Commotity Market

WORDL WIDE COMMODITY MARKET
INTRODUCTION
Many people have become very rich in the commodity markets. It is one of a few investment
areas where an individual with limited capital can make extraordinary profits in a relatively short
period of time. For example, Richard Dennis borrowed $1,600 and turned it into a $200 million
fortune in about ten years.
Nevertheless, because most people lose money, commodity trading has a bad reputation as being
too risky for the average individual. The truth is that commodity trading is only as risky as
you want to make it.
Those who treat trading as a get-rich-quick scheme are likely to lose because they have to take
big risks.If you act prudently, treat your trading like a business instead of a giant gambling casino
and are willing to settle for a reasonable return, the risks are acceptable. The probability of
success is excellent.
The process of trading commodities is also known as futures trading. Unlike other kinds of
investments, such as stocks and bonds, when you trade futures, you do not actually buy anything
or own anything. You are speculating on the future direction of the price in the commodity you
are trading. This is like a bet on future price direction. The terms "buy" and "sell" merely indicate
the direction you expect future prices will take.

If, for instance, you were speculating in corn, you would buy a futures contract if you thought the
price would be going up in the future. You would sell a futures contract if you thought the price
would go down. For every trade, there is always a buyer and a seller. Neither person has to own
any corn to participate. He must only deposit sufficient capital with a brokerage firm to insure
that he will be able to pay the losses if his trades lose money.
In addition to speculators, both the commodity's commercial producers and commercial

consumers also participate. The principal economic purpose of the futures markets is for these
commercial participants to eliminate their risk from changing prices.
On one side of a transaction may be a producer like a farmer. He has a field full of corn growing
on his farm. It won't be ready for harvest for another three months. If he is worried about the
price going down during that time, he can sell futures contracts equivalent to the size of his crop
and deliver his corn to fulfill his obligation under the contract. Regardless of how the price of
corn changes in the three monthsuntil his crop will be ready for delivery, he is guaranteed to be
paid the current price.
On the other side of the transaction might be a producer such as a cereal manufacturer who needs
to buylots of corn. The manufacturer, such as Kellogg, may be concerned that in the next three
months theprice of corn will go up, and it will have to pay more than the current price. To protect
against this, Kelloggcan buy futures contracts at the current price. In three months Kellogg can
fulfill its obligation under thecontracts by taking delivery of the corn. This guarantees that

regardless of how the price moves in the next three months, Kellogg will pay no more than
the current price for its corn.
In addition to agricultural commodities, there are futures for financial instruments and
intangibles such as currencies, bonds and stock market indexes. Each futures market has
producers and consumers who need to hedge their risk from future price changes. The
speculators, who do not actually deal in the physical commodities, are there to provide liquidity.
This maintains an orderly market where price changes from one trade to the next are small.
Rather than taking delivery or making delivery, the speculator merely offsets his position at some
time before the date set for future delivery. If price has moved in the right direction, he will
profit. If not, he will lose.
What is Commodity?
The word commodity came into use in English in the 15th century, it came from the French,
"commodite", to benefit or profit. Going further back, the French word derived from the Latin
commoditatem (nominative commoditas) meaning "fitness, adaptation,". The Latin root
Commodity meant variously "appropriate","proper measure, time or condition" and advantage, or
benefit.
A commodity is something for which there is demand, but which is supplied without qualitative
differentiation across a market. It is a product that is the same no matter who produces it, such as
petroleum, notebook paper, or milk.
In other words, copper is copper. The price of copper is universal, and fluctuates daily based on
global supply and demand. Sharekhan customers have the advantage of trading in all the market
segments together in the same window, aswe understand the need of transactions to be executed
with high speed andreduced time. At the same time, they have the advantage of having all
AdvisoryServices for Life Insurance, General Insurance, Mutual Funds and IPOs
also.Sharekhan is a customer focused financial services organization providing arange of
investment solutions to our customers. We work with clients to meettheir overall investment
objectives and achieve their financial goals. Our clientshave the opportunity to get personalized
services depending on their investment profiles. Our personalized approach enables clients to
achieve their TotalInvestment Objectives.Key product offerings are as follows The word

Commodities came into use in English in the 15th century, it camefrom the French,
"commodities", to benefit or profit. Going further back, theFrench word derived from the Latin
commoditize
Stereos,
on
the
other
hand,
have
many
levels
of
quality
coffee
beans , soybeans ,aluminum, rice ,wheat,gold and silver .Commoditization occurs as a goods or
services market loses differentiation across its supply base, often by the diffusion of the
intellectual capital necessaryto acquire or produce it efficiently. As such, goods that formerly
carried
premiummargins
for market participants
have
become
commodities,
such
asgeneric pharmaceuticals andsilicon chips.
15COMMODITY MARKET IN INDIA

India, a commodity based economy where two-third of the one billion population depends on
agricultural commodities, surprisingly has anunder developed commodity market.
The vast geographical extent of India andher huge population is aptly complemented.
The broadest classification of theIndian Market can be made in terms of the commodity market
and the bond market.
India Commodity Market can be subdivided into the following two categories:
Wholesale Market
Retail Market
The traditional wholesale market in India dealt with whole sellers whobought goods from the
farmers and manufacturers and then sold them to the re-tailers after making a profit in the
process. It was the retailers who finally sold thegoods to the consumers. With the passage of time the
importance of whole sell-ers began to decline due to various reasons. In recent years, the extent of
the re-tail market (both organized and unorganized) has evolved in leaps and bounds. Infact, the
success stories of the commodity market of India in recent years hasmainly centered on the
growth generated by the Retail Sector. Almost everycommodity under the sun both agricultural
and industrial is now being providedat well distributed retail outlets throughout the country.
Moreover, the retail outlets belong to both the organized as well as the unor-ganized sector.

The unorganized retail outlets of the yesteryears consist of small shopowners who are price takers
where consumers face a highly competitiveprice structure.
The organized sectors on the other hand are owned by various businesshouses like Pantaloons,
Reliance, Tata and others. Such markets are usuallyselling a wide range of articles agricultural
and manufactured, edible andinedible, perishable and durable.
Modern marketing strategies and other techniques of sales promotionenable such markets to
draw customers from every section of the society. How-ever the growth of such markets has still
centered on the urban areas primarilydue to infrastructural limitations. Considering the present
growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000
billion in the year 2010. Demand for commodities is likely to become four times by 2012than
what it presently is.
COMMODITIES MARKET WORLD WIDE PICTURE
Commodities unlike stock/share, which mostly have an impact on thecountry in which it is being
listed or traded, can leave a long lastingimpression in almost all the countries in which it
is traded. A group of traders can never be in command of influencing a large price fluctuationsin
commodities, as the prices are not determined by that particular sect/ orgroup but by other factors
i.e. international demand, supply, totalproduction, consumption expected, international regulation
andinternational state of affairs etc. The cost of living index/wholesale price is determined by the
pricevariations in the commodities which are consumed by the general publicand the industries.
The inflation or deflation are mostly linked with thecommodity price instability, they have
epitomized themselves as a verysturdy force in the international state of affairs.Now almost all
type of commodities are being traded that too in a moreorganized manner, for instance CBOT
has switched over to electronictrading platform in the year 2000 and very recently it has
switched over itsclearing operations to the same mode, at NYMEX the trading takes placeboth in
Open Out Cry and Electronic Mode, at TOCOM (Tokyo CommodityExchange) the trading is
computerized and like wise all the internationalexchanges the following the suit.
History of Commodity Market in India
The history of organized commodity derivatives in India goes back to thenineteenth century
when Cotton Trade Association started futures trading in1875, 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 contractsin
Commodities all over the India. The act prohibited options trading in Goodsalong 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 act20
envisages three tire regulations:
(i)
Exchange which organizes forward tradingin commodities can regulate trading on
(ii)
day-to-day basis;
Forward Markets Commission provides regulatory oversight under the powers
(iii)
delegated to it bythe central Government.

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
17commodity groups. It also recommended strengthening Forward Markets Commission, and
certain amendments to Forward Contracts (Regulation) Act1952, particularly allowing option
trading in goods and registration of brokers with Forward Markets Commission. The
Government accepted most of these recommendations and futures trading was permitted in all
recommended commodities. It is timely decision since internationally the commodity cycle ison
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 hasexperienced an unexpected boom in terms of modern exchanges, number
of commodities allowed for derivatives trading as well as the value of futures trading in
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commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives
market was virtually non- existent, except somenegligible activities on OTC basis.In India there
are 25 recognized future exchanges, of which there are threenational 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 IndiaLimited (MCX)
Mumbai and National Multi-Commodity Exchange of IndiaLimited (NMCEIL) Ahmedabad.
There are other regional commodityexchanges situated in different parts of India
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Size of the market

The trading of commodities consists of direct physical trading and derivatives trading. The
commodities markets have seen an upturn in the volume of trading in recent years. In the five
years up to 2007, the value of global physical exports of commodities increased by 17% while
the notional value outstanding of commodity OTC derivatives increased more than 500% and
commodity derivative trading on exchanges more than 200%.The notional value outstanding of
banks OTC commodities derivatives contracts increased 27%
in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading in goldand silver.
Overall, precious metals accounted for 8% of OTC commodities derivatives trading in 2007,
down from their 55% share a decade earlier astrading in energy derivatives rose.Global physical
and derivative trading of commodities on exchanges increased more than a third in 2007 to reach
1,684million contracts. Agricultural contracts trading grew by 32% in 2007, energy29% and
industrial metals by 30%. Precious metals trading grew by 3%, with higher volume in New York
being partially offset by declining volume in Tokyo. Over 40% of commodities trading on
exchanges was conducted on US exchanges and a quarter in China. Trading on exchanges in
China and India has gained in importance in recent years due to their emergence as significant
commodities consumers and producers .
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THE EVOLUTION OF COMMODITY TRADING IN INDIA
THE BEGINNING OF COMMODITY FUTURES TRADING IN INDIA

Commodity futures markets in India have a long history. The first organized futures market
appeared in 1921, when the Cotton Exchange, which dealtin various types of cotton, was created
in Bombay. A second exchange, the Seeds Traders Association Ltd, also in Bombay was created
in 1926. Thisexchange traded oilseeds and their products like castor seeds, groundnutsand
groundnut oil.Many other exchanges followed, trading in commodities such as raw jute, jute
products, black pepper, turmeric, potatoes, sugar, food grains andsilver. Several exchanges traded
in the same commodities and some of thesehad formal trading links.A complete regulatory
framework for futures was drafted, including rules fortrading in futures, a system for the
licensing of brokers and a clearinghouse structure. Not only futures, but also options on
a number of commodities were traded on the exchanges; for example, options on cotton were
traded up to one year out, until all options were banned in 1939.
In the 1940s, forward and futures contracts as well as options wereoutlawed as part of the
governments drive to contain inflation or trading inthese contracts was made impossible through
price controls. This situation prevailed until 1952, when the government passed theForward
Contract (Regulation) Act, which controls all transferable forwardcontracts and futures up to this
day. The Act again allowed futures trade ina number of commodities (but excluded some
essential foods like sugar andfood grains).It provided that forward and futures markets should
normally be self-regulating through governing bodies of recognized associations in whichthe
13

government has the right to place representatives. During the 1960s, the central government
banned or suspended futurestrading in several commodities including cotton, raw jute, edible oil
seedsand their products. In the 1970s, futures trading in non-edible oil seeds likecastor seed and
linseed were forbidden. The reason for this crackdown infutures markets was that government
felt that these markets helped driveup prices for commodities, by giving free reign to
speculators.Restrictive measures were directed at combating speculation, which affectedthe
activities of 31 recognized associations, which were supposed toregulate trade and
commodities futures. The government policies softened somewhat in the late 1970s
when futurestrade in jaggery was allowed.
Two government appointed comities The Datwala Committee in 1966 and the Khusro
Committee in 1979 recommended the revival of futures trading in a wide range of
commodities,but little action resulted.Contracts in most commodities are actively traded for
periods up to sixmonths out and as should be the case for mature future markets, most contracts
are used for hedging purposes and not for physical trade. Thismeans that a large majority of
positions are closed out before maturity and physical delivery is relatively rare. The Indian
economy is going through a process of liberalization and isopening up to the world market.
Partly, as a result, Indian exporters are increasingly confronted with highly competitive world
markets in which theyare forced not only to work on slimmer margins but also to sell further
forwards in order not to lose markets.
14

The rupee gas becomes fully convertible for commercial purposes. Againstthis background, the
role of commodity futures market is being recognizedby the government, through the Forward
Market Commission (FMC) toassist them in this internationalization process.
15
Organizational Structure of Commodity Exchanges in India
1 In the hierarchy of Indian commodity exchanges market, the Forward Markets Commission is
a statutory body set up under the Forward Contracts (Regulation) Act, 1952. The Commission
functions under the administrative control of the Ministry of Consumer Affairs, Food & Public
Distributions, Dept. of Consumer Affairs, Government of India.
Under the Act, the Commission has following functions
To advise the Central Government in respect of recognition or withdrawal of
recognition of any association and other matters arising out of the administration of the Act.
(i)
To keep forward markets under observation and to take appropriate action in

relation to them.
(ii)
To collect and publish information regarding trading conditions in respect of

goods to which any of the provisions of the Act is made applicable including
information regarding supply, demand and prices and to submit to Central
Government periodical reports on the operation of this Act and on the
working of the forward markets relating to such goods.
(iii)
To make recommendations to improve the organization and working of forward

markets.
(iv)
To undertake inspection of the accounts of recognized associations and/any

members thereof.
(v)
To perform other duties prescribed by the Central Government.
16

2
The Commission, thus, is a statutory authority entrusted with regulatory functions
under the Act. The Commission, at present comprises 4 Members, one of whom is
its Chairman. It has its headquarters at Mumbai and a Regional Office at Calcutta.
The sanctioned strength of the office comprises of 42 officers and 94 staff
members, one post of Director (Enforcement) has been revived and 3 posts (2 of
Computer and 1 of Hamal) has been surrendered. The Commission has 3 functional
wings under the set-up to carry out various tasks as detailed below:
(i) The Commodity Division: This Division deals with all the matters relating to the
regulation of the forward and futures markets in the country. Besides, this
Division keeps a close watch on the emerging developments in different
commodity markets in India. This Division also prepares a number of analytical
reports and notes of varying periodicity regarding the trading condition in respect
of goods to which the provisions of the Act are applicable including the supply,
demand and prices. These reports are submitted to the Department of Consumer
Affairs.
(ii) The Enforcement Division: Assists the police authorities in the States and Union
Territories in enforcing the provisions of the Act, conducts training courses,
scrutinizes documents seized by the police during the course of raids and renders
help to the prosecution with its officers appearing as expert witnesses in the
different Courts of Law in the country. The Commission keeps close surveillance
on the activities in illegal forward markets and communicates the intelligence
17

thereon, to the concerned police authorities for their verifications,
surveillance and appropriate enforcement action. The Commission or its officers do not possess
the powers of search, seizure and prosecution in respect of the
various offences committed under the Act. These powers are vested with the police
authorities in the State and Union Territories. The officers of this division assist the
police authorities, wherever possible in organising and conducting the raids. Further
more, this division also assists the police authorities in scrutinizing the documents
seized by them in the course of their raids against the operators in the illegal forward
markets. Comprehensive scrutiny reports are prepared in this division on the basis of
the evidence contained in the documents seized and are then sent to the police
authorities for further necessary action. Apart from carrying out these tasks the
officers of this division also tender evidence in the different courts of law as 'Expert
Witness'. The Enforcement Division also conducts surprise checks of the recognized
Commodity Exchanges whenever necessary. This division has been organising a
number of training Programmes for police officers and public prosecutors and
seminar for Judicial Magistrates with a view to acquaint police officers with the
intricacies of forward trading and the Act.
(iii) The Administration Division: Deals with the personnel and staff matters of the
Commission. The commodity exchanges under the Forward market Commission, are divided
into national commodity exchanges and regional commodity exchanges.
Under the national commodity exchanges, there are three major exchanges namely
MCX, NCDEX and NMCE. The Regional Commodity Exchange consists of 21 Regional
18

Exchanges their responsibilities and operations as same as National Commodity Exchanges
but commodities are more or less regional specific for their trading activities
19
Commodity Derivatives Market
Derivative Market can broadly be

classified as commodity derivative mar-ket and financial derivative market.
As the name suggest, commodity derivativestrade contracts for which the underlying assets is a
commodity like, wheat, soyabean ,cotton etc or precious metal like Gold and Silver. Financial
derivatives mar-kets trade contract that have a financial assets or variable as the underlying.
Themost financial derivatives are those ,which have equity, interest rate and ex-change rate as
the underlying.Financial derivatives areused to hedge the expo-sure to market risk.
The commodity derivatives differ from the financial deriva-tives mainly in the following two
aspects:
Firstly,
due to the bulky nature of theUnderlying assets, physical settlement in commodity derivatives
creates the needfor warehousing.
Secondly,
in the case of commodities, the quality of the assetunderlying a contract can vary largely.
20
International Commodity Exchanges
Futures trading is a result of solution to a problem related to the maintenance of a

year round s u p p l y o f c o m m o d i t i e s / p r o d u c t s t h a t a r e s e a s o n a l a s i s t h e c a s e
Of agreecultural prodecer.
TheUnited States, Japan, United Kingdom, Brazil, Australia, Singapore ar
e h o m e s t o l e a d i n g commodity futures exchanges in the world.
Of agreecultural prodecer
The New York Mercantile Exchange (NYMEX)

T h e N e w Yor k M e r c a n t i l e E x c h a n g e i s t h e w o r l d s b i g g e s t e x c h a n g e f o r
t r a d i n g i n p h y s i c a l commodity futures. The exchange is in existence since last 132 years
and performs trades trought w o d i v i s i o n s , t h e N Y M E X d i v i s i o n , w h i c h d e a l s i n
e n e r g y a n d p l a t i n u m a n d t h e C O M E X division, which trades in all the other metals.
Commodities traded: L i g h t s w e e t c r u d e o i l , N a t u r a l G a s , H e a t i n g O i l , G a s o l i n e , R B O B Gasoline,
Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.
London Metal Exchang

T h e L o n d o n M e t a l E x c h a n g e ( L M E ) i s t h e w o r l d s p r e m i e r n o n - f e r r o u s
market, with highlyliquid contracts. The exchange was formed in 1877 as
a d i r e c t c o n s e q u e n c e o f t h e i n d u s t r i a l revolution witnessed in the 19
Th century.
21

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.
Commodities Traded:
- Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol, Rough Rice,Gold, and
Silver etc.
Tokyo Commodity Exchange (TOCOM)

The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures exchange
int h e w o r l d .
It trades in to metals and energy contracts. It has
m a d e r a p i d a d v a n c e m e n t i n commodity trading globally since its inception 20

years back. TOCOMs recent tie up with the M C X t o e x p l o r e c o o p e r a t i o n a n d
b u s i n e s s o p p o r t u n i t i e s i s s e e n a s o n e o f t h e s t e p s t o w a r d s providing
platform for futures price discovery in Asia for Asian players in Crude Oil since the
22

demand-supply situation in U.S. that drives NYMEX is different from demand-supply situation
in Asia
Commodities traded:
G a s o l i n e , K e r o s e n e , C r u d e O i l , G o l d , S i l v e r , P l a t i n u m , A l u m i n u m , Rubber,
etc
Chicago Mercantile Exchange

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.
Commodities Traded:
Butter milk, Diammonium phosphate, Feeder cattle, frozen pork bellies ,Lean Hogs, Live cattle,
Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc.
23
Leading commodity markets of India
The government has now allowed national commodity exchanges, similar tothe BSE & NSE, to
come up and let them deal in commodity derivatives in anelectronic trading environment. These
exchanges are expected to offer anation-wide anonymous, order driven, screen based trading
system fortrading. The Forward Markets Commission (FMC) will regulate these exchanges.
Consequently four commodity exchanges have been approved to commence business in this
regard. They are:
Multi Commodity Exchange (MCX) located at Mumbai.

National Commodity and Derivatives Exchange Ltd (NCDEX) located atMumbai.
National Board of Trade (NBOT) located at Indore.
National Multi Commodity Exchange (NMCE) located at Ahmedabad.
24
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),
IndianFarmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and GoldmanSachs by
subscribing to the equity shares have joined the promoters as a shareholder 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 isa
national level technology driven on line Commodity Exchange with anindependent Board of
Directors and professionals not having any vested interestin 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
alsosubjected 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 than550 centers through out India. NCDEX currently
facilitates trading of 57commodities No securities transaction tax levied.
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Commodities traded
Bullion
Minerals
Oil &oil seeds
Pulses
Spices
Plantation
Fibers & others
Energy
Multi Commodity Exchange (MCX)
Multi Commodity Exchange (MCX) is an independent commodity exchange based in India.It

was established in 2003 and is based in Mumbai. The turnover of the exchange for the period
Apr-Dec 2008 was INR 32 Trillion. MCXoffers futures trading in Agricultural Commodities,
Bullion, Ferrous & Non-ferrous metals, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and
other soft commodities.MCX has also setup in joint venture the National Spot Exchange a
purelyagricultural commodity exchange and National Bulk Handling Corporation (NBHC)
which provides bulk storage and handling of agricultural products.It is now regulated by forward
market commission.
MCX is India's No. 1 commodity exchange with 84% Market share in2008($0.84 trillion) [2]
The exchange's competitor is National Commodity & Derivatives ExchangeLtd ([1])
26

Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil andgold in futures
trading ([2])
The crude volume touched 23.49 Miliion barrels [3]on January 3, 2009
The highest traded item is gold with an average monthly turnover of Rs 1.42Trillion ($29
Billion).
MCX has 10 strategic alliances with leading commodity exchange across theglobe
The average daily turnover of MCX is about US$ 2.4 billion[4]
MCX now reaches out to about 500 cities in India with the help of about10,000 trading
terminals
Commodities traded
Bullion , Minerals, Oil and oil seeeds , Pulses, Grains,Spices , Plantation ,Fiber & others ,
Petrochemicals, sEnergy
National Multi-Commodity Exchange of India Limited (NMCX)
27
The first De-Mutualised Electronic Multi-Commodity Exchange of Indiagranted the National

status on a permanent basis by the Government of Indiaand operational since 26th November
2002.NMCE facilitates electronicderivatives trading through robust and tested trading platform,
DerivativeTrading Settlement System (DTSS), provided by CMC.When an order is placed on the
exchange, the server at NMCE scans through theorders posted on it from all its trading terminals.
It then locates and matches the best counter-offers/bids by maintaining anonymity of the counterparties. Anonymity helps is eliminating formation of cartels and other unfair practices,thereby
protecting the efficiency of price-discovery at the Exchange. NMCEwas the first commodity
exchange to provide trading facility through internet,through Virtual Private Network
(VPN). NMCE follows best international risk management practices. The contracts aremarked to
market on daily basis. The system of upfront margining based onValue at Risk is followed to
ensure financial security of the market. In the eventof high volatility in the prices, special intraday clearing and settlement is held. NMCE has also set up a Trade Guarantee Fund. Wellcapitalized in-houseclearinghouse assumes counter-party risk of settlement. NMCE was the first
toinitiate process of dematerialization and electronic transfer of warehousedcommodity stocks.
The unique strength of NMCE is its settlements via aDelivery Backed System, an imperative in
the commodity trading business.These deliveries are executed through a sound and reliable
Warehouse ReceiptSystem, leading to guaranteed clearing and settlement.
28

Anonymity helps is eliminating formation of cartels and other unfair practices,thereby protecting
the efficiency of price-discovery at the Exchange. NMCEwas the first commodity exchange to
provide trading facility through internet,through Virtual Private Network (VPN). NMCE follows
best international risk management practices. The contracts aremarked to market on daily basis.
The system of upfront margining based onValue at Risk is followed to ensure financial security
of the market. In the eventof high volatility in the prices, special intra-day clearing and
settlement is held. NMCE has also set up a Trade Guarantee Fund. Well-capitalized inhouseclearinghouse assumes counter-party risk of settlement. NMCE was the first toinitiate
process of dematerialization and electronic transfer of warehousedcommodity stocks. The unique
strength of NMCE is its settlements via aDelivery Backed System, an imperative in the
commodity trading business.These deliveries are executed through a sound and reliable
Warehouse ReceiptSystem, leading to guaranteed clearing and settlement.
Commodity traded:Cardamom , Castor Seed, Oil & Oilcake , Chana ,Coffee ,Copra, Coconut Oil& Coconut Oil
cake ,Cuminseed ,Gold Study ,Groundnut seed, oil & oil cake ,Guar SeedS, Isabgul Seed ,Lin
Seed ,Menthol Crystal ,Pepper ,Pulses,Rape/Mustard Seed, Oil & Oil cake ,Raw Jute, Rubber
,Sacking ,Safflower seed ,Salient features of Oil ,Sesame Seed Silver Study ,Soy Seed, Oil &
Oilcake ,Sugar ,Sunflower seed ,Turmeric Wheat.
National Board Of Trade Limited (NBOT)
29
Incorporated on July 30,1999? to offer integrated, state-of-the-art? commodity futures?

Exchange . It was incorporated to offer transparent and efficient trading platform to various
market intermediaries in the commodity futures trade. Today NBOT is one of the fastest growing
commodity exchanges recognized by the Government of India under the aegis of the Forward
Markets Commission. Within a short span of seven years, NBOT has carved out a niche for itself
in the commodities market. With a humble beginning of trading in February 2000 its average
daily volume has reached a staggering 60,000 MTs (approx.) in terms of Soya oil. It has
implemented the state-of-the-art technology and system for efficient handling of Trading,
Margining, Clearing and Settlement in respect of all the transactions confirmed by the Exchange.
The Board of directors, adorned by a galaxy of the most respectful personalities drawn from
different categories of trade and commerce has been giving necessary impetus and thrust for
setting up of the exchange and provide guidance for its proper functioning
List of commodity traded:Oil, oil-Cake, Soy bean, Soy Meal, Soy Oil, Crude Palm Oil.
30
31

NBOT
N MC X
COMMODIT Y EXCH ANGE IN IN DIA
MCX
N CD E X
32
Regional Commodity Exchangesalso in India.

Rajdhani Oils and Oilseeds Exchange Ltd., Delhi ( www.roel.com)
Ahmedabad Commodity Exchange Ltd. ( www.acecastorfuture.com)
Bhatinda Om and Oil Exchange Ltd.
Bikaner Commodity Exchange Ltd. ( www.bcel.org)
Esugarindia Ltd. ( www.esugarindia.com)
First commodity Exchange of India Ltd, Kochi ( www.fceikochi.com)
Haryana Commodities Ltd. ( www.hissarcommodities.com)
India pepper and Spices Trade Association., Kochi ( www.ipsta.com)
National Board of Trade; Indore ( www.nbotind.org)
Surendranagar Cotton Oil and Oilseeds Association Ltd.
The Bombay Commodity Exchange Ltd. ( www.booe.com)
The Central India Commercial Exchange Ltd; Gwalior
The Chamber of Commerce ; Hapur
The Coffee Futures Exchange India ltd; Bangalore ( www.cofei.com)
The East India Cotton Association; Mumbai ( www.eicaexchange.com)
The Meerut Agro Commodities Exchange Co. Ltd.
33

The Rajkot Seeds Oil and Bullion Merchants Association Ltd.( www.rajkotexchange.com)
The Spice and Oilseeds Exchange Ltd; Sangli
Vijay Beopar Chamber Ltd; Muzaffarnagar.
34
Different segments in Commodities market
There are two major segments of the commodities market. They are
Over-the-counter (OTC) market and

Exchange traded market.
Both these markets are given below.
Over-the-counter (OTC) market:Over-the-counter means that there is no formal structure of trading and parties trade on
the basis of bilateral understanding.
In terms of commoditytrading, OTC represents spot trading of commodities. Since the structure
is notformal, it is also referred as customized market".
Almost all the trading thattakes place over in these markets is delivery based.
It is entirely unregulated with respect to disclosure of informationbetween the parties; therefore,

the trades that take place are subject tocounter-party risk. Like an ordinary contract each counterparty relies on theother side to fulfill their obligation..
OTC Contract:OTC contract is a mutual contract between two parties in whichthey agree on how a
particular trade or agreement will be settled in future.
35

Toput it in simple words, which location will the settlement takes place, the specific date in
future when the contract will be honored and the pre-arranged price forfulfilling the contract.
Forwards and swaps are examples of such contracts.
Exchange-traded market:-
Exchange-traded market also known as derivatives market is the placewhere commodities

are traded over the exchange.
It is standardized in natureand decently regulated. An exchange acts as an intermediary to all
commoditytransactions, and takes initial margin from both sides of the trade to act as aguarantee.
All the commodity exchanges are overseen by Forward Market Commission.
36
India Commodity Market - Global Scenario
Despite having a robust economy, India's share in the global commodity market is not as big as
estimated. Except gold the share in other sectors of the commodity market is not very significant.
India accounts for 3% of the global oil demands and 2% of global copper demands. In
agriculture India's contribution to international trade volume is rather less compared to the huge
production base available. Various infrastructure development projects that are being undertaken
in India are being seen as a key growth driver in the coming days.
What are Commodities Exactly?

The commodities markets are where traders and producers of the world's natural resources come
together to find a standard market value for each product. Commodities are highly speculative
due to the nature of a supply and demand" economy" that is built on the ever changing market
factors. The commodities market plays a very central role in finding the true value of virtually
every product by creatingan equilibrium of true demand plus speculative value. The run up in oil
prices in 2008was mostly due to speculation; however, if investors agree that oil is worth $140
per barrel, then this will be the market value all around the world. The commodities
market knows no discrimination; buyers and sellers may or may not have practical purposes for
the commodities being traded, but that does not impact price.
37

Commodities Markets Balance out Trade
Without the commodities markets, prices for natural resources would vary place top lace all
around the world. Likewise for determining price, the commodities markets balance out natural
resources by economic feasibility. US consumers will be willing to pay more for oil than Saudi
Arabia as the supply is different; if US consumers outbid England for Saudi oil, then that oil will
be delivered to the buyer in the United States.
Why do people trade commodities?
Commodities offer the ultimate volatility in intraday trading. The wild movements oftenas great
as 5-10% can be leveraged throughBrokerage accounts up to 40:1. This kindof obscene leverage
is utilized by day traders who can multiply their gains an leverage up small amounts of money to
buy a large volume of a certain commodity Corporations that produce raw materials often trade
on the commodities market as away to balance out the amount of money they receive for their
goods. Corporate traders have the responsibility to ensure that wild market movements up or
down do not affect the profit margins of the company at hand.
38
Commodity Trading Basics-
Investors should always learn the basics of trading before they put their money into it.
Commodity trading like any other form of trading is similar in concept only thing here
we are trading in certain commodities instead of shares or foreign currencies as in other forms of
trading.
Commodity trading gives you options to hedge against inflation while also promising you good
return. Commodities market also helps you in diversifying your portfolio hence if another form
of investment of yours runs bad then you can always rely on the commodities market in order to
maintain profits. Commodity trading is not just for the institutional investors but also for the
retail investors though investors should always invest after having done research and having the
knowledge of the market so that if there is a sudden slump in the market they are not adversely
affected by it in a huge way.
Trading in commodity derivatives is also easily possible. Hence if you want to buy or sell a
particular commodity like gold, silver, crude oil, metals or other then you can easily trade in
commodity derivatives. There are several exchanges on which you can trade incommodities with
the most popular commodity trading exchanges being The National commodity and the
derivative exchange or the multi commodity exchange. Everything ranging from hold to metals
to agricultural commodities like grains pulses oils etc can be traded by anyone who wants to
do commodity trading.
39

Commodities Trading
Directly trading commodities is the best, and cheapest, way to get in on commodityprice action.
Trading commodities starts with a broker who can grant traders access toboth the futures market
and some spot commodities market. Commodity futures aremore common though many brokers
offer precious metals to be traded at spot pricesrather than in future format. With spot prices, the
price of the commodity is not reflected as a future value, but rather as a current value that will
never expire. Futures are priced in month long intervals, thus November crude oil will trade at a
higher orlower price than October crude oil, even though the same commodity is being
traded.Spot prices are the same prices across the board.
Exchange Traded Funds
There are many exchange traded funds (ETFs) that are bought and sold on the stockmarkets,
such as the NY Stock Exchange or NASDAQ rather than the commoditiesmarkets, such as the
US CBOT exchange. ETFs are traded just like stocks but arebacked in full by a balance of both
futures and hard assets. One very popular ETF is the SPDR Gold Trust, which trades under the
ticker GLD. One of the main benefits of ETFsis that of storage, the gold that backs the fund is
held elsewhere and can be moveddigitally through a stock exchange rather than a hand to hand
transaction. Exchangetraded funds often come with an expense ratio which is extrapolated from
the current market value each year to cover storage and trading expenses for the fund, as well
asreward the fund's creator.
Commodity Stocks
40

Rather than trade commodities, it is possible to produce similar returns with ordinarycompanies.
For instance, if you thought the price of crude oil was set to explode,shorting the airline industry
would be a smart move, as higher prices would cost theairlines more cash. Likewise, buying a
gold mining company before a bull run in goldwould produce a very nice return generally greater
than the change in the commodityitself.Leveraging investments in commodity stocks is easy
simply due to the way corporationsand balance sheets work. For example, a company that
produces oil at a cost of $50per barrel would make $1,000,000 if it sold 100,000 barrels for $60
per barrel. If theprice were to rise to $75 per barrel, the company would make 150% more while
thechange in the price of oil was just 25%. Natural leverage in commodity stocks makesthem a
great alternative to the volatile commodities markets and provides a return that is worthwhile to
the investor. Making money with commodity stocks is a lot less riskyconsidering the stability of
the business and the book value that is assigned to stocks,but never assumed in the world of
commodities
Commodity Trading Market41
There are 2 major kinds of markets in India. These markets are the Bond Market and the
Commodity Trading market. Here, we will be discussing more about the later one.The
Commodity trading market in India deals with all the touchable markets which wecome across in
our mundane activities.These Commodity trading markets enablepeople to exchange goods for
money andvice versa. These goods or commoditiescan be anything and can belong to anysector
may it be agricultural, mineral, fossiland many more. The commodity tradingmarket observes the
trading of variouscommodities such as cereals, ginned aswell as un- ginned cotton, pulses,
oils,jute, sugar, gur, cotton, oilseeds, coffee,tea, jute products, potatoes, onions,petrochemicals,
gold , silver, crude, metals and many more commodities.The regulator for the commodity trading
market in India is the Forward MarketsCommission. It is similar to SEBI (Securities and
Exchange Board of India) whichperforms the role of protecting the interests of investors in
securities. The commoditymarket in India is mainly influenced by the demand and supply
equation. Variousexternal factors such as social changes, weather, policies of the government,
globalfactors drive the commodity market as well The commodity trading market in our country
is said to have a daily turnover of 120Billion rupees to about 150 Billion rupees on an average.
The total commodities derivatives trade value forms 66% of Indias GDP (Gross Domestic
Product). It is alsobelieved by a lot of people that this percentage will only keep rising in the
future.
Commodities in the World Market
42
The commodities market is virtually a 24/7 market. Though there are many different markets that
trade throughout the day and open and close at different times,commodities in the US are the
same as commodities in Europe and Asia. The price of gold in Asian commodity trading will be
reflected in the price when the US marketsopen. Many traders who enjoy the foreign exchange
market, but would prefer to trademore fundamentally driven investments, will find the
commodities market a nice changefrom the currency markets. There are some drawbacks to a
24/7 market, as the price of your positions will change as you sleep; thus, short term investors in
the commoditiesmarket are likely to buy and sell within the day rather than hold an investment
through another trading cycle in a foreign country.
STRUCTURE OF COMMODITY MARKET
43
MINISTRY OF
CONSUMER AFFAIRS
FMC
(Forward Market
Commission)
COMMODITY
EXCHANGE
NATIONAL
EXCHANGE
NCDEX
MCX
REGIONAL
EXCHANGE
NMCE
NBOT
2O OTHER
REGIONAL
EXCHANGE
Types of Commodities
44

Commodities are products that are bought and sold on an open market. Generally,commodities
are considered extremely raw materials that are standard from market tomarket and producer to
producer. For example, a bushel of corn is a commodity that isvirtually standard all around the
world. The same is true for crude oil, pork bellies, andany of the other various simple materials
that trade on the open exchanges.
Commodity Futures Trading in India
45

INTRODUCTION
Derivatives as a tool for managing risk first originated in the Commodities markets. They were
then found useful as a hedging tool in financial markets as well. The basic concept of a
derivative contract remains the same whether the underlying happens to be a commodity or a
financial asset. However there are some features, which are very peculiar to commodity
derivative markets. In the case of financial derivatives, most of these contracts are cash settled.
Even in the case of physical settlement, financial assets are not bulky and do not need special
facility for storage. Due to the bulky nature of the underlying assets, physical settlement in
commodity derivatives creates the need for warehousing. Similarly, the concept of varying
quality of asset does not really exist as far as financial underlyings are concerned. However in
the case of commodities, the quality of the asset underlying a contract can vary largely. This
becomes an important issue to be managed.
What Are Commodity Futures Uused For?
It is estimated that around 60 to 70 percent of all trades transacted onfutures exchanges are done
for the purpose of hedging. Although hedging isthe most important use of futures contracts, their
use is obviously notlimited to that. They are there to take risk for profit. That is why speculators
are drawn to the futures markets like bees to ahoney jar. Speculators play a very important role in
the whole marketmechanism. They bring liquidity to the markets.Commodity futures contracts
are also used to diversify portfolios.Producers and their representatives (cooperatives,
govt organizations) of commodities use commodity futures to protect the selling price of
46

theircommodity. Consumers and their representatives of the commodity usecommodity futures to
fix their purchasing price within an acceptable level.Other than the actual producers and
consumers, there are participants withinvestment interest in commodities. These participants
seek to capitalize onthe profit opportunity and assume higher risks. Generally, these investorsare
called SPECULATORS There is a kind of participant who looks at imperfection in pricing
of thecommodity between different markets. These imperfections are often shortlived and caused
by restrictions in the markets, flow of capital, or physicalasset. These participant, called
arbitrageurs assume relative low level of risk compared with speculators
Benefits to Industry from Futures trading.

* Hedging the price risk associated with futures contractual commitments.
* Spaced out purchases possible rather than large cash purchases and its storage.
*
Efficient
price
discovery
prevents
seasonal
price
volatility.
* Greater flexibility, certainty and transparency in procuring commodities would aid bank
lending.
*Facilitate
informed
lending.
* Hedged positions of producers and processors would reduce the risk of default faced by
banks.
* Lending for agricultural sector would go up with greater transparency in pricing and
storage.
* Commodity Exchanges to act as distribution network to retail agri-finance from Banks
47

to rural households.
* Provide trading limit finance to Traders in commodities Exchanges.
Benefits to Exchange Member
* Access to a huge potential market much greater than the securities and cash market in
commodities.
*
Robust,
scalable,
state-of-art
technology
deployment.
* Member can trade in multiple commodities from a single point, on real time basis.
* Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met, like bank credit, information dissemination, etc.
Why Commodity Futures?
One answer that is heard in the financial sector is "we need commodity futures markets so that
we will have volumes, brokerage fees, and something to trade''. I think that is missing the point.
We have to look at futures market in a bigger perspective
What Is The Role For Commodity Futures In India's Economy?
In India agriculture has traditionally been an area with heavy government intervention.
Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they have
import-export restrictions and a host of other interventions. Many economists think that we could
have major benefits from liberalization of the agricultural sector.
In this case, the question arises about who will maintain the buffer stock, how will we smoothen
the price fluctuations, how will farmers not be vulnerable that tomorrow the price will crash
48

when the crop comes out, how will farmers get signals that in the future there will be a great
need for wheat or rice. In all these aspects the futures market has a very big role to play.
If you think there will be a shortage of wheat tomorrow, the futures prices will go up today, and it
will carry signals back to the farmer making sowing decisions today. In this fashion, a system of
futures markets will improve cropping patterns.
Next, if I am growing wheat and am worried that by the time the harvest comes out prices will go
down, then I can sell my wheat on the futures market. I can sell my wheat at a price, which is
fixed today, which eliminates my risk from price fluctuations. These days, agriculture requires
investments -- farmers spend money on fertilizers, high yielding varieties, etc. They are worried
when making these investments that by the time the crop comes out prices might have dropped,
resulting in losses. Thus a farmer would like to lock in his future price and not be exposed to
fluctuations in prices.
The third is the role about storage. Today we have the Food Corporation of India, which is doing
a huge job of storage, and it is a system, which -- in my opinion -- does not work. Futures market
will produce their own kind of smoothing between the present and the future. If the future price
is high and the present price is low, an arbitrager will buy today and sell in the future. The
converse is also true, thus if the future price is low the arbitrageur will buy in the futures market.
These activities produce their own "optimal" buffer stocks, smooth prices. They also work very
effectively when there is trade in agricultural commodities; arbitrageurs on the futures market
will use imports and exports to smooth Indian prices using foreign spot markets.
49

In totality , commodity futures markets are a part and parcel of a program for agricultural
liberalization. Many agriculture economists understand the need of liberalization in the sector.
Futures markets are an instrument for achieving that liberalization.
How Commodity Market Works?
50

There are two kinds of trades in commodities. The first is the spot trade, inwhich one pays cash
and carries away the goods. The second is futures trade.The underpinning for futures is the
warehouse receipt. A person deposits certainamount of say, good X in a ware house and gets a
warehouse receipt. Whichallows him to ask for physical delivery of the good from the
warehouse. Butsome one trading in commodity futures need not necessarily posses such areceipt
to strike a deal. A person can buy or sale a commodity future on anexchange based on his
expectation of where the price will go. Futures havesomething 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 dueto changes in the
futures price is recorded. Squiring off is done by taking anopposite contract so that the net
outstanding is nil.For commodity futures to work, the seller should be able to deposit
thecommodity 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.
Today Commodity trading system is fully computerized. Traders need not visita commodity
market to speculate. With online commodity trading they could sitin the confines of their home
or office and call the shots.
The commodity trading system consists of certain prescribed steps or stages asfollows:
51
1 Trading: - At this stage the following is the system implemented- Order receiving
- Execution
- Matching
- Reporting
- Surveillance
- Price limits
- Position limits
Clearing: - This stage has following system in place
- Matching
- Registration
- Clearing
- Clearing limits
- Notation
- Margining
- Price limits
- Position limits
- Clearing house.
Settlement: - This stage has following system followed as follows-
52

- Marking to market
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.
How to Trade in Commodity Market
53
You can invest in the futures market in a number of different ways, but before taking the plunge,
you must be sure of the amount of risk you're willing to take. As a futures trader, you should
have a solid understanding of how the market works and contracts function. You'll also need
todetermine how much time, attention, and research you can dedicate to the investment. Talk
toyour broker and ask questions before opening a futures account.Unlike traditional equity
traders, futures traders are advised to only use funds that have beenearmarked as risk capital.
Once you've made the initial decision to enter the market, the nextquestion should be, how?
Here are three different approaches to consider:

Self Directed
Full Service
Commodity pool
1) Self Directed: As an investor, you can trade your own account, without theaid or advice of a Commodity
broker. This involves the most risk because you becomeresponsible for managing funds, ordering
trades, maintaining margins, acquiring research, andcoming up with your own analysis of how
the market will move in relation to the commodity inwhich you've invested. It requires time
and complete attention to the market.
2) Full Service: -
54

Another way to participate in the market is by opening amanaged account, similar to an equity
account. Your broker would have the power to trade onyour behalf, following conditions agreed
upon when the account was opened. This method couldlessen your financial risk, because a
professional broker would be assisting you, or makinginformed decisions on your behalf.
However, you would still be responsible for any lossesincurred and margin calls.
3) Commodity Pool: A third way to enter the market, and one that offers thesmallest risk, is to join a commodity pool.
Like a mutual fund, the commodity pool is a group of commodities which can be invested in. No
one person has an individual account; funds arecombined with others and traded as one. The
profits and losses are directly proportionate to theamount of money invested. By entering a
commodity pool, you also gain the opportunity toinvest in diverse types of commodities. You are
also not subject to margin calls. However, it isessential that the pool be managed by a skilled
broker, for the risks of the futures market are stillpresent in the commodity pool.
How to invest in a Commodity Market?
55
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 thedetails 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) DRIVNG licence
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 addressof investor is given.
56
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
The above things are only procedure in character and the risk involved andonly 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 aspectsin mind to
ensure that they are not being missed in any which way. Thesefactors 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 mostimportant.
Credit facility.
The research team.
57

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 individualtraders and the
commodity exchange. In other words the Commodity Broker isthe member of Commodity
Exchange, having direct connection with theexchange to carry out all trades legally. He is also
known as the authorizeddealer.
How to become a Commodity Trader/Broker of Commodity Exchange?
To become a commodity trader one needs to complete certain legal and bindingobligations.
There is routine process followed, which is stated by a unit of Government that lays down the
laws and acts with regards to commoditytrading. A broker of Commodities is also required to
meet certain obligations togain such a membership in exchange.To become a member of
Commodity Exchange the broker of brokerage firmshould have net worth amounting to Rs. 50
Lakh. This sum has been determined by Multi Commodity Exchange.
How to become a Member of Commodity Exchange?
To become member of Commodity Exchange the person should comply withthe following
Eligibility Criteria.
SOME LEADING EXCHANGE OF THE WORLD

58
66921
EXCHANGES PLACE TRADED COMMODITIES
MARKET PLAYERS
59
HEDGERS
A Hedger can be Farmers, manufacturers, importers and exporter. A hedger buys or sells in
thefutures market to secure the future price of a commodity intended to be sold at a later date in
thecash market. This helps protect against price risks.The holders of the long position in futures
contracts (buyers of the commodity), are trying tosecure as low a price as possible. The short
holders of the contract (sellers of the commodity)will want to secure as high a price as possible.
The commodity contract, however, provides adefinite price certainty for both parties, which
reduces the risks associated with price volatility.By means of futures contracts, Hedging can also
be used as a means to lock in an acceptableprice margin between the cost of the raw material and
the retail cost of the final product sold.
Example:
A silversmith must secure a certain amount of silver in six months time for earrings and bracelets
that have already been advertised in an upcoming catalog with specific prices. But what if
theprice of silver goes up over the next six months? Because the prices of the earrings and
braceletsare already set, the extra cost of the silver can't be passed onto the retail buyer, meaning
it would be passed onto the silversmith. The silversmith needs to hedge, or minimize her risk
against a possible price increase in silver. How? The silversmith would enter the futures market
and purchase a silver contract for settlement in six months time (let's say June) at a price of $5
perounce. At the end of the six months, the price of silver in the cash market is actually $6
perounce, so the silversmith benefits from the futures contract and escapes the higher price. Had
60

the price of silver declined in the cash market, the silversmith would, in the end, have been better
off without the futures contract. At the same time, however, because the silver market is very
volatile, the silver maker was still sheltering himself from risk by entering into the futures
contract. So that's basically what a hedger is: the attempt to minimize risk as much as possible
bylocking in prices for a later date purchase and sale.Someone going long in a securities future
contract now can hedge against rising equity prices inthree months. If at the time of the contract's
expiration the equity price has risen, the investor'scontract can be closed out at the higher price.
The opposite could happen as well: a hedger couldgo short in a contract today to hedge against
declining stock prices in the future. A potato farmer would hedge against lower French fry prices,
while a fast food chain would hedge against high erpotato prices. A company in need of a loan in
six months could hedge against rising in the interest rates future, while a coffee beanery could
hedge against rising coffee bean prices nex tyear.
SPECULATORS
Other commodity market participants, however, do not aim to minimize risk but ratherto benefit
from the inherently risky nature of the commodity market. These are thespeculators, and they
aim to profit from the very price change that hedgers areprotecting themselves against. A hedger
would want to minimize their risk no matterwhat they're investing in, while speculators want to
increase their risk and therefore maximize their profits. In the commodity market, a speculator
buying a contract low in order to sell high in the future would most likely be buying that contract
from a hedger selling a contract low in anticipation of declining prices in the future.
61

Unlike the hedger, the speculator does not actually seek to own the commodity in question.
Rather, he or she will enter the market seeking profits by offsetting rising and declining prices
through the buying and selling of contracts.
LONG
SHORT
Secure a price now to protect against Secure a price now to protect
HEDGERS
future rising prices
against future declining prices
Secure a price now in anticipation of Secure a price now in anticipation

SPECULATORS
rising prices
of declining prices
ARBITRAGEURS
Arbitrage refers to the opportunity of taking advantage between the price difference between
twodifferent markets for that same stock or commodity.In simple terms one can understand by an
example of a commodity selling in one market at pricex and the same commodity selling in
another market at price x + y. Now this y, is the differencebetween the two markets is the
arbitrage available to the trader. The trade is carriedsimultaneously at both the markets so
theoretically there is no risk. (This arbitrage should not beconfused with the word arbitration, as
arbitration is referred to solving of dispute between two ormore parties.)The person who
conducts and takes advantage of arbitrage in stocks, commodities, interest ratebonds, derivative
products, forex is know as an arbitrageur.An arbitrage opportunity exists between different
markets because there are different kind of players in the market, some might be speculators,
62

others jobbers, some market-markets, andsome might be arbitrageurs.In India there are a good
amount of Arbitrage opportunities between NCDEX, MCX incommodities.
Participants of Commodity Market
HARBISPECUED GT ERSRAGLATOEURS
63
Risk associated with Commodities Market
No risk can be eliminated, but the same can be transferred to some-one who can handle it better
or to someone who has the appetitefor risk. Commodity enterprises primarily face the following
classes of risk. Namely:
The price Risk,
The quantity Risk,
The yield/output risk and
The political Risk
Explanation of the above Risk-
The price risk:The chance there will be unexpected changes in a financial price, including currency (foreign
exchange) risk, interest rate risk, and commodity price risk.
Basically, it's the risk the you will lose money due to a fall in the market price of a security that you
own.
The quantity risk:Occurs when the quantity of an asset to be hedged is uncertain.
64

The risk that an insufficient amount of an investment will be hedged and will result in a loss of the un
hedged portion.
The yield/output risk:The risk of experiencing an adverse shift in market interest rates associated with investing in
a fixed income instrument. The risk is associated with either a flattening or steepening of the
yield curve, which is a result of changing yields among comparable bonds with different
maturities. When market yields change, this will impact the price of a fixed-income instrument.
When market interest rates, or yields, increase, the price of a bond will decrease and vice versa.
The political Risk:It is a type of risk that can be understood and managed with reasoned foresight and
investment .Broadly, political risk refers to any political change that alters the expected outcome
and value of a given economic action by changing the probability of achieving business objectives.
Talking about the nationwide commodity exchanges, the risk of the counter party not
fulfilling his obligations on due date or at any time therefore is the most common risk.
This risk is mitigated by collection of the following margins:1. Initial margins
2. Exposure margins
3. Mark to Market on daily positions.
4. Surveillance
65

Questionnaire for Investors
1.Do you have an y investment plan?
a. YES b. NO(if no move to question no. 4)
2.If, yes, where you would like to invest your money?
a. Bank F.D. b. Share Market c. Commodity Market d. Other (specify)
3.Why you
prefer
specific
i n v e s t m e n t ? ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------4 . I f
n o ,
w h y ?
a. Not aware about invest avenues b. Insufficient income c. Other (specify)

5 . D o y o u a w a r e a b o u t C o m m o d i t y M a r k e t ? a. YES b. NO(if no move to question no
12)
6 . A r e y o u w i l l i n g t o i n v e s t i n C o m m o d i t y M a r k e t ? (If in Q. 2 Commodity Market,
skip this question)
a. If YES, why? ------------------------------------------------------------------------------b. If NO, why?
------------------------------------------------------------------------------(If no move to the Question
no.10)
7.If yes, which Commodity Exchange you will prefer for investment?
a. MCX b. NCDEX c. NMCE d. Other (specify) f. Cant Say
8.Why you prefer specific Commodity Exchange for investment?(if answer to Q.7 f,
skip
this
question)-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
66

9.In
which
Commodities
you
will
prefer
to Invest? And
why?
a. Bullion b. Agricultural c. Metals d. Fossils/Energy------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------10.What is your perception about Commodity Market?a. Less Risky b. Risky c. Very Risky
11.What
you think
Commodity
Market
Advertisements
(hoardings,
prints
etc) areexplanatory enough to give needed useful information?

a. YES b. NO
12.Gender
a. Male b. Female
13.Age Group
s a.Below 21 Years b. 21 years 30 years c.31 years 40 yearsd. 41 years 50 years e.
Above 50 years
14.Occupation
a.Govt. Job b. Private Job c. Business d. Other (specify)
15.Income
Group
(Per
month)a . N i l b . B e l o w 1 0 , 0 0 0 / - c . 1 0 , 0 0 0 2 0 , 0 0 0 / -
d.20,000 30,000/- e. Above 30,000/-
67
Conclusions
Commodity market in India is still in a nascent stage. It should be given a helping hand by the
concerned authorities to increase its depth. The infrastructure facilities likewarehouses,
transportation etc. should be improved so that the genuine buyers can take physical delivery of
goods instead of settling transaction in cash. This may also controlspeculation to an extent.There
is also an urgent need for an independent regulator for these markets. Instead of bureaucratic
Ministry of Consumer Affairs & Food, professional agency like ForwardsMarket Commission
(FMC) needs to be at the helm.Apart for these more products like Commodity Options need to
be introduced. This willfurther help deepen the market & would help in increasing the popularity
of suchexchanges. This will finally lead to a wider investor base & lesser power in the hands
of ruthless traders & speculator Taking these few but firm steps, I believe, there is a bright future
ahead for the Futures Market.
68
BIBLIOGRAPHY
http://commodities.in
http://www.commoditiescontrol.com
http://www.mcxindia.com
http://www.ncdex.com
http://etd.uasd.edu/ft/th9518.pdf
http://www.scribd.com/doc/57538114/29/Current-Scenario-in-Indian-Commodity-Market
http://www.scribd.com/doc/58231340/6/INTRODUCTION-TO-COMMODITY-MARKET
http://www.scribd.com/doc/15961806/Commodity-Market-Report
http://www.scribd.com/doc/29702792/Indian-Commodity-Market
http://www.scribd.com/doc/66929130/Indian-Commodity-Market-Repaired
http://www.scribd.com/doc/64389119/17678441-Complete-Project-Commodity-MarketCommodity-Market-Modified
http://www.scribd.com/doc/98779533/Introduction-to-commodity-market
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WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

In addition to speculators, both the commodity's commercial producers and commercial

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

for market participants

asgeneric pharmaceuticals andsilicon chips.

WORDL WIDE COMMODITY MARKET

15COMMODITY MARKET IN INDIA

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

COMMODITIES MARKET WORLD WIDE PICTURE

WORDL WIDE COMMODITY MARKET

History of Commodity Market in India

Exchange which organizes forward tradingin commodities can regulate trading on

delegated to it bythe central Government.

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

Size of the market

WORDL WIDE COMMODITY MARKET

THE EVOLUTION OF COMMODITY TRADING IN INDIA

THE BEGINNING OF COMMODITY FUTURES TRADING IN INDIA

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

Organizational Structure of Commodity Exchanges in India

To keep forward markets under observation and to take appropriate action in

To collect and publish information regarding trading conditions in respect of

To make recommendations to improve the organization and working of forward

To undertake inspection of the accounts of recognized associations and/any

To perform other duties prescribed by the Central Government.

WORDL WIDE COMMODITY MARKET

The Commission, thus, is a statutory authority entrusted with regulatory functions

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

WORDL WIDE COMMODITY MARKET

Commodity Derivatives Market

Derivative Market can broadly be

WORDL WIDE COMMODITY MARKET

International Commodity Exchanges

Futures trading is a result of solution to a problem related to the maintenance of a

The New York Mercantile Exchange (NYMEX)

London Metal Exchang

WORDL WIDE COMMODITY MARKET

Special Aluminum Alloy (NASAAC),Polypropylene, Linear Low Density Polyethylene, etc

The Chicago Board of Trade

Tokyo Commodity Exchange (TOCOM)

It trades in to metals and energy contracts. It has

m a d e r a p i d a d v a n c e m e n t i n commodity trading globally since its inception 20

WORDL WIDE COMMODITY MARKET

Chicago Mercantile Exchange

WORDL WIDE COMMODITY MARKET

Leading commodity markets of India

Multi Commodity Exchange (MCX) located at Mumbai.

WORDL WIDE COMMODITY MARKET

National Commodities & Derivatives Exchange Limited ( NCDEX )

WORDL WIDE COMMODITY MARKET

Multi Commodity Exchange (MCX)

Multi Commodity Exchange (MCX) is an independent commodity exchange based in India.It

WORDL WIDE COMMODITY MARKET

National Multi-Commodity Exchange of India Limited (NMCX)

WORDL WIDE COMMODITY MARKET