country promoted by national level institutions.
NCDEX is a public limited company incorporated on 23 April 2003.
NCDEX is a national level technology driven on line Commodity Exchange with an
independent Board of Directors and professionals not having any vested interest in
Commodity Markets.
It is committed to provide a world class commodity exchange platform for market
participants to trade in a wide spectrum of commodity derivatives driven by best global
practices, professionalism and transparency.
NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is
also subjected to the various laws of land like the Companies Act, Stamp Act, Contracts
Act, Forward Contracts Regulation Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members in more
than 550 centers through out India. NCDEX currently facilitates trading of 57
commodities.


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Commodities Traded at NCDEX:-
Bullion:-
Gold KG, Silver, Brent
Minerals:-
Electrolytic Copper Cathode, Aluminum Ingot, Nickel
Cathode, Zinc Metal Ingot, Mild steel Ingots
Oil and Oil seeds:-
Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell),
Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM
seed oil cake, Refined soya oil, Rape seeds, Mustard seeds,
Caster seed, Yellow soybean, Meal
Pulses:-
Urad, Yellow peas, Chana, Tur, Masoor,
Grain:-
Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-
36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow
red maize
Spices:-
Jeera, Turmeric, Pepper
Plantation:-
Cashew, Coffee Arabica, Coffee Robusta
Fibers and other:-
Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28
mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium
Staple, Mulberry, Green Cottons, , , Potato, Raw Jute,
Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334
Energy:-
Crude Oil, Furnace oil

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Multi Commodity Exchange of India Limited (MCX)
Multi Commodity Exchange of India Limited (MCX) is an independent and de-
mutualized exchange with permanent reorganization from Government of India, having
Head Quarter in Mumbai. Key share holders of MCX are Financial Technologies (India)
Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of
India and Canara Bank. MCX facilitates online trading, clearing and settlement
operations for commodity futures market across the country.
MCX started of trade in Nov 2003 and has built strategic alliance with Bombay
Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India,
pulses Importers Association and Shetkari Sanghatana.
MCX deals with about 100 commodities.

Commodities Traded at MCX:-
Bullion:-
Gold, Silver, Silver Coins,
Minerals:-
Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead
Oil and Oil seeds:-
Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein, Groundnut oil,
Mustard/ Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil, Coconut Oil
Cake, Copra, Sunflower oil, Sunflower Oil cake, Tamarind seed oil,
Pulses:-
Chana, Masur, Tur, Urad, Yellow peas
Grains:-
Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,
Spices:-
Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove,
Ginger,
Plantation:-
Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,
Coffee,

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Fiber and others:-
Kapas, Kapas Khalli, Cotton (long staple, medium staple,
short staple), Cotton Cloth, Cotton Yarn, Gaur seed and
Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art
Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute
Sacking,
Petrochemicals:-
High Density Polyethylene (HDPE), Polypropylene (PP), Poly
Vinyl Chloride (PVC)
Energy:-
Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour
Crude Oil, Natural Gas

National Multi Commodity Exchange of India Limited (NMCEIL)
National Multi Commodity Exchange of India Limited (NMCEIL) is the first
de-mutualised Electronic Multi Commodity Exchange in India. On 25
th
July 2001 it
was granted approval by Government to organize trading in edible oil complex. It
is being supported by Central warehousing Corporation Limited, Gujarat State
Agricultural Marketing Board and Neptune Overseas Limited. It got reorganization
in Oct 2002. NMCEIL Head Quarter is at Ahmedabad.









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Chapter 4

INTERNATIONAL COMMODITY EXCHANGES


Futures trading is a result of solution to a problem related to the
maintenance of a year round supply of commodities/ products that are seasonal as is
the case of agricultural produce. The United States, Japan, United Kingdom, Brazil,
Australia, Singapore are homes to leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX):-
The New York Mercantile Exchange is the worlds biggest exchange for
trading in physical commodity futures. It is a primary trading forum for energy products
and precious metals. The exchange is in existence since last 132 years and performs
trades trough two divisions, the NYMEX division, which deals in energy and platinum
and the COMEX division, which trades in all the other metals.
Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline,
RBOB Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum,
Palladium, etc.

London Metal Exchange:-
The London Metal Exchange (LME) is the worlds premier non-ferrous
market, with highly liquid contracts. The exchange was formed in 1877 as a direct
consequence of the industrial revolution witnessed in the 19
th
century. The primary
focus of LME is in providing a market for participants from non-ferrous based metals
related industry to safeguard against risk due to movement in base metal prices and
also arrive at a price that sets the benchmark globally. The exchange trades 24 hours a
day through an inter office telephone market and also through a electronic trading
platform. It is famous for its open-outcry trading between ring dealing members that
takes place on the market floor.

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Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy,
North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low Density
Polyethylene, etc.

The Chicago Board of Trade:-
The first commodity exchange established in the world was the Chicago
Board of Trade (CBOT) during 1848 by group of Chicago merchants who were keen to
establish a central market place for trade. Presently, the Chicago Board of Trade is one
of the leading exchanges in the world for trading futures and options. More than 50
contracts on futures and options are being offered by CBOT currently through open
outcry and/or electronically. CBOT initially dealt only in Agricultural commodities like
corn, wheat, non storable agricultural commodities and non-agricultural products like
gold and silver.
Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol,
Rough Rice, Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM):-
The Tokyo Commodity Exchange (TOCOM) is the second largest
commodity futures exchange in the world. It trades in to metals and energy contracts. It
has made rapid advancement in commodity trading globally since its inception 20 years
back. One of the biggest reasons for that is the initiative TOCOM took towards
establishing Asia as the benchmark for price discovery and risk management in
commodities like the Middle East Crude Oil. TOCOMs recent tie up with the MCX to
explore cooperation and business opportunities is seen as one of the steps towards
providing platform for futures price discovery in Asia for Asian players in Crude Oil since
the demand-supply situation in U.S. that drives NYMEX is different from demand-supply
situation in Asia. In Jan 2003, in a major overhaul of its computerized trading system,
TOCOM fortified its clearing system in June by being first commodity exchange in
Japan to introduce an in-house clearing system. TOCOM launched options on gold
futures, the first option contract in Japanese market, in May 2004.
Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum,
Aluminum, Rubber, etc

Chicago Mercantile Exchange:-

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The Chicago Mercantile Exchange (CME) is the largest futures exchange in
the US and the largest futures clearing house in the world for futures and options
trading. Formed in 1898 primarily to trade in Agricultural commodities, the CME
introduced the worlds first financial futures more than 30 years ago. Today it trades
heavily in interest rates futures, stock indices and foreign exchange futures. Its products
often serves as a financial benchmark and witnesses the largest open interest in futures
profile of CME consists of livestock, dairy and forest products and enables small family
farms to large Agri-business to manage their price risks. Trading in CME can be done
either through pit trading or electronically.
Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen
pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate,
etc


















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Chapter 5

How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade, in which one
pays cash and carries away the goods. The second is futures trade. The underpinning
for futures is the warehouse receipt. A person deposits certain amount of say, good X in
a ware house and gets a warehouse receipt. Which allows him to ask for physical
delivery of the good from the warehouse. But some one trading in commodity futures
need not necessarily posses such a receipt to strike a deal. A person can buy or sale a
commodity future on an exchange based on his expectation of where the price will go.
Futures have something called an expiry date, by when the buyer or seller either closes
(square off) his account or give/take delivery of the commodity. The broker maintains an
account of all dealing parties in which the daily profit or loss due to changes in the
futures price is recorded. Squiring off is done by taking an opposite contract so that the
net outstanding is nil.
For commodity futures to work, the seller should be able to deposit the
commodity at warehouse nearest to him and collect the warehouse receipt. The buyer
should be able to take physical delivery at a location of his choice on presenting the
warehouse receipt. But at present in India very few warehouses provide delivery for
specific commodities.
Following diagram gives a fair idea about working of the Commodity market.

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Today Commodity trading system is fully computerized. Traders need not
visit a commodity market to speculate. With online commodity trading they could sit in
the confines of their home or office and call the shots.
The commodity trading system consists of certain prescribed steps or
stages as follows:

I. Trading: - At this stage the following is the system implemented-
- Order receiving
- Execution
- Matching
- Reporting
- Surveillance
- Price limits
- Position limits

II. Clearing: - This stage has following system in place-
- Matching
- Registration
- Clearing
- Clearing limits
- Notation

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- Margining
- Price limits
- Position limits
- Clearing house.

III. Settlement: - This stage has following system followed as follows-
- Marking to market
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.



















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Chapter 6

How to invest in a Commodity Market?

With whom investor can transact a business?
An investor can transact a business with the approved clearing member of previously
mentioned Commodity Exchanges. The investor can ask for the details from the
Commodity Exchanges about the list of approved members.

What is Identity Proof?
When investor approaches Clearing Member, the member will ask for identity proof.
For which Xerox copy of any one of the following can be given
a) PAN card Number
b) Driving License
c) Vote ID
d) Passport

What statements should be given for Bank Proof?
The front page of Bank Pass Book and a canceled cheque of a concerned bank.
Otherwise the Bank Statement containing details can be given.

What are the particulars to be given for address proof?
In order to ascertain the address of investor, the clearing member will insist on
Xerox copy of Ration card or the Pass Book/ Bank Statement where the address of
investor is given.

What are the other forms to be signed by the investor?
The clearing member will ask the client to sign
a) Know your client form
b) Risk Discloser Document

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The above things are only procedure in character and the risk involved and only
after understanding the business, he wants to transact business.

What aspects should be considered while selecting a commodity broker?
While selecting a commodity broker investor should ideally keep certain aspects
in mind to ensure that they are not being missed in any which way. These factors
include
Net worth of the broker of brokerage firm.
The clientele.
The number of franchises/branches.
The market credibility.
The references.
The kind of service provided- back office functioning being most important.
Credit facility.
The research team.
These are amongst the most important factors to calculate the credibility of
commodity broker.

Broker:-
The Broker is essentially a person of firm that liaisons between individual traders and
the commodity exchange. In other words the Commodity Broker is the member of
Commodity Exchange, having direct connection with the exchange to carry out all
trades legally. He is also known as the authorized dealer.

How to become a Commodity Trader/Broker of Commodity Exchange?
To become a commodity trader one needs to complete certain legal and binding
obligations. There is routine process followed, which is stated by a unit of Government
that lays down the laws and acts with regards to commodity trading. A broker of
Commodities is also required to meet certain obligations to gain such a membership in
exchange.
To become a member of Commodity Exchange the broker of brokerage firm
should have net worth amounting to Rs. 50 Lakh. This sum has been determined by
Multi Commodity Exchange.

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How to become a Member of Commodity Exchange?
To become member of Commodity Exchange the person should comply with
the following Eligibility Criteria.
1. He should be Citizen of India.
2. He should have completed 21 years of his age.
3. He should be Graduate or having equivalent qualification.
4. He should not be bankrupt.
5. He has not been debarred from trading in Commodities by statutory/regulatory
authority,
There are following three types of Memberships of Commodity Exchanges.

Trading-cum-Clearing Member (TCM):-
A TCM is entitled to trade on his own account as well as on account of his clients,
and clear and settle trades himself. A sole proprietor, Partnership firm, a joint Hindu
Undivided Family (HUF), a corporate entity, a cooperative society, a public sector
organization or any other Government or non-Government entity can become a TCM.
There are two types of TCM, TCM-1 and TCM-2. TCM-1 refers to
transferable non-deposit based membership and TCM-2 refers to non-transferable
deposit based membership.
A person desired to register as TCM is required to submit an application as
per the format prescribed under the business rules, along with all enclosures, fee and
other documents specified therein. He is required to go through interview by
Membership Admission Committee and committee is also empowered to frame rules or
criteria relating to selection or rejection of a member.

Institutional Trading-cum-clearing Member (ITCM):-
Only an Institution/ Corporate can be admitted by the Exchange as a member,
conferring upon them the right to trade and clear through the clearing house of
exchange as an Institutional Trading-cum-clearing Member (ITCM). The member may
be allowed to make deals for himself as well as on behalf of his clients and clear and
settle such deals. ITCMs can also appoint sub-brokers, authorized persons and Trading
Members who would be registered as trading members.


23 | P a g e

Professional Clearing Member (PCM):-
A PCM entitled to clear and settle trades executed by other members of the
exchange. A corporate entity and an institution only can apply for PCM. The member
would be allowed to clear and settle trades of such members of the Exchange who
choose to clear and settle their trades through such PCM.


Membership Details for NCDEX:-
1


Trading-cum-clearing Member: - TCM
Sr.
No.
Particulars NCDEX: TCM
1
Interest Free Cash
Security Deposit
15.00 Lakhs
2
Collateral Security
Deposit
15.00 Lakhs
3 Admission Fee 5.00 Lakhs
4
Annual Membership
Fees
0.50 Lakhs
5
Advance Minimum
Transaction Charges
0.50 Lakhs
6 Net worth Requirement 50.00 Lakhs

Professional Clearing Membership: - PCM
Sr.
No.
Particulars NCDEX: PCM
1
Interest Free Cash
25.00 Lakhs

1
www.ncdex.com

24 | P a g e

Security Deposit
2
Collateral Security
Deposit

25.00 Lakhs
3
Annual Subscription
Charges
1.00 Lakhs
4
Advance Minimum
Transaction Charges
1.00 Lakhs
5 Net worth Requirement 5000.00 Lakhs





Membership Details for MCX:-
2






2
MCX Certified Commodity Professional Reference Material
Categor
y
Admissio
n
Fees
Initial
Security
Deposit
Annual
Subscription
Net worth Criteria
Corporate Partnership Individual
TCM-1
Rs. 10
Lakhs
Rs. 15
Lakhs
Rs 50,000
Rs 50
Lakhs
Rs. 50 Lakhs
Rs. 50
Lakhs
TCM-2
Rs. 5
Lakhs
Rs. 50
Lakhs
Rs 50,000
Rs. 50
Lakhs
Rs. 50 Lakhs
Rs. 50
Lakhs
ITCM
Rs. 10
Lakhs
Rs. 50
Lakhs
Rs 50,000
Rs. 50
Lakhs
N.A. N.A.
PCM Nil
Rs. 50
Lakhs
Rs 1,00,000
Rs.
5Crores
N.A. N.A.

25 | P a g e

Chapter 7

Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India:-
India is among top 5 producers of most of the Commodities, in addition to being a
major consumer of bullion and energy products. Agriculture contributes about 22% GDP
of Indian economy. It employees around 57% of the labor force on total of 163 million
hectors of land Agriculture sector is an important factor in achieving a GDP growth of 8-
10%. All this indicates that India can be promoted as a major centre for trading of
commodity derivatives.

Trends in volume contribution on the three National Exchanges:-

Pattern on Multi Commodity Exchange (MCX):-
MCX is currently largest commodity exchange in the country in terms of trade
volumes, further it has even become the third largest in bullion and second largest in
silver future trading in the world.
Coming to trade pattern, though there are about 100 commodities traded on
MCX, only 3 or 4 commodities contribute for more than 80 percent of total trade volume.
As per recent data the largely traded commodities are Gold, Silver, Energy and base
Metals. Incidentally the futures trends of these commodities are mainly driven by
international futures prices rather than the changes in domestic demand-supply and
hence, the price signals largely reflect international scenario.
Among Agricultural commodities major volume contributors include Gur, Urad,
Mentha Oil etc. Whose market sizes are considerably small making then vulnerable to
manipulations.

Pattern on National Commodity & Derivatives Exchange (NCDEX):-
NCDEX is the second largest commodity exchange in the country after MCX.
However the major volume contributors on NCDEX are agricultural commodities. But,

26 | P a g e

most of them have common inherent problem of small market size, which is making
them vulnerable to market manipulations and over speculation. About 60 percent trade
on NCDEX comes from guar seed, chana and Urad (narrow commodities as specified
by FMC).

Pattern on National Multi Commodity Exchange (NMCE):-
NMCE is third national level futures exchange that has been largely trading in
Agricultural Commodities. Trade on NMCE had considerable proportion of commodities
with big market size as jute rubber etc. But, in subsequent period, the pattern has
changed and slowly moved towards commodities with small market size or narrow
commodities.

Analysis of volume contributions on three major national commodity exchanges
reveled the following pattern,

Major volume contributors: - Majority of trade has been concentrated in few
commodities that are

Non Agricultural Commodities (bullion, metals and energy)
Agricultural commodities with small market size (or narrow commodities) like
guar, Urad, Mentha etc.

Trade strategy:-
It appears that speculators or operators choose commodities or contracts where the
market could be influenced and extreme speculations possible.
In view of extreme volatilities, the FMC directs the exchanges to impose
restrictions on positions and raise margins on those commodities. Consequently, the
operators/speculators chose another commodity and start operating in a similar pattern.
When FMC brings restrictions on those commodities, the operators once again move to
the other commodities. Likewise, the speculators are moving from one commodity to
other (from methane to Urad to guar etc) where the market could be influenced either
individually or with a group.


27 | P a g e

Beneficiaries: - So far the beneficiaries from the current nature of trading are
Exchangers: - making profit from mounting volumes
Arbitragers
Operators

In order to understand the extent of progress the trading the trading in
Commodity Derivatives has made towards its specified objectives (price discovery and
price risk management), the current trends are juxtaposed against the specification

Specified and actual pattern of futures trade:-
3

Process Aught to be Actual
Commodities There should be large
demand for and supply of
the commodity- no
individual or a group of
persons acting in concert
should be in a position to
influence the demand or
supply, and consequently
the price substantially
Towards this, the major
Produced or consumed
Commodities in the
Country such as wheat,
rice, jute etc. and India is the
top first or second
producer of these
Commodities.

Largely Traded are

Bullion, Metals and
Commodities with small
market size (or narrow
Commodities) like guar,
Burmese Urad, Mentha etc.

Trade
Strategy
Hedging together with
Moderate speculation to
Smoothen the price
Fluctuations.
Over speculation and
Manipulation leading to wide
Fluctuations.
Beneficiaries Farmers/producers,,
Consumers and traders
Either through direct
Participation or through
So far exchangers, arbitrageurs,
Operators etc.,
Further there were instances of
Wrong price signals accruing

3
FMC & TECL research

28 | P a g e

Price signals. losses to farmers in case of
menthe, and to traders in case
Of imported pulses.
Objectives
Price Discovery Pure replication of
International trends not
Taking in account of
Domestic D-S in case of
Non-agril. Commodities
Wide fluctuations from
Over speculation and
Manipulation in case of
Largely traded agril.
commodities
Risk Management No such evidences and contrarily,
the extreme volatilities in certain
commodities are making futures
More risky for participants.

Thus it is evident that the realization of specified objectives is still a distinct
destination. It is further, evident from the nature of the commodities largely traded on
national exchanges that the factors driving the current pattern of futures trade are purely
speculative.

Reasons for prevailing trade pattern:-
No wide spread participation of all stake holders of commodity markets. The
actual benefits may be realized only when all the stake holders in commodity market
including producers, traders, consumers etc trade actively in all major commodities like
rice, wheat, cotton etc.

Some Suggestions to make futures market as a level playing field for all stake holders:-
Creation of awareness among farmers and other rural participants to use
the futures trading platform for risk mitigation.
Contract specifications should have wider coverage, so that a large number
of varieties produced across the country could be included.
Development of warehousing and facilities to use the warehouse receipt as
a financial instrument to encourage participation farmers.
Development of physical market through uniform grading and
standardization and more transparent price mechanisms.

29 | P a g e

Delivery system of exchanges is not good enough to attract investors. E.g.-
In many commodities NCDEX forces the delivery on people with long
position and when they tend to give back the delivery in next month contract
the exchange simply refuses to accept the delivery on pretext of quality
difference and also auctions the product. The traders have to take a delivery
or book losses at settlement as there are huge differences between two
contracts and also sometimes few contracts are not available for trading for
no reason at all.
Contract sizes should have an adequate range so that smaller traders can
participate and can avoid control of trading by few big parties.
Setting of state level or district level commodities trading helpdesk run by
independent organization such as reputed NGO for educating farmers.
Warehousing and logistics management structure also needs to be created
at state or area level whenever commodity production is above a certain
share of national level.
Though over 100 commodities are allowed for Derivatives trading, in
practice only a few commodities derivatives are popular for trading. Again
most of the trade takes place only on few exchanges. This problem can
possibly solved by consolidating some exchanges.
Only about 1% to 5% of total commodity derivatives traded in country are
settled in physical delivery due to insufficiencies in present warehousing
system. As good delivery system is the back bone of any Commodity trade,
warehousing problem has to be handled on a war footing.
At present there are restrictions in movement of certain goods from one
state to another. These needs to be removed so that a truly national market
could develop for commodities and derivatives.
Regulatory changes are required to bring about uniformity in Octri and sales
tax etc. VAT has been introduced in country in 2005, but, has not yet been
uniformly implemented by all states.
A difficult problem in Cash settlement of Commodities Derivatives contract is
that, under Forward Contracts Regulation Act 1952 cash settlement of
outstanding contracts at maturity is not allowed. That means outstanding
contracts at maturity should be settled in physical delivery. To avoid this
participants square off their their positions before maturity. So in practice
contracts are settled in Cash but before maturity. There is need to modify
the law to bring it closer to the wide spread practice and save participants
from unnecessary hassle.






30 | P a g e

Chapter 8

Commodities

Steel: -

General Characteristics: -
Steel is an alloy of iron and carbon, containing less than 2% carbon, 1%
manganese and small amount of silicon, phosphorus, sulphur and oxygen. Steel is most
important engineering and construction material in the world. It is most important, multi
functional and the most adaptable of materials. Steel production is 20 times higher a
compared to production of all non-ferrous metals put together.
Steel compared to other materials of its type has low production costs. The
energy required for extracting iron from ore is about 25% of what is needed for
extracting aluminum.
There are altogether about 2000 grades of steel developed of which 1500
grades are high-grade steels. The large number of grades gives steel the characteristics
of basic production material.

Categories of Steel: -
Steel market is primarily divided in to two main categories- flat and long. A flat
carbon steel product is a plate product or a (hot or cold) rolled strip product. Plate
products vary in dimensions from 10 mm to 200 mm and thin flat rolled products from 1
mm to 10 mm. Plate products are used for ship building, construction, large diameter
welded pipes and boiler applications. Thin flat products find end use applications in
automotive body panels, domestic white goods products, tin cans and the whole host
of other products from office furniture to heart pacemakers. Plates, HR coils and HR
Sheet, CR Sheet and CR coils, GP/GC (galvanized plates and coils) pipes etc. are
included in this category.
A long steel product is a road or a bar. Typical rod product are the reinforcing
rods made from sponge iron for concrete, ingots, billets, engineering products, gears,

31 | P a g e

tools, etc. Wiredrawn products and seamless pipes are also part of the long products
group. Bars, rods, structures, railway materials, etc are included in this category.
Sponge Iron/ Direct reduced iron (DRI): This is a high quality product
produced by reducing iron ore in a solid state and is primarily used as an iron input in
electric arc furnace (EAF) steel making process. This industry is an integral part of the
steel sector. India is one of the leading countries in terms of sponge iron production.
There are a number of coal-based sponge iron/DRI plants (in the eastern and central
region) and also three natural gas based plants (in western part of the country) in the
country.

Global Scenario: -
The total output of the word crude steel in 2006 stood at 945 million tons,
resulting in a growth of 6.7% over the previous year.
China is the words largest crude steel producer in the year 2006 with around
220.12 million tons of steel production, followed by Japan and USA. USA was largest
importer of steel products, both finished and semi finished, in 2005, followed by China
and Germany.
The words largest exporter of semi-finished and finished steel was Japan in 2005,
followed by Russia and Ukraine.
China is the largest consumer now and consumption of steel by China is
estimated to increase by 12-13% in 2007.

Indian Scenario: -
India is the 8
th
largest producer of the steel with an annual production of 36.193
million tons, while the consumption is around 30 million tons.
Iron & steel can be freely exported and imported from India. India is a net
exporter of steel.
The Government of India has taken a number of policy measures, such as
removal of iron & steel industry from the list of industries reserved for public sector,
deregulation of price and distribution of iron & steel and lowering import duty on capital
goods and raw materials, since liberalization for the growth and development of Indian
iron & steel industry.

32 | P a g e

After liberalization India has seen huge scale addition to its steel making
capacity. The country faces shortage of iron and steel materials.

Factors Influencing
Demand & Supply of
Steel Long and Steel
Flat: -
The demand for
steel is dependent on the overall health of the economy and the in fracture development
activities being undertaken. The steel prices in the Indian market primarily depend on
the domestic demand and supply conditions, and international prices. Government and
different producer and consumer associations regularly monitor steel prices.
The duty imposed on import of steel and its fractions also have an impact on
steel prices. The price trend in steel in Indian markets has been a function of Worlds
economic activity. Prices of input materials of iron and steel such as power tariff, fright
rates and coal prices, also contribute to the rise in the input costs for steel making.
Monthly Variations in Steel Prices from Feb 2005- Dec 2006: -
4


Contract specifications of Steel Flat
Symbol STEELFLAT
Description STEELFLATMMMYY
Trading Period Mondays through Saturdays
Trading session Monday to Friday:
1
st
session: 10.00 am to 5.00 pm
2
nd
session: 5.30 pm to 8.00 pm
Saturday: 10.00 am to 2.00 pm
No. of contracts a year 12
Contact Duration 4 months
Trading
Trading unit 25 MT
Price Quote Rs./ton, Ex-Taloj Kalambo
(excluding execise duty and sales tax).
Maximum order size 200 MT
Tick size (minimum
Price movement)
Rs. 10
Daily price limits 4%

4
MCX certified Commodity Professional Reference Material.
Percentage Change > 5% 2-5% < 2%
No. of Times
Ingots- Mandi 2 10 10
HRC 2.5 Mumbai 8 3 11
HRC 2.0 Imported 12 4 6
HRC fob- Europe 5 9 8

33 | P a g e

Initial margin 5%
Special margin In case of additional volatility, a special margin
of 2% or such other percentage, as deemed fit,
will be imposed immediately on, both buy and
sale side in respect of all outstanding position,
which will remain in force of next three days,
after which the special margin will be relaxed.
Maximum Allowable Open
Position
For individual clients: 1,00,000 MT
For a member collectively for all clients:
25% of open market position.
Delivery
Delivery unit 25 MT with tolerance limit
Between 23.5 MT to 26.5 MT
Delivery Center(s) Warehouses at Taloja/ Kalamboli
Quality Specifications
HR coil conforming to the following specification:

Thickness 2 mm
Width either 1250mm or 910 mm at sellers option.
It should confirm to IS 11513 Grade D/SAE 1008 (International equivalent)

Delivery is acceptable only in coil form.




Contract specifications of Steel Long
Symbol STEELLONG
Description STEELLONGMMMYY
Trading Period Mondays through Saturdays
Trading session Monday to Friday:
1
st
session: 10.00 am to 5.00 pm
2
nd
session: 5.30 pm to 8.00 pm
Saturday: 10.00 am to 2.00 pm
No. of contracts a year 12
Contact Duration 4 months
Trading
Trading unit 15 MT
Price Quote Rs./ton, Ex- Mandi Gobindgarh (including excise
duty but excluding sales tax).
Maximum order size 300 MT
Tick size (minimum
Price movement)
Rs. 10

34 | P a g e

Daily price limits 4%
Initial margin 5%
Special margin In case of additional volatility, a special margin
of 2% or such other percentage, as deemed fit,
will be imposed immediately on, both buy and
sale side in respect of all outstanding position,
which will remain in force of next three days,
after which the special margin will be relaxed.
Maximum Allowable Open
Position
For individual clients: 1,00,000 MT
For a member collectively for all clients:
25% of open market position.
Delivery
Delivery unit 15 MT with tolerance limit
Between 13.5 MT to 16.5 MT
Delivery Center(s) Warehouses at Mandi Gobindgarh
Quality Specifications
Mild steels ingots 3 * 4 inch
Carbon composition: Below 0.25%
Manganese: Above 0.45%
Material should be physically sound. It should have no hollowness, no piping
no rising. Its surface should be plain.



Quality Specifications: -

Sponge Iron Futures
Sponge Iron Lumps

Chemical Properties (only Magnetic Portion): -

Degree of Metallization: 88 +/- 2%.
Total Iron: 91%.
Carbon: 0.2% to 0.3%.
Sulphur: 0.05% Max.
Phosphorus: 0.06 Max.
Sio2 + Al2o3: 6% or Max.

35 | P a g e

Char & other process Contaminants: 1% Max.
Size: 3 to 20 mm
Undersize arising during tailings (-3mm): 5% Max

Steel Flat: -
HR Coil confirming to the following specification: -
Thickness 2mm
Width either 1250 mm or 910 mm at sellers option.
It should confirm to IS 11513 Grade D/ SALE 1008 (international equivalent)
Delivery is acceptable only in coil form.
Steel Long (Bhavnagar): -
Mild steel ingots 3 * 4 inch.
Carbon composition: Below 0.25%
Manganese: Above 0.45%
Material should be physically sound. It should have no hollowness, no piping and
no rising. Its surface should be plain.
Steel Long (Govindgarh): -
Mild steel ingots 3 * 4 inch.
Carbon composition: Below 0.25%
Manganese: Above 0.45%
Material should be physically sound. It should have no hollowness, no piping and
no rising. Its surface should be plain.


WHEAT
Wheat is cereal grain and consumed worldwide. Wheat is more popular than
any other cereal grain for use in baked goods. Its popularity stems from the gluten that

36 | P a g e

forms when lour is mixes with water. Wheat is the most widely grown cereal grain in the
world.

Global and Indian Scenario: -
The world wheat production in the recent years has been observed to be
hovering between 555 million tons to 625 million tons a year. The biggest cultivators of
wheat are EU 25, China, India, USA, Russia, Australia, Canada, Pakistan, Turkey and
Argentina. EU 25, China, India and US are the four largest producers account for
around 60% of total global production.
Worlds wheat consumption is continuously growing with growth in a
population, as it is one of the major staple foods across the world. The major consuming
countries of wheat are EU, China, India, Russia, USA and Pakistan. India has largest
area in the world under wheat. However, in terms of production, India is second largest
behind China. In India, Wheat is sown during October to December and harvested
during March to May. The wheat marketing season in India is assumed to begin from
April every year.
The major wheat producing states in India are Utter Pradesh, Punjab, Haryana,
Madhya Pradesh, Rajastan and Bihar. Which together account for around 93% of total
production. In terms of productivity, Punjab stands first followed by Haryana, Rajastan,
UP, Gujarat, Bihar and MP. Indian wheat is largely soft/medium hard, medium protein,
bread wheat. India is also produces around 1.5 million tons of durum wheat, mostly in
central and western India, which is not segregated and marketed separately. India
consumes around 72-74 million tons of Wheat every year.
There are around 1000 large flourmills in India, with a milling capacity of
around 15 million tons. The total procurement of wheat by Government agencies during
last 15 years from 8 to 20 million tons, accounting for only 15-20% of the total
production. India exported around 5 m illion tons subsidized by Government in 2004-05,

37 | P a g e

as a result of surplus stock. Recently Govt. took decision to import wheat in view of,
declining stocks and increasing demand.

Key market moving Factors: -
Price tends to be lower as harvesting progresses and produce starts coming in to
the market. At the time sowing and before harvesting price tend to rise in a view of tight
supply situation. Weather has profound influence on wheat production. Temperature
plays crucial role towards maturity of wheat and productivity.
Change in Minimum Support Price (MSP) by Govt. and the stock available with
Food corporation of India and the release from official stock influence of the price.
Though, international trade is limited, the ups and downs in the production and
consumption at all the major/minor producing and consuming nation dose influence the
long term price trend.

Contract specifications of Wheat
Contract Period Five Months
Trading Period Mondays through Saturdays
Trading session Monday to Friday:
10.00 am to 5.00 pm
Saturday:
10.00 am to 2.00 pm
Trading
Trading unit 10 MT
Quotation based value 1 Quintal
Maximum order size 500 MT
Tick size (minimum
Price movement)
10 Paise
Price Quotation Ex-warehouse Delhi (including all taxes, levies
and sales tax/ VAT, as the case may be)
Daily price limits 4%
Initial margin 5%
Special margin In case of additional volatility, a special margin
at such other percentage, as deemed fit will be
imposed immediately on, both buy and sale side
in respect of all outstanding position, which will

38 | P a g e

remain in force of next 2 days, after which the
special margin will be relaxed.
Maximum Allowable Open
Position
Clientwise- 20000 MT, Member wise-80000 MT
or 20% of open position, which ever is higher.
Delivery
Delivery unit 10 MT with tolerance limit of 5%

Delivery Margin 25%
Delivery Center(s) Warehouses at Delhi
Quality Specifications
Wheat of Standard Mill variety confirming to the following quality standerds
will be delieverable. The material will be tested using a 3mm sieve.



Defects
(a) Foreign Matter
(organic/inorganic)
2.0% (Max)
(b) Damaged Kernels 2.00 (Max) provided that infestation damaged not
to exceed 1 per 100 kernels.
(c) Shrunken Shriveled
& broken grains
3.00% (Max)
Total defects (a+b+c)
Acceptable up to
Rejected total defect is
Below 6%
8% With rebate on 1:1 basis
Above 8%
Teat weight up to 76 kg/hl 76kg/hl. Min. acceptable with rebate of 150 grams
per kg/hl or pro-rata variance in hector liter weight
deducted per quintal Below 74 kg/hl
Rejected Below 74 kg/hl
Moisture
Acceptable
Reject able
11%
(Max)13% With rebate 1:1
Above 13%


39 | P a g e


Quality Specifications: -

Wheat of Standard Mill variety conforming to the following quality standards will be
deliverable; The material will be tested by using 3 mm sieve.
Defects: -
1. Foreign Matter (organic/inorganic)
2. Damaged Kernel

3. Sunken, Shriveled and
Broken grains
Total Defects (a+b+c)
Acceptable
Rejected if total defects

2.0% (maximum)
2.0% (maximum) provided that
infestation damaged not exceed 1
Per 100 kernels.
3.00% (maximum)
Below 6%
Up to 8% with rebate on 1:1 basis
Above 8%
Total Weight
Up to 74 kg/hl




Below 74 kg/hl
76 kg/hl. (minimum)
Acceptable with rebate of 150 grams per
kg/hl or pro-rata variance in hector liter
weight deducted per quintal weight
delivered.
Rejected
Moisture
Acceptable
Reject able
11% (maximum)
Up to 13% with rebate 1:1
Above 135
Packing Packing should be in B Twill once used
100kg jute bags, the tare weight
deduction per bag for net weight
calculation shall be 1 kg per quintal of
gross weight.









40 | P a g e

Chapter-9
ANNEXURE

Terms and Definitions related to Commodity Market: -
Accruals:- Commodities on hand ready for shipment, storage and manufacture

Arbitragers: - Arbitragers are interested in making purchase and sale in different
markets at the same time to profit from price discrepancy between the two
markets.

At the Market: - An order to buy or sell at the best price possible at the time an
order reaches the trading pit.

Basis: - Basis is the difference between the cash price of an asset and futures
price of the underlying asset. Basis can be negative or positive depending on the
prices prevailing in the cash and futures.

Basis grade: - Specific grade or grades named in the exchanges future contract.
The other grades deliverable are subject to price of underlying futures

Bear: - A person who expects prices to go lower.

Bid: - A bid subject to immediate acceptance made on the floor of exchange to
buy a definite number of futures contracts at a specific price.

Breaking: - A quick decline in price.

Bulging: - A quick increase in price.

Bull: - A person who expects prices to go higher.

Buy on Close: - To buy at the end of trading session at the price within the
closing range.


41 | P a g e

Buy on opening: - To buy at the beginning of trading session at a price within
the opening range.

Call: - An option that gives the buyer the right to a long position in the underlying
futures at a specific price, the call writer (seller) may be assigned a short position
in the underlying futures if the buyer exercises the call.

Cash commodity: - The actual physical product on which a futures contract is
based. This product can include agricultural commodities, financial instruments
and the cash equivalent of index futures.

Close: - The period at the end of trading session officially designated by
exchange during which all transactions are considered made at the close.

Closing price: - The price (or price range) recorded during the period
designated by the exchange as the official close.

Commission house: - A concern that buys and sells actual commodities or
futures contract for the accounts of customers.

Consumption Commodity: - Consumption commodities are held mainly for
consumption purpose. E.g. Oil, steel

Cover: - The cancellation of the short position in any futures contract buys the
purchase of an equal quantity of the same futures contract.

Cross hedge: - When a cash commodity is hedged by using futures contract of
other commodity.

Day orders: - Orders at a limited price which are understood to be good for the
day unless expressly designated as an open order or good till canceled order.

Delivery: - The tender and receipt of actual commodity, or in case of agriculture
commodities, warehouse receipts covering such commodity, in settlement of
futures contract. Some contracts settle in cash (cash delivery). In which case
open positions are marked to market on last day of contract based on cash
market close.

42 | P a g e


Delivery month: - Specified month within which delivery may be made under the
terms of futures contract.

Delivery notice: - A notice for a clearing members intention to deliver a stated
quantity of commodity in settlement of a short futures position.

Derivatives: - These are financial contracts, which derive their value from an
underlying asset. (Underlying assets can be equity, commodity, foreign
exchange, interest rates, real estate or any other asset.) Four types of derivatives
are trades forward, futures, options and swaps. Derivatives can be traded either
in an exchange or over the counter.

Differentials: - The premium paid for grades batter than the basis grade and the
discounts allowed for the grades. These differentials are fixed by the contract
terms on most exchanges.

Exchange: - Central market place for buyers and sellers. Standardized contracts
ensure that the prices mean the same to everyone in the market. The prices in
an exchange are determined in the form of a continuous auction by members
who are acting on behalf of their clients, companies or themselves.

Forward contract: - It is an agreement between two parties to buy or sell an
asset at a future date for price agreed upon while signing agreement. Forward
contract is not traded on an exchange. This is oldest form of derivative contract.
It is traded in OTC Market. Not on an exchange. Size of forward contract is
customized as per the terms of agreement between buyer and seller. The
contract price of forward contract is not transparent, as it is not publicly disclosed.
Here valuation of open position is not calculated on a daily basis and there is no
requirement of MTM. Liquidity is the measure of frequency of trades that occur in
a particular commodity forward contract is less liquid due to its customized
nature. In forward contracts, counter- party risk is high due to customized &
bilateral nature of the transaction. Forward contract is not regulated by any
exchange. Forward contract is generally settled by physical delivery. In this case
delivery is carried out at delivery center specified in the customized bilateral
agreement.

Futures Contract:- It is an agreement between two parties to buy or sell a
specified and standardized quantity and quality of an asset at certain time in the
future at price agreed upon at the time of entering in to contract on the futures

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exchange. It is entered on centralized trading platform of exchange. It is
standardized in terms of quantity as specified by exchange. Contract price of
futures contract is transparent as it is available on centralized trading screen of
the exchange. Here valuation of Mark-to-Mark position is calculated as per the
official closing price on daily basis and MTM margin requirement exists. Futures
contract is more liquid as it is traded on the exchange. In futures contracts the
clearing-house becomes the counter party to each transaction, which is called
novation. Therefore, counter party risk is almost eliminated. A regulatory
authority and the exchange regulate futures contract. Futures contract is
generally cash settled but option of physical settlement is available. Delivery
tendered in case of futures contract should be of standard quantity and quality as
specified by the exchange.

Futures commission merchant: - A broker who is permitted to accept the
orders to buy and sale futures contracts for the consumers.

Futures Funds: - Usually limited partnerships for investors who prefer to
participate in the futures market by buying shares in a fund managed by
professional traders or commodity trading advisors.

Futures Market:-It facilitates buying and selling of standardized contractual
agreements (for future delivery) of underlying asset as the specific commodity
and not the physical commodity itself. The formulation of futures contract is very
specific regarding the quality of the commodity, the quantity to be delivered and
date for delivery. However it does not involve immediate transfer of ownership of
commodity, unless resulting in delivery. Thus, in futures markets, commodities
can be bought or sold irrespective of whether one has possession of the
underlying commodity or not. The futures market trade in futures contracts
primarily for the purpose of risk management that is hedging on commodity
stocks or forward buyers and sellers. Most of these contracts are squared off
before maturity and rarely end in deliveries.

Hedging: - Means taking a position in futures market that is opposite to position
in the physical market with the objective of reducing or limiting risk associated
with price.

In the money: - In call options when strike price is below the price of underlying
futures. In put options, when the strike price is above the underlying futures. In-
the-money options are the most expensive options because the premium
includes intrinsic value.


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Index Futures: - Futures contracts based on indexes such as the S & P 500 or
Value Line Index. These are the cash settlement contracts.

Investment Commodities: - An investment commodity is generally held for
investment purpose. e.g. Gold, Silver

Limit: - The maximum daily price change above or below the price close in a
specific futures market. Trading limits may be changed during periods of
unusually high market activity.

Limit order: - An order given to a broker by a customer who has some
restrictions upon its execution, such as price or time.

Liquidation: - A transaction made in reducing or closing out a long or short
position, but more often used by the trade to mean a reduction or closing out of
long position.

Local: - Independent trader who trades his/her own money on the floor of the
exchanges. Some local act as a brokers as well, but are subject to certain rules
that protect customer orders.

Long: - (1) The buying side of an open futures contract or futures option; (2) a
trader whose net position in the futures or options market shows an excess of
open purchases over open sales.

Margin: - Cash or equivalent posted as guarantee of fulfillment of a futures
contract (not a down payment).

Margin call: - Demand for additional funds or equivalent because of adverse
price movement or some other contingency.

Market to Market: - The practice of crediting or debating a traders account
based on daily closing prices of the futures contracts he is long or short.

Market order: - An order for immediate execution at the best available price.


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Nearby: - The futures contract closest to expiration.

Net position: - The difference between the open contracts long and the open
contracts short held in any commodity by any individual or group.

Offer: - An offer indicating willingness to sell at a given price (opposite of bid).

On opening: - A term used to specify execution of an order during the opening.

Open contracts: - Contracts which have been brought or sold without the
transaction having been completed by subsequent sale, repurchase or actual
delivery or receipt of commodity.

Open interest: - The number of open contracts. It refers to unliquidated
purchases or sales and never to their combined total.

Option: - It gives right but not the obligation to the option owner, to buy an
underlying asset at specific price at specific time in the future.

Out-of-the money: - Option calls with the strike prices above the price of the
underlying futures, and puts with strike prices below the price of the underlying
futures.

Over the counter: - It is alternative trading platform, linked to network of dealers
who do not physically meet but instead communicates through a network of
phones & computers.

Pit: - An octagonal platform on the trading floor of an exchange, consisting of
steps upon which traders and brokers stand while trading (if circular called ring).

Point: - The minimum unit in which changes in futures prices may be expressed
(minimum price fluctuation may be in multiples of points).

Position: - An interest in the market in the form of open commodities.


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Premium: - The amount by which a given futures contracts price or commoditys
quality exceeds that of another contract or commodity (opposite of discount). In
options, the price of a call or put, which the buyer initially pays to the option writer
(seller).

Price limit: - The maximum fluctuation in price of futures contract permitted
during one trading session, as fixed by the rules of a contract market.

Purchase and sales statement: - A statement sent by FMC to a customer when
his futures option has been reduced or closed out (also called P and S)

Put: - In options the buyer of a put has the right to continue a short position in an
underlying futures contract at the strike price until the option expires; the seller
(writer) of the put obligates himself to take a long position in the futures at the
strike price if the buyer exercises his put.

Range: - The difference between high and low price of the futures contract
during a given period.

Ratio hedging: - Hedging a cash position with futures on a less or more than
one-for-one basis.

Reaction: - The downward tendency of a commodity after an advance.

Round turn: - The execution of the same customer of a purchase transaction
and a sales transaction which offset each other.

Round turn commission: - The cost to the customer for executing a futures
contract which is charged only when the position is liquidated.

Scalping: - For floor traders, the practice of trading in and out of contracts
through out the trading day in a hopes for making a series of small profits.

Settlement price: - The official daily closing price of futures contract, set by the
exchange for the purpose of setting margins accounts.


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Short: - (1) The selling of an option futures contract. (2) A trader whose net
position in the futures market shows an excess of open sales over open
purchases.


Speculator: - Speculator is an additional buyer of the commodities whenever it
seems that market prices are lower than they should be.

Spot Markets:-Here commodities are physically brought or sold on a negotiated
basis.

Spot price: - The price at which the spot or cash commodity is selling on the
cash or spot market.

Spread: - Spread is the difference in prices of two futures contracts.

Striking price: - In options, the price at which a futures position will be
established if the buyer exercises (also called strike or exercise price).

Swap: - It is an agreement between two parties to exchange different streams of
cash flows in future according to predetermined terms.

Technical analysis (charting): - In price forecasting, the use of charts and other
devices to analyze price-change patters and changes in volume and open
interest to predict future market trends (opposite of fundamental analysis).

Time value: - In options the value of premium is based on the amount of time left
before the contract expires and the volatility of the underlying futures contract.
Time value represents the portion of the premium in excess of intrinsic value.
Time value diminishes as the expiration of the options draws near and/or if the
underlying futures become less volatile.

Volume of trading (or sales): - A simple addition of successive futures
transactions (a transaction consists of a purchase and matching sale).

Writer: - A sealer of an option who collects the premium payment from the buyer.

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Summary


This decade is termed as Decade of Commodities. Prices of all
commodities are heading northwards due to rapid increase in demand for
commodities. Developing countries like China are voraciously consuming the
commodities. Thats why globally commodity market is bigger than the stock
market.
India is one of the top producers of large number of commodities and
also has a long history of trading in commodities and related derivatives. The
Commodities Derivatives market has seen ups and downs, but seems to have
finally arrived now. The market has made enormous progress in terms of
Technology, transparency and trading activity. Interestingly, this has happened
only after the Government protection was removed from a number of
Commodities, and market force was allowed to play their role. This should act
as a major lesson for policy makers in developing countries, that pricing and
price risk management should be left to the market forces rather than trying to
achieve these through administered price mechanisms. The management of
price risk is going to assume even greater importance in future with the
promotion of free trade and removal of trade barriers in the world.
As majority of Indian investors are not aware of organized
commodity market; their perception about is of risky to very risky investment.
Many of them have wrong impression about commodity market in their minds. It
makes them specious towards commodity market. Concerned authorities have
to take initiative to make commodity trading process easy and simple. Along
with Government efforts NGOs should come forward to educate the people
about commodity markets and to encourage them to invest in to it. There is no
doubt that in near future commodity market will become Hot spot for Indian
farmers rather than spot market. And producers, traders as well as consumers
will be benefited from it. But for this to happen one has to take initiative to
standardize and popularize the Commodity Market.




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BIBLIOGRAPHY

Trading Commodities and Financial Futures: A Step by Step guide to
Mastering the Market, 3
rd
Edition by George Kleinman

Options, Futures and Other Derivatives by Johan C. Hull

http://commodities.in

http://finance.indiamart.com/markets/commodity/

http://www.commoditiescontrol.com

http://www.mcxindia.com

http://www.ncdex.com

MCX Certified Commodity Professional Reference Material

Business World (15
th
September 2003)

Business World (4
th
December 2006)

http://investmentz.co.in

http://trade.indiainfoline.com

http://www.finance.indiamart.com