INTRODUCTION

Commodities are raw materials used to create various products. Commodities

include agricultural products such as grains, oilseeds, vegetable oils, pulses
and also meats and livestock; energy products such as crude oil and gasoline;
and metals such as gold, silver, aluminum and mild steel ingots. There are
many other commodities like polypropylene, sugar, cotton, cocoa and coffee,
etc., that are also traded. A commodity is something for which there is
demand, but which is supplied without qualitative differentiation across a
given market. Characteristic of commodities is that their prices are
determined as a function of their market as a whole. Well-established physical
commodities are actively traded on various spot and derivative markets. The
commodity market has evolved significantly from the days when farmers
hauled cartloads of wheat ,rice and other produce to the local market. In the
1800s, demand for standardized contracts for trading agricultural products
led to the development of commodity futures exchanges.

Commodities (commodity) are basic raw materials and foodstuffs such as

metals, petroleum, coffee, grain etc. Commodities are traded on a commodity
exchange both by the companies that use them (e.g. chocolate manufacturers)
and by speculators. Futures contracts allow commodity producers and
commodity users to bring some predictability and stability to pricing. By
buying futures contracts, they can hedge against underlying price changes in
the commodity. Commodity exchange are the exchanges where the trading of
futures and forward stake place, basically commodity exchange are trading in
future contracts
onthose commodities which have some regional relevance it is not going to be
aseasy as a share of a company to get listed in a different exchange.
Commodity exchanges in India are expected to contribute significantly in the
strengthening Indian economy to face the challenges of globalization. The
Commodity Exchange makes commodity money available to all as a medium
of exchange, store of wealth and unit of account.
India is one of the largest agrarian economies makes it a natural territory for
trading in commodities. Agriculture’s share in India’s GDP stands at 26%, while
the commodity sector, including non-agro commodities and bullion-related
industries, constitutes about 58% of the country’s GDP. India is essentially a
commodity-based economy and the physical commodity market in India is around
Rs.11, 00,000 Crore. India also happens to be one of the largest importers of gold
(80% of demand of 800 tones) and silver (70% of demand of 3800tones). It is also
the largest producer of cotton (15 % of world production).Therefore, it is
necessary to study the Indian Commodity Market

The scope of this study is as follows:

 Origin of Commodities Market.

 Meaning of and Objectives of Commodity Futures.

 Pricing of Commodity Futures.

 Using commodity futures for Risk Management.

 Commodity profiles of gold & silver

OBJECTIVES OF THE STUDY

1. To study Indian commodity market.

2. To study and analyze the gold and silver commodity in India.
3. To know the nature of the bonanza portfolio limited.
4. To study the awareness and involvement of salaried persons
toward commodity market.
 COMPANY PROFILE

BONANZA MISSION STATEMENT:

Our mission is to be leading ,preferred service provider to our customer and we

aim to achieve leadership position by building an innovative, enterprising and
technology-driven organization which will set highest standards of service and
business ethics.

Bonanza is a premier integrated financial services provider,

and ranked among the top five in the country in all its business segments ,
services over 16 million individual investors in various capacities, and provide
investor service to over 300 corporate, comprising the who of corporate India.
Bonanza covers the entire spectrum of financial service such as stock broking,
depository participants, Distribution of financial products-mutual funds, bonds,
fixed deposit, equities, insurance broking, Commodities broking, Personal Finance
Advisory Services, Merchant Banking & Corporate Finance, placement of equity,
IPO’s, among others.

BONANZA : EARLY DAYS

The birth of bonanza was on the modest scale in 1981 . it began withb the vision
and enterprise of a small group of practicing Chartered Accountants who founded
the flagship company , Bonanza Consultant Limited . It started with the
consultation and financial accounting automation , and carved inroads into the
field of registry and share accounting by 1985. Since then, we have utilized our
experience and superlative expertise to go from strength to strength.. to better
our services, to provide new ones, to innovative , diversity and in the process,
evolved bonanza as one of india’s premier integrated financial service enterprise.
 Bonanza is a leading financial services & brokerage
house working diligently since 1994 can be described in a single word as a “
Financial Powerhouse” with acknowledged industry leadership in execution and
clearing services on exchange Traded Derivatives and cash market products .
bonanza has spread its trustworthy tentacles all over the country with more than
1025 utlets spread across 340 cities.

It provide an extensive smorgasbord of services in

equity, commodity , currency derivatives, wealth management, distribution of
third party products etc. keeping in par with the modern tech-savvy world,
bonanza makes an integrated and innovative use of technology; it also enables its
clients to trade online as well as offline and the strategic tie-ups with the latest
technology partners has earned bonanza this prestigious place in one of the top
brokerage houses in the country. Client- focused philosophy backed membership
of all principal Indian Stock and commodity Exchange makes Bonanza stand apart
from its competitors and a preferred service provider in the industry for the
value-based services. To add to our evergrowing achievements, a study by Dun
and Bradstreet has bonanza as the SIXTH largest broking house in terms of equity
terminal listings in the country in an event conducted by CNBC-TV18 and OptiMix
Financial Advisor Award 2008 . Also Bonanza has been awarded by BSE the “
Major volume driver for the year 2004-2005 , 2006-2007 and 2008-2009.”

ACHIEVEMENTS

1. Top Equity Broking House in term of branch expansion for 2008*

2. 3rd in terms of number of Trading Accounts for 2008*.
3. 6th in terms of trading terminals in for two consecutive year 2007-2008*.
4. 9th in term of Sub Brokers for 2007*.
5. Awarded by BSE ‘Major Volume Driver 04-05, 06-07, 07-08 ’ .
6. Nominated among the top 3 for the “Best Financial Advisor Award ‘08’ in
the category of National Distributors- retail instituted by CNBC-TV AND
OptiMix.
CORPORATE TIE UPS

The company has corporate tie ups with Birla Sun life , Bajaj Allianz , ICICI
Prudential, SBI, Aviva , Kotak Mahindra and Reliance for Life Insurance and
General Insurance , Bonanza provides insurance for Motor , health ,Travel,
Housekeeper , Shopkeeper, Marine, Personal and Group insurance.

REASON TO CHOOSE BONANZA PORTFOLIO LTD.

 Experience
Bonanza portfolio ltd has more than eight decades of trust and
credibility in the Indian stock market. In the Asia Money broker’s
poll held recently , SSKI won the ‘ India’s best broking house for
2004 award’ . ever since it launched company as it retail broking
division in February 2000. It has been providing institutional –level
research and broking services to individuals investors.

 TECHNOLOGY
With our trading account you can buy and sell shares in an
instant from any PC with an internet connection . you will get
access to our powerful online trading tools that will help you
take complete control over your investment in shares.

 KNOWLEDGE
In a business where the right information at the right time can
translate into direct profits , you get access to a wide range of
information on our content-rich portal, sharekhan.com. you will
also get a useful set of knowledge-based tools that will
empower you to take informed decision.

 CONVENIENCE
You can call Dial N-Trade number to get investment advice and
execute your transactions. We have a dedicated call-center to
provide this service via a toll free number for anywhere in
india.

 CUSTOMER SERVICE
 Our customer service team will assist you for any help that you
need relating to transaction, billing , demat and other queries
.our customer services can be contracted via a toll-free number ,
email or live chat on sharekhan.com.

 INVESTMESNT ADVICE
Company has dedicated research team for fundamental and
technical research . our analyst constantly track the pulse of the
market and provide timely investment advice to you in the form
of daily research email , online chat , printed reports and sms
on your phone.

 BENEFITS

1. Secure order by voice tools Dail-n-Trade.

2. Automated portfolio to keep track of value of actual purchases.
3. 24*7 voice tool access to your trading account.
4. Personalized price and account alert delivered instantly to your cell
phones & email address.
5. Special personal inbox for order and trade confirmations.
6. Online customers service via we chat.
7. Anytime ordering
 LITERATURE REVIEW

While doing this project I studied the previous researches which helped me to get
a broader prospective for my project. I also referred various books and journals to
have a better understanding about the topic of my project. With the help of
moneycontrol.com and commodityonline.com I gathered the required data. I also
made use of questionnaire method of research for my project work and acquired
the complete information for my project

What is commodity market?

Commodity markets are markets where raw or primary products are exchanged.
These raw commodities are traded on regulated commodities exchanges, in
which they are bought and sold in standardized contracts. This article focuses on
the history and current debates regarding
global commodity markets. It covers physical product (food, metals and electricity
) markets but not the ways that services, including those of governments, nor
investment,nor debt, can be seen as a commodity. Articles on reinsurance market
s, stock markets, bond markets and currency markets cover those concerns
separately and in more depth. One focus of this article is the relationship between
simple commodity money and the more complex instruments offered in the
commodity markets

History

The modern commodity markets have their roots in the trading of agricultural
products. While wheat and corn, cattle and pigs, were widely traded using
standard instruments in the 19th century in the United States, other basic food
stuffs such as soybeans were only added quite recently in most markets.

For a commodity market to be established there must be very broad consensus

on the variations in the product that make it acceptable for one purpose or
another. The economic impact of the development of commodity markets is hard
to overestimate. Through the 19th century "the exchanges became effective
spokesmen for, and innovators of, improvements in transportation, warehousing,
and financing, which paved the way to expanded interstate and international
trade.”

Early history of commodity markets

Historically, dating from ancient Sumerian use of sheep or goats, other peoples
using pigs, rare seashells, or other items as commodity money, people have
sought ways to standardize and trade contracts in the delivery of such items, to
render trade itself more smooth and predictable. Commodity money and
commodity markets in a crude early form are believed to have originated in
Sumer where small baked clay tokens in the shape of sheep or goats were used in
trade. Sealed in clay vessels with a certain number of such tokens, with that
number written on the outside, they represented a promise to deliver that
number. This made them a form of commodity money - more than an I.O.U. but
less than a guarantee by a nation-state or bank. However, they were also known
to contain promises of time and date of delivery - this made them like a modern
futures contract. Regardless of the details, it was only possible to verify the
number of tokens inside by shaking the vessel or by breaking it, at which point the
number or terms written on the outside became subject to doubt. Eventually the
tokens disappeared, but the contracts remained on flat tablets. This represented
the first system of commodity accounting. Classical civilizations built complex
global markets trading gold or silver for spices, cloth, wood and weapons, most of
which had standards of quality and timeliness. Considering the many hazards of
climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the
trade routes, it was a major focus of these civilizations to keep markets open and
trading in these scarce commodities. Reputation and clearing became central
concerns, and the states which could handle them most effectively became very
powerful empires, trusted by many peoples to manage and mediate trade and
commerce.
INDIA AND THE COMMODITY MARKET

When did Commodity Market start in India?

Organized commodity derivatives in India started as early as 1875, barely about a

decade after they started in Chicago. However, many feared that derivatives
fuelled unnecessary speculation and were detrimental to the healthy functioning
of the markets for the underlying commodities. As a result, after independence,
commodity options trading and cash settlement of commodity futures were
banned in 1952. A further blow came in 1960s when, following several years of
severe draughts that forced many farmers to default on forward contracts (and
even caused some suicides), forward trading was banned in many commodities
considered primary or essential. Consequently, the commodities derivative
markets dismantled and remained dormant for about four decades until the new
millennium when the Government, in a complete change in policy, started
actively encouraging the commodity derivatives market. Since 2002, the
commodities futures market in India has experienced an unprecedented boom in
terms of the number of modern exchanges, number of commodities allowed for
derivatives trading as well as the value of futures trading in commodities, which
might cross the $ 1 Trillion mark in2006. However, there are several impediments
to be overcome and issues to be decided for sustainable development of the
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 derivatives
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 inBombay
(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.

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.
Forward Contracts (Regulation) Act 1952, 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 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.

PRESENT COMMODITY MARKET IN INDIA

Today; commodity exchanges are purely speculative in nature. Before discovering

the price, they reach to the producers, end-users, and even there tail investors, at
a grassroots level. It brings a price transparency and risk management in the vital
market. By Exchange rules and by law, no one can bid under a higher bid, and no
one can offer to sell higher than someone else’s 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. In
India there are 25recognized future exchanges, of which there are four 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 four exchanges are:

(i)National Commodity & Derivatives Exchange Limited, Mumbai

(ii)Multi Commodity Exchange of India Limited, Mumbai.

(iii)National Multi- Commodity Exchange of India Limited, Ahmadabad.

(iv)Indian Commodity Exchange Limited, Gurgaon.

INDIAN COMMODITY MARKET STRUCTURE
Commodities Traded in India
Derivatives
Another major leap in the development of commodities markets is the growth in
commodities derivative segment. Derivatives trading have a long history. The first
recorded incident of commodities trade was traced back to the times of ancient
Greece. In the year 1688 De la Vega reported the trading in 'time bargains' which
were the then commonly used terms for options and futures. Though the first
recorded futures trade was found to have happened in Japan during the 17th
century, evidences reveal that the trading in rice futures was existent in China,
6000 years ago. Derivatives are useful for both the producers and the traders for
the mitigation of risk in their business. Trading in futures is an outcome of the
mankind's efforts towards maintaining the supply balance of seasonal
commodities throughout the year.

Farmers derived the real benefit of derivatives contracts by assuring the

prices they want to procure on their products. The volatility of prices has made
the commodity derivatives not only significant risk hedging instruments but also
strategic exchange traded assets. Slowly, traders’ and speculators, who never
intended to take the delivery of goods, entered this segment. They traded in
these instruments and made their margins by taking the advantage of price
volatility in commodity markets. The dawn of the 21st century brought back the
good times for commodity markets. With the end of a 20 year bear market for
commodities, following the global economic recovery and increased demand from
China and other developing nations, has revitalized the charisma of commodities
markets. According to the forecasts given by experts commodities markets
are likely to experience a bright future with the depreciation in the value of
financial assets. Furthermore, increasing global consumption, declining U.S. Dollar
value, rising factor-input costs and the recent recovery of the market from the
clutches of bear trend are considered to be the positive symptoms, which
contribute to the acceleration of growth in commodity markets segment.

Meaning Of Derivatives

A derivative is a product whose value is derived from the value of one or more
underlying variables or assets in a contractual manner. The underlying asset can
be equity, forex , commodity or any other asset. In other words, Derivative means
having no independent value. i.e. the value is derived from the value of the
underlying asset. Derivative means a forward, future, option or any other hybrid
contract of predetermine fixed duration, linked for the purpose of contract
fulfillment to the value of a specified real of financial asset or to an index
securities. Thus, a derivative contract is an enforceable agreement whose value is
derived from the value of an underlying asset. The four most common examples
of derivative instruments are forwards, futures, options and swaps / spreads

COMMODITY FUTURE

Commodities futures are agreements to buy or sell a raw material at a

specific date in the future at a particular price. The contract is for a set
amount. The three main areas of commodities are food, energy, and
metals. The most popular food futures are for meat, wheat, and sugar.
Most energy futures are for oil and gasoline. Metals using futures
include gold, silver, and copper.

Buyers of food, energy, and metal use futures contracts to fix the price of
the commodity they are purchasing. That reduces their risk that prices
will go up. Sellers of these commodities use futures to guarantee they
will receive the agreed-upon price. They remove the risk of a price drop.

That’s because the prices of commodities change on a weekly or even

daily basis. Contract prices change as well. That’s why the cost of meat,
gasoline, and gold changes so often.

How They Work

If the price of the underlying commodity goes up, the buyer of the futures
contract makes money. He gets the product at the lower, agreed-upon
price and can now sell it at today's higher market price. If the price goes
down, the futures seller makes money. He can buy the commodity
at today's lower market price and sell it to the futures buyer at the higher,
agreed-upon price.
If commodities traders had to deliver the product, few people would do it.
Instead, they can fulfill the contract by delivering proof that the product is
in the warehouse. They can also pay the cash difference or
provide another contract at the market price.

Using commodity futures

Hedging:
Many participants in the commodity futures market are hedgers. They use the
futures market to reduce a particular risk that they face. This risk might relate to
the price of wheat or oil or any other commodity that the person deals in. The
classic hedging example is that of wheat farmer who wants to hedge the risk of
fluctuations in the price of wheat around the time that his crop is ready for
harvesting. By selling his crop forward, he obtains a hedge by locking in to a
predetermined price. Hedging does not necessarily improve the financial
outcome; indeed, it could make the outcome worse. What it does however is,
that it makes the outcome more certain. Hedgers could be government
institutions, private corporations like financial institutions, trading companies and
even other participants in the value chain, for instance farmers, extractors,
ginners ,processors etc., who are influenced by the commodity.
.Speculation:
An entity having an opinion on the price movements of a given commodity can
speculate using the commodity market. While the basics of speculation apply to
any market, speculating in commodities is not as simple as speculating on stocks
in the financial market. For a speculator who thinks the shares of a given
company will rise, it is easy to buy the shares and hold them for whatever
duration he wants to. However, commodities are bulky products and come with
all the costs and procedures of handling these products. The commodities futures
markets provide speculators with an easy mechanism to speculate on the price of
underlying commodities. To trade commodity futures on the NCDEX, a customer
must open a futures trading account with a commodity derivatives broker. Buying
futures simply involves putting in the margin money. This enables futures traders
to take a position in the underlying commodity without having to actually hold
that commodity. With the purchase of futures contract on a commodity, the
holder essentially makes a legally binding promise or obligation to buy the
underlying security at some point in the future (the expiration date of the
contract).

Arbitrage:
A central idea in modern economics is the law of one price.This states that in
a competitive market, if two assets are equivalent from the point of view of risk
and return, they should sell at the same price. If the price of the same asset is
different in two markets, there will be operators who will buy in the market
where the asset sells cheap and sell in the market where it is costly. This activity
termed as arbitrage
,
involves the simultaneous purchase and sale of the same or essentially similar
security in two different markets for advantageously different prices.The buying
cheap and selling expensive continues till prices in the two markets reach
equilibrium. Hence, arbitrage helps to equalize prices and restore market
efficiency