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Analysis of Indian Commodity Market

At MANOHAR CHAWDHARI AND ASSOCIATION (CHARTED ACCOUNTED), BANGLORE

Submitted in partial fulfillment of the requirements of Master of Business Administration


Submitted to:

Punjab Technical University Jalandhar


Submitted By: PARMJEET KUMAR SINGH Registration No- 9212400130 Under the guidance of Prof. Amit Kanjilal

#70, 2nd Main Road, 3rd Cross, Kanaka Nagar, Nagawara, BANGALORE 560 032 2009 11

DECLARATION
I hereby declared that this project titled Analysis of Indian Commodity Market is submitted to the Punjab Technical University as a partial requirement for the award of Degree of Master of Business Administration, during the year 2009-2011. It is the record of an original & independent study carried out by me, under the able guidance and supervision of Prof. Amit Kanjilal of International Institute of Business Studies, Bangalore. This project report has not been submitted earlier by me or by anybody else for the award of any other degree in any University in India or abroad.

Date: Place:

Signature (Parmjeet Kumar Singh)

ACKNOWLEDGEMENT
I take this opportunity to extend my sincere gratitude to the respondents who gave all the support and had been cooperative in providing all the valuable required information without which I would not have completed my report. I would also like to thank Prof. Amit Kanjilal internal guide for the constant guidance, encouragement and motivation they extended throughout the study. I also thank my parents and friends for their co-operation, support and encouragement extended throughout the study.

Date: Place:

Parmjeet Kumar Singh

EXECUTIVE SUMMARY
Different web based literature has been studied to understand which are the major players of commodity markets in the world? And what is their way of operation? Which are the major commodity exchanges in India? What is their modus operandi? While we were surveying various web site we came to know the whole commodity market and the exchange takes place in this market is broadly classify into two principle categories that is agriculture and non agriculture commodity market. The first session deals with the significance of commodity market. As commodity market is the place where 2 parties agree to buy and sell a specified and standardized quantity of a commodity at a certain time of future at a price agreed upon at the time of agreement agreed upon irrespective of availing future price. Following the significance of commodity market is the history of the commodity market. The root of commodity market is traced from Japan where Japanese merchants used to store rice in ware houses and later on they have issued Rice tickets. And as the time passes rice tickets are started to accepted as a currency. Patterns of exchange that was prevailing in the market which was auction and the pattern that is currently prevailing in the market which is future is discussed. Major international and national players are described. Various national and international markets and their features in brief are described. The perspective of commodity market in which active and passive mode of commodity market, volatility, liquidity of commodity market and their relation with economy are discussed. Benefits of future commodity markets to agriculturists, farmers are discussed in brief along with price discovery, price risk management, import-export competitiveness, improved product quality-market transparency etc. are discussed. The attractive features of commodity market, various instruments those are available in the market are listed.

INDEX
Chapter No Topic 1 Introduction to Commodity Market 2 3 4 5 6 7 8 Analysis 9 10 11 12 Finding Conclusion Questionnaire ANNAXTURE Bibliography 38 47 55 56 History of Evolution of Commodity Markets India and the Commodity Market International Commodity Exchanges How Commodity Market Works? How to Invest in a Commodity Market Page No. 04 08 10 15 17 19

Current Scenario in Indian Commodity Market 23 28

Chapter 1
Introduction to Commodity Market
INTRODUCTION Organized futures markets in India are now 134 years old, with the first such organization the Bombay Cotton Trade Association Ltd. been set up in 1875. While India was gradually becoming the largest consumer of gold in the world, a position it still enjoys, futures markets in bullion were inevitable and began to emerge in Mumbai in 1920. The vast geographical extent of India and her huge population is aptly complemented by the size of her market. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency. India Commodity Market can be subdivided into the following two categories: Wholesale Market Retail Market Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it was in 2009. MARKET A market is conventionally defined as a place where buyers and sellers meet to exchange goods or services for a consideration. This consideration is usually money. In an Information Technology-enabled environment, buyers and sellers from different locations can transact business in an electronic marketplace. Hence the physical marketplace is not necessary for the exchange of goods or services for a consideration. COMMODITY A commodity is a product that has commercial value, which can be produced, bought, sold, and consumed. Commodities are basically the products of the

primary sector of an economy. The primary sector of an economy is concerned with agriculture and extraction of raw materials such as metals, energy (crude oil, natural gas), etc., which serve as basic inputs for the secondary sector of the economy.

COMMODITY EXCHANGE A commodity exchange is an association, a company, or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority. COMMODITY FUTURES A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons: Consumer Preferences: - In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance. Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging. Commodity Future is a very important instrument in hedging risks, which arises in the spot market. Speculators and hedgers use Commodity Futures to reduce the risks. The spot prices so determined, may not be profitable to the person who is dealing with that particular commodity. With the help of Futures, he can reduce this risk, by entering into a contract to sell a particular commodity at a future date, at a pre-determined price.

But, by doing so he still is not free from risk. The contract so entered into may lose its value due to external factors. So, there is a very important and genuine need to effective management of the contract through various risk management techniques. The objectives of Commodity futures: Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.

Benefits of Commodity Futures Markets:The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly. 1. Price Discovery:-Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. 2. Price Risk Management: - Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. 3. Import- Export competitiveness: - The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders, which are involved in physical trade internationally, intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. 4. Predictable Pricing: - The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices.

5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce 6. Credit accessibility: - The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Improved product quality: - The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. Statement of the problem Commodity Future is a very important instrument in hedging risks, which arises in the spot market. Speculators and hedgers use Commodity Futures to reduce the risks. The spot prices so determined, may not be profitable to the person who is dealing with that particular commodity. With the help of Futures he can reduce this risk, by entering into a contract to sell a particular commodity at a future date, at a pre-determined price. But, by doing so he still is not free from risk. The contract so entered into may lose its value due to external factors. So, there is a very important and genuine need to effective management of the contract through various risk management techniques. By using the various tools, a sound investment can be made and benefit from the price movement. But the problem lies in the fact that there are various other investment opportunities for an investor. And also another factor that little price movements can result in huge losses. So, why should anyone trade in commodity future.

COMMODITY MARKETS OF WORLD Some of the exchanges of the world are: S. No. Global Commodity Exchanges 1 New York Mercantile Exchange (NYMEX) 2 London Metal Exchange (LME) 3 Chicago Board of Trade (CBOT) 4 New York Board of Trade (NYBOT) 5 Kansas Board of Trade 6 Winnipeg Commodity Exchange, Manitoba 7 Dalian Commodity Exchange, China 8 Bursa Malaysia Derivatives exchange 9 Singapore Commodity Exchange (SICOM) 10 Chicago Mercantile Exchange (CME), US 11 London Metal Exchange 12 Tokyo Commodity Exchange (TOCOM) 13 Shanghai Futures Exchange 14 Sydney Futures Exchange 15 London International Financial Futures and Options Exchange (LIFFE) 16 Dubai Gold & Commodity Exchange (DGCX) 17 Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX))

OBJECTIVES OF THE STUDY The objective of this study is mainly to prove that commodity futures can be used as a risk reduction instrument and also as an investment opportunity. In order to do so, the following are the sub-objectives. 1. 2. To study the Indian commodity Market with International commodity market To study the growth of commodity futures trading 3. To study the perception of investors of commodity futures (questionnaire)

Chapter-2 Research Design and Implementation


METHODOLOGY OF RESEARCH In this study primary analytical research method is used, which includes questionnaire, tabulation an analysis. This is one of the most import methods. SAMPLE DESIGN In this study convenient random sampling method is used to select the respondents. The sample size is 25 respondents.

SOURCES OF DATA The various sources of data are 1. 2. Primary Sources, which includes questionnaire, and a survey. Secondary sources

TOOLS FOR DATA COLLECTION The questionnaire is the tool used for data collection.

ANALYSIS AND INTERPRETATION The various tools for analysis used are graphs, charts, percentage growth, secondary data.

LIMITATIONS OF THE STUDY The following are the limitations of the study
Due to non-availability of sufficient time and money, a detailed study could not be made. The research is confined to Bangalore only. The sample size taken is 25 only.

Chapter-3 Review of Literature


COMMODITIES TRADED IN INDIA
I have gone through plenty of articles before conducting survey, some of the glimpse are:

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

and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading was permitted in all recommended commodities. It is timely decision since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities. Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market.

INTERNATIONAL COMMODITY EXCHANGES


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

The New York Mercantile Exchange (NYMEX):The New York Mercantile Exchange is the worlds biggest exchange for trading in physical commodity futures. It is a primary trading forum for energy products and precious metals. The exchange is in existence since last 132 years and performs trades trough two divisions, the NYMEX division, which deals in energy and platinum and the COMEX division, which trades in all the other metals.

Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline,
RBOB Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.

London Metal Exchange:-The London Metal Exchange (LME) is the worlds


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

Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum


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

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

Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol,
Rough Rice, Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM):- The Tokyo Commodity Exchange


(TOCOM) is the second largest commodity futures exchange in the world. It trades in to metals and energy contracts. It has made rapid advancement in commodity trading globally since its inception 20 years back. One of the biggest reasons for that is the initiative TOCOM took towards establishing Asia as the benchmark for price discovery and risk management in commodities like the Middle East Crude Oil. TOCOMs recent tie up with the MCX to explore cooperation and business opportunities is seen as one of the steps towards providing platform for futures price discovery in Asia for Asian players

in Crude Oil since the demand-supply situation in U.S. that drives NYMEX is different from demand-supply situation in Asia.

Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum,


Aluminum, 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. Today it trades heavily in interest rates futures, stock indices and foreign exchange futures. Its products often serves as a financial benchmark and witnesses the largest open interest in futures profile of CME consists of livestock, dairy and forest products and enables small family farms to large Agri-business to manage their price risks. Trading in CME can be done either through pit trading or electronically.

Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen


pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc

COMMODITIES TRADED IN INDIA

EXHIBIT 5.1 COMMODITIES IN WHICH FUTURES TRADING IS BEING CONDUCTED IN INDIA.

Chapter 5

How Commodity market works?


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

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

I. Trading: - At this stage the following is the system implemented-

Order receiving Execution Matching Reporting Surveillance Price limits Position limits

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


Registration Clearing Clearing limits Notation Margining Price limits Position limits Clearing house.

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

Chapter 6
How to invest in a Commodity Market?
With whom investor can transact a business?
An investor can transact a business with the approved clearing member of previously mentioned Commodity Exchanges. The investor can ask for the details from the Commodity Exchanges about the list of approved members.

What is Identity Proof?


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

What statements should be given for Bank Proof?


The front page of Bank Pass Book and a canceled cheque of a concerned bank. Otherwise the Bank Statement containing details can be given.

What are the particulars to be given for address proof?


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

What are the other forms to be signed by the investor?


The clearing member will ask the client to sign a) Know your client form b) Risk Discloser Document

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

What aspects should be considered while selecting a commodity broker?


While selecting a commodity broker investor should ideally keep certain aspects in mind to ensure that they are not being missed in any which way. These factors include Net worth of the broker of brokerage firm. The clientele. The number of franchises/branches. The market credibility. The references. The kind of service provided- back office functioning being most important. Credit facility. The research team. These are amongst the most important factors to calculate the credibility of commodity broker. Broker:The Broker is essentially a person of firm that liaisons between individual traders and the commodity exchange. In other words, the Commodity Broker is the member of Commodity Exchange, having direct connection with the exchange to carry out all trades legally. He is also known as the authorized dealer.

How to become a Commodity Trader/Broker of Commodity Exchange?


To become a commodity trader one needs to complete certain legal and binding obligations. There is routine process followed, which is stated by a unit of Government that lays down the laws and acts with regards to commodity trading. A broker of Commodities is also required to meet certain obligations to gain such a membership in exchange.

To become a member of Commodity Exchange the broker of brokerage firm should have net worth amounting to Rs. 50 Lakh. This sum has been determined by Multi Commodity Exchange.

How to become a Member of Commodity Exchange?


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

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

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

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

Membership Details for NCDEX:Trading-cum-clearing Member: - TCM Sr. Particulars NCDEX: TCM No. Interest Free Cash Security 1 15.00 Lakhs Deposit 2 Collateral Security Deposit 15.00 Lakhs 3 Admission Fee 5.00 Lakhs 4 Annual Membership Fees 0.50 Lakhs Advance Minimum 5 0.50 Lakhs Transaction Charges 6 Net worth Requirement 50.00 Lakhs Professional Clearing Membership: - PCM Sr. Particulars NCDEX: PCM No. Interest Free Cash Security 1 25.00 Lakhs Deposit Collateral Security Deposit 2 25.00 Lakhs 3 4 5 Annual Subscription 1.00 Lakhs Charges Advance Minimum 1.00 Lakhs Transaction Charges Net worth Requirement 5000.00 Lakhs

Membership Details for MCX:


Category TCM-1 TCM-2 ITCM PCM Admissi Initial on Security Fees Deposit Rs. 10 Lakhs Rs. 5 Lakhs Rs. 10 Lakhs Nil Rs. Lakhs Rs. Lakhs Rs. Lakhs Rs. Lakhs 15 50 50 50 Annual Subscription Rs 50,000 Rs 50,000 Rs 50,000 Rs 1,00,000 Net worth Criteria Corporate Rs Lakhs Rs. Lakhs Rs. Lakhs Rs. 5Crores Partnershi p 50 Rs. 50 Lakhs 50 Rs. 50 Lakhs 50 N.A. N.A. Individual Rs. Lakhs Rs. Lakhs N.A. N.A. 50 50

Chapter-7 Current Scenario in Indian Commodity Market


1 CURRENT SCENARIO
The growth paradigm of Indias commodity markets is best reflected by the figures from the regulators official website, which indicated that the total value of trade on the commodity futures market in the financial year 2008/09 was INR52.49 lakh crore (over US$1 trillion) as against INR 40.66 lakh crore in the preceding year, registering a growth of 29.09%, even under challenging economic conditions globally. The unqualified success of the futures market has ensured the next step, i.e., the launch of electronic spot markets for agro-products. Being in a time-zone that falls in the gap left by the major commodity exchanges in the US, Europe and Japan has also worked in Indias favour because commodity business by its very nature is a 24/7 business. Innovation coupled with modern and successful financial market environment has ensured the beginning of a success story in commodities, which will eventually see India becoming a price-setter in major commodities on the strength of its large production and consumption. Need of Commodity Derivatives for India:India is among top 5 producers of most of the Commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian economy. It employees around 57% of the labor force on total of 163 million hectors of land Agriculture sector is an important factor in achieving a GDP growth of 810%. All this indicates that India can be promoted as a major centre for trading of commodity derivatives.

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

Pattern on National Commodity & Derivatives Exchange (NCDEX):NCDEX is the second largest commodity exchange in the country after MCX. However, the major volume contributors on NCDEX are agricultural commodities. But, most of them have common inherent problem of small market size, which is making them vulnerable to market manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed, chana and Urad (narrow commodities as specified by FMC).

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

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

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


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

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

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

In order to understand the extent of progress the trading the trading in Commodity Derivatives has made towards its specified objectives (price discovery and price risk management), the current trends are juxtaposed against the specifications. Thus it is evident that the realization of specified objectives is still a distinct destination. It is further, evident from the nature of the commodities largely traded on national exchanges that the factors driving the current pattern of futures trade are purely speculative.

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

Some Suggestions to make futures market as a level playing field for all stake holders: Creation of awareness among farmers and other rural participants to use the futures trading platform for risk mitigation. Contract specifications should have wider coverage, so that a large number of varieties produced across the country could be included. Warehousing and logistics management structure also needs to be created at state or area level whenever commodity production is above a certain share of national level. Though over 100 commodities are allowed for Derivatives trading, in practice only a few commodities derivatives are popular for trading. Again most of the trade takes place only on few exchanges. This problem can possibly solved by consolidating some exchanges. Only about 1% to 5% of total commodity derivatives traded in country are settled in physical delivery due to insufficiencies in present warehousing

system. As good delivery system is the back bone of any Commodity trade, warehousing problem has to be handled on a war footing. A difficult problem in Cash settlement of Commodities Derivatives contract is that, under Forward Contracts Regulation Act 1952 cash settlement of outstanding contracts at maturity is not allowed. That means outstanding contracts at maturity should be settled in physical delivery. To avoid this participants square off their their positions before maturity.

Chapter 8
Steel Commodities
General Characteristics: Steel is an alloy of iron and carbon, containing less than 2% carbon, 1% manganese and small amount of silicon, phosphorus, sulphur and oxygen. Steel is most important engineering and construction material in the world. It is most important, multi functional and the most adaptable of materials. Steel production is 20 times higher a compared to production of all non-ferrous metals put together. Steel compared to other materials of its type has low production costs. The energy required for extracting iron from ore is about 25% of what is needed for extracting aluminum. There are altogether about 2000 grades of steel developed of which 1500 grades are high-grade steels. The large number of grades gives steel the characteristics of basic production material.

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

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

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

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

goods and raw materials, since liberalization for the growth and development of Indian iron & steel industry. After liberalization India has seen huge scale addition to its steel making capacity. The country faces shortage of iron and steel materials.

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

Monthly Variations in Steel Prices from Feb 2005- Dec 2006: -1

Contract specifications of Steel Flat Symbol STEELFLAT Description STEELFLATMMMYY Trading Period Mondays through Saturdays Trading session Monday to Friday: 1st session: 10.00 am to 5.00 pm 2nd session: 5.30 pm to 8.00 pm Saturday: 10.00 am to 2.00 pm No. of contracts a year 12 Contact Duration 4 months Trading Trading unit 25 MT Price Quote Rs./ton, Ex-Taloj Kalambo (excluding excise duty and sales tax). Maximum order size 200 MT Tick size (minimum Rs. 10 Price movement) Daily price limits 4% Initial margin 5% Special margin In case of additional volatility, a special margin of 2% or such other percentage, as deemed fit, will be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next three days, after which the special margin will be relaxed. Maximum Allowable Open For individual clients: 1,00,000 MT Position For a member collectively for all clients: 25% of open market position. Delivery Delivery unit 25 MT with tolerance limit Between 23.5 MT to 26.5 MT Delivery Center(s) Warehouses at Taloja/ Kalamboli Quality Specifications HR coil conforming to the following specification: Thickness 2 mm Width either 1250mm or 910 mm at sellers option. It should confirm to IS 11513 Grade D/SAE 1008 (International equivalent) Delivery is acceptable only in coil form.
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Contract specifications of Steel Long Symbol STEELLONG Description STEELLONGMMMYY Trading Period Mondays through Saturdays Trading session Monday to Friday: 1st session: 10.00 am to 5.00 pm 2nd session: 5.30 pm to 8.00 pm Saturday: 10.00 am to 2.00 pm No. of contracts a year 12 Contact Duration 4 months Trading Trading unit 15 MT Price Quote Rs./ton, Ex- Mandi Gobindgarh (including excise duty but excluding sales tax). Maximum order size 300 MT Tick size (minimum Rs. 10 Price movement) Daily price limits 4% Initial margin 5% Special margin In case of additional volatility, a special margin of 2% or such other percentage, as deemed fit, will be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next three days, after which the special margin will be relaxed. Maximum Allowable Open For individual clients: 1,00,000 MT Position For a member collectively for all clients: 25% of open market position. Delivery Delivery unit 15 MT with tolerance limit Between 13.5 MT to 16.5 MT Delivery Center(s) Warehouses at Mandi Gobindgarh Quality Specifications Mild steels ingots 3 * 4 inch Carbon composition: Below 0.25% Manganese: Above 0.45% Material should be physically sound. It should have no hollowness, no piping no rising. Its surface should be plain.

Quality Specifications: -

Sponge Iron Futures Sponge Iron Lumps Chemical Properties (only Magnetic Portion): Degree of Metallization: 88 +/- 2%. Total Iron: 91%. Carbon: 0.2% to 0.3%. Sulphur: 0.05% Max. Phosphorus: 0.06 Max. Sio2 + Al2o3: 6% or Max. Char & other process Contaminants: 1% Max. Size: 3 to 20 mm Undersize arising during tailings (-3mm): 5% Max

Steel Flat: HR Coil confirming to the following specification: Thickness 2mm Width either 1250 mm or 910 mm at sellers option. It should confirm to IS 11513 Grade D/ SALE 1008 (international equivalent) Delivery is acceptable only in coil form.

Steel Long (Bhavnagar): Mild steel ingots 3 * 4 inch. Carbon composition: Below 0.25% Manganese: Above 0.45% Material should be physically sound. It should have no hollowness, no piping and no rising. Its surface should be plain. Steel Long (Govindgarh): Mild steel ingots 3 * 4 inch. Carbon composition: Below 0.25% Manganese: Above 0.45%

Material should be physically sound. It should have no hollowness, no piping and no rising. Its surface should be plain.

WHEAT
Wheat is cereal grain and consumed worldwide. Wheat is more popular than any other cereal grain for use in baked goods. Its popularity stems from the gluten that forms when lour is mixes with water. Wheat is the most widely grown cereal grain in the world. Global and Indian Scenario: The world wheat production in the recent years has been observed to be hovering between 555 million tons to 625 million tons a year. The biggest cultivators of wheat are EU 25, China, India, USA, Russia, Australia, Canada, Pakistan, Turkey and Argentina. EU 25, China, India and US are the four largest producers account for around 60% of total global production. Worlds wheat consumption is continuously growing with growth in a population, as it is one of the major staple foods across the world. The major consuming countries of wheat are EU, China, India, Russia, USA and Pakistan. India has largest area in the world under wheat. However, in terms of production, India is second largest behind China. In India, Wheat is sown during October to December and harvested during March to May. The wheat marketing season in India is assumed to begin from April every year. The major wheat producing states in India are Utter Pradesh, Punjab, Haryana, Madhya Pradesh, Rajasthan and Bihar. Which together account for around 93% of total production. In terms of productivity, Punjab stands first followed by Haryana, Rajasthan, UP, Gujarat, Bihar and MP. Indian wheat is largely soft/medium hard, medium protein, bread wheat. India is also produces around 1.5 million tons of durum wheat, mostly in central and western India, which is not segregated and marketed separately. India consumes around 72-74 million tons of Wheat every year. There are around 1000 large flourmills in India, with a milling capacity of around 15 million tons. The total procurement of wheat by Government agencies during last 15 years from 8 to 20 million tons, accounting for only 15-20% of the total production. India exported around 5 million tons subsidized by Government in 2004-05, as a result of surplus stock. Recently Govt. took decision to import wheat in view of, declining stocks and increasing demand.

Key market moving Factors: Price tends to be lower as harvesting progresses and produce starts coming in to the market. At the time sowing and before harvesting price tend to rise in a view of tight supply situation. Weather has profound influence on wheat production. Temperature plays crucial role towards maturity of wheat and productivity. Change in Minimum Support Price (MSP) by Govt. and the stock available with Food corporation of India and the release from official stock influence of the price. Though, international trade is limited, the ups and downs in the production and consumption at all the major/minor producing and consuming nation dose influence the long term price trend. Contract specifications of Wheat Contract Period Five Months Trading Period Mondays through Saturdays Trading session Monday to Friday: 10.00 am to 5.00 pm Saturday: 10.00 am to 2.00 pm Trading Trading unit 10 MT Quotation based value 1 Quintal Maximum order size 500 MT Tick size (minimum 10 Paise Price movement) Price Quotation Ex-warehouse Delhi (including all taxes, levies and sales tax/ VAT, as the case may be) Daily price limits 4% Initial margin 5% Special margin In case of additional volatility, a special margin at such other percentage, as deemed fit will be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next 2 days, after which the special margin will be

PERFORMANCE ANALYSIS OF INDIAN COMODITY MARKET.


Futures contracts are available for major agricultural commodities, metals and energy. Commodity group-wise value of trading since 2004-08 is given in Fig. COMMODITY GROUP-WISE VALUE OF TRADE

TRADING FROM APRIL 2007-MARCH 2010 IN UNIT (AS PER MCX)

VOLATILITY IN MONTHLY SPOT PRICE INDICES: ESTIMATES OF STANDARD DEVIATIONS.

STUDY THE PERCEPTION OF INVESTORS TOWARDS COMMODITY FUTURES.


In this section the data obtained through the questionnaire from the investors in commodity futures is analyzed. SECTION A:
Sex profile Sex Male Female No. of Respondents 20 5 Percentage 80% 20%

Bar chart showing the Sex Profile of the Respondents 100% Percentage 80% 60% 40% 20% 0% Male Sex Male Female Female 20%

80%

Findings
From the above table and chart, it can be seen that 80% of the respondents were male, and 20% were female.

Interpretation
It can be concluded that mainly males invest in commodity futures.

Age Profile

Age Group 20-30 years 30-40 years 40-50 years 50 years and above

No. of Respondents 13 6 5 1

Percentage 52% 24% 20% 4%

Pie chart showing the age profile of the respondents

4% 20% 20-30 years 30-40 years 52% 40-50 years 50 years and above 24%

Findings
From the above table and chart, it can be seen that 52% of the respondents were in the age group of 20-30 years, 24% were in the age group of 30-40 years, and 20% were in the age group of 40-50 years and 4% in the age group of 50 years and above.

Interpretation
It can be concluded that mainly the young people have invested commodity futures.

Education profile:
Educational Qualification Higher Secondary P.U.C G raduate Post Graduate No. of Respondents 0 1 15 9 Percentage 0% 4% 60% 36%

Pie chart showing the education profile of the respondents 0% 4% 36% Higher Secondary P.U.C Graduate 60% Post Graduate

Findings
From the above table and chart, it can be seen that 52% of the respondents were in the age group of 20-30 years, 24% were in the age group of 30-40 years, 20% were in the age group of 40-50 years and 4% in the age group of 50 years and above.

Interpretation
It can be concluded that mainly the young graduates have invested commodity futures.

Occupation Profile

Occupation No. of Respondents Government Employee 1 Private Sector 7 Employee Self-Employee 5 Businessmen 12 Commodity Futures 3 Advisor Others 0

Percentage 4% 28% 20% 48% 12% 0%

Pie chart showing the Occupation Profile of the respondents Government Employee 0% 12% 4% Private Sector Employee 28% Self-Employee Businessmen 48% Commodity Futures 20% Advisor Others

Findings
From the above table and chart, it can be seen that 4% of the respondents were government employees, 28% were private sector employee, 20% were SelfEmployed and 48% were businessmen, 12% were Commodity futures advisors.

Interpretation
It can be concluded commodity futures. that mainly the businessmen have invested

Income Profile
Income Group Below Rs. 4 Lakh Rs. 4 10 Lakh Rs. 10 25 Lakh Above Rs. 25 Lakh No. of Respondents 10 14 1 0 Percentage 40% 56% 4% 0%

Pie chart showing the income profile of the respondents

4%

0% Below Rs. 4 Lakh 40% Rs. 4 10 Lakh Rs. 10 25 Lakh Above Rs. 25 Lakh

56%

Findings From the above table and chart, it can be seen that 40% of the respondents were in the income group of below Rs. 4 lakh, 56% were in the income group of Rs. 4-10 lakh, 56% were in the income group of Rs. 4-10 lakh and 4% were in the income group of Rs. 10-25 lakh. Interpretation It can be concluded that most of the people who have invested commodity futures are in the income group of Rs.4-10 lakh.

SECTION B
1) Which are the investments you have made (excluding commodity

futures)?
Particulars Shares Mutual Funds Bonds Bank Deposits Real Estate jewellery Insurance No. of Respondents 16 9 3 5 7 4 2 Percentage 35% 20% 6% 10% 15% 9% 5%

Pie chart showing the various investments made by respondents

5% 9% Shares Mutual Funds 35% Bonds 15% B ank D eposits Real Estate jew ellery 10% Insurance 6% 20%

Findings It can be seen that, out of the respondents who have invested in other securities, 35% of them have invested in shares, 20% Mutual funds, 6% in Bonds, 10% have invested in bank deposits. 15% in real estate, 9% have invested in jewellery and the rest 9% have invested in insurance. Interpretation

It can be concluded that other than commodity futures, most of the respondents have invested in shares.

2) What is your Experience in your previous Investment (excluding

commodity futures)?
Particulars Good Bad Reasonable No. of Respondents 13 9 2 Percentage 52% 36% 8%

Bar chart showing the Experience of the respondents in their previous investment 60% 50% 36% 40% Percentage 30% 20% 8% 10% 0% Good Bad Particulars Good Bad Reasonable Reasonable 52%

Findings It can be seen that 52% of the respondents had a good experience in their previous investment, 36% had a reasonable experience in their previous investment and 8% had a bad experience in their previous investment. Interpretation It can be concluded that most of the respondents had a good experience in their previous investment

3) What is the amount you have invested in commodity futures?


Amount (Rupees) Rs. 2 lakh Rs. 2-3 lakh Rs. 3-5 lakh Rs. 5-10 lakh Above Rs. 10 lakh No. of Respondents 6 12 6 1 0 Percentage 24% 48% 24% 4% 0%

Pie chart showing the amount invested in commodity futures

0% 4% 24% Rs. 2 lakh 24% Rs. 2-3 lakh Rs. 3-5 lakh Rs. 5-10 lakh Above Rs. 10 lakh 48%

Findings It can be seen that out of the investors, 24% of them had invested Rs. 2 lakhs, 48% of them had invested between Rs. 2-3 lakhs, 24% had invested between Rs. 3-5 lakhs and 4% had invested between Rs. 5-10 lakhs. Interpretation It can be concluded that most of the investors had invested between Rs. 2-3 lakhs in commodity futures.

4) Which commodities have you traded in, the most?


Commodity Coffee Cotton Pork Belly Orange juice Wheat Corn Soybean Silver Copper Lumber Palladium Platinum oats No. of Respondents 6 5 3 1 6 5 10 15 9 6 1 2 2 Percentage 9% 7% 5% 1% 9% 7% 15% 22% 12% 9% 1% 3% 3%

Pie chart showing the mostly traded commodities by the investors Coffee 3% cotton 3% Pork Belly 1% 9% Orange juice 7% 9% Wheat 5% Corn 1% 12% Soybean 9% Silver 7% 22% Copper Lumber

Palladium 15%

Findings
It can be seen that out of the investors in commodity futures, 22% of them have traded mostly in silver, 15% of them traded in soybean, 12% in copper, 9% each in coffee, wheat and lumber, 7% each in Cotton Corn, 5% in Pork Belly, 3% each in Oats and platinum, 1% each in Orange Juice and Palladium.

Interpretation
It can be concluded that the mostly traded commodity is Silver, followed by soybean and copper.

5) Which commodity do you think is the most volatile?


Commodity Coffee Silver Soybean Lumber No. of Respondents 2 7 14 1 Percentage 8% 28% 56% 4%

Pie Chart showing the investors Perception of the most volatile commodity

4%

8%

Coffee 29% Silver Soybean Lumber 59%

Findings It can be seen that 56% of the investors feel that soybean is the most volatile commodity, 28% feel silver is the most volatile, 8% feel Coffee is the most volatile while 4% feel that lumber is the most volatile commodity. Interpretation It can be concluded that soybean is the most volatile commodity.

6) Which is the risk management technique, which you use mostly?

Particulars Switching Averaging Locking Cut Loss

No. of Respondents 3 7 12 3

Percentage 12% 28% 48% 12%

Bar chart showing the mostly used risk management technique 60% 48% 50% 40% percentage 28% 30% 20% 12% 10% 0% Switching Averaging Locking Cut Loss particulars Switching Cut Averaging Locking Loss 12%

Findings
It can be seen that out of the risk management techniques, 48% of the investors use locking, 28% use switching and 12% use Cut loss technique.

Interpretation
It can be concluded that locking is the mostly used risk management technique.

7) What percentage of savings have you invested in commodity

futures?
Particulars 0-10% 10-20% 20-30% 30-50% 50% and above No. of Respondents 2 8 11 1 3 Percentage 8% 32% 44% 4% 12%

Pie chart showing the percentage of savings the investors has made in commodity futures

8% 12% 4% 32% 20-30% 30-50% 50% and above 44% 0-10% 10-20%

Findings It can be seen that, 44% of the investors have invested between 20-30% of their savings in commodity futures, 32% of them have invested between 10-20% of their savings, 12% of them have invested above 50% of their savings, 8% of them have invested between 0-10% of their savings and 4% of them have invested between 3050% of their savings. Interpretation

It can be concluded that most of the investors have invested between 20-30% of their savings in commodity futures.

8) What do think about the felicitation fee charged by your company?


Particulars Very High High Reasonable Low No. of Respondents 1 5 19 0 Percentage 4% 20% 76% 0%

Bar chart showing the investors perception towards the facility fee charged by their company 76% 80% percentage 60% 40% 20% 20% 4% 0% 0% Very High High Reasonable particulars Very High High Reasonable Low Low

Findings It can be seen that, 76% of the investors feel that the facility fee charged by their company is reasonable, 20% of them feel that the facility fee charged by their company is high and 4% of the investors feel that it is very high. Interpretations It can be concluded that most of the investors feel that the facility fee charged by their company is reasonable.

9) Do you think there is future in commodity future trading, in the

present economy?
Particular s Yes No Cant say No. of Respondents 20 4 1 Percenta ge 80% 16% 4%

Bar chart showing the opinion of the investor of whether there is future in commodity futures trading in the present economy 100% 80% percentage 80% 60% 40% 16% 20% 0% Yes No Particulas Yes No Cant say 4% Cant say

Findings It can be seen that, 80% of the investors feel that there is future in commodity futures trading in the present economy, 16% of them feel that there is no future in commodity futures, 4% of the investors were unable to come to a conclusion. Interpretations It can be concluded that most of the investors feel that there is future in commodity future trading in the present economy.

10) What do you think of the return derived from commodity futures?
Particulars Good Reasonable Bad No. of Respondents 17 6 2 Percentage 68% 24% 8%

Bar chart showing the extent of returns derived by the investors from commodity futures 80% 68% 60% Percentage 40% 24% 20% 8% 0% Good Reasonable Particulars Good Reasonable Bad Bad

Findings It can be seen that, 68% of the investors feel that they got good returns from commodity futures trading, 24% of them feel that they got reasonable returns commodity futures, 4% of the investors felt they got bad returns from commodity futures. Interpretations It can be concluded that most of the investors got good returns from commodity futures.

11) Do you think commodity futures can reduce risk?


Particulars Yes No No. of Respondents 22 3 Percentage 88% 12%

Bar chart showing the investors opinion on whether risk can be reduced by commodity futures 88% 100% Percentage

80% 60% 40% 12% 20% 0% Yes Particulars Yes No No

Findings It can be seen that 92% of the investors feel that risk can be reduced through commodity futures, and 12% of the investors feel that risk cannot be reduced through commodity futures. Interpretation It can be concluded that most of the investors feel that risk can be reduced through commodity futures trading.

14) Have you invested in any other derivative instrument?


Particular s Yes No No. of Respondents 6 19 Percentag e 24% 76%

Bar Chart showing whether the investors have invested in any other derivative instrument 76% 80%

ePercentag

70% 60% 50% 40% 24% 30% 20% 10% 0% Yes Particulars No

Yes

No

Findings It can be seen that 76% of the investors have not invested in any other derivative instrument and 24% of the investors have invested in any other derivative instrument. Interpretation

It can be concluded that most of the investors have not invested in any other derivative instrument.

15) Do you think commodity futures are a good investment opportunity? Particular s Yes No Percenta ge 92% 8%

No. of Respondents 23 2

Bar chart showing opinion of the investor of whether commodity futures is a good investment opportunity 92% 100% Percentage 80% 60% 40% 20% 8% 0% Yes No

Particulars

Findings From the above table and chart, it can be seen that 92% of the investors feel that commodity futures is a good investment opportunity, and 8% investors feel that commodity futures is not a good investment opportunity Interpretation It can be concluded that most of the investors feel that commodity futures is a good investment opportunity

16. Investors preferences: -

Other

7% 23% 43% Share Market


Bank F.D. Commodity Market

27%

Investment Prefrences specified in other category

3% 30% Real Estate Jwelary 67% Not Specified

Analysis of data revels that majority of people prefer investment in Real Estate (28.81% of total sample) which specified in other category investment and it is greater than share market investment preference.

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17. Peoples knowledge about Commodity Market: -

13% Know

Dont Know 87%

Very few people heard of commodity market. Vast majority of people are unaware about Commodity Market.

18. Investors interested to invest in Commodity Market:


(Out of those, who know Commodity Market)

Interested

50%

50%

Not Interested

Though some people heard of commodity market due to lack of complete knowledge about it half of then are not interested in investing in Commodity Market.

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4.Commodity Market Investors Preferences

13% 20% 37% Bullion M etals Agricultural Fossils/Energy 30%

Above data revels that majority of commodity investors like to invest in Bullion (Gold & Silver).

20. Perception about Commodity Market

25% Less Risky Risky 50% 25% Very Risky

Analysis of data shows that majority of people who are aware about commodity market; feel that investment in commodity market is very risky. So efforts should be done to minimize the risk in commodity investment and make peoples about minimum risk in commodity investment.

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21. Opinion about Commodity Market Advertisements (Expressed by those who know commodity market)

Not Informative

100

There is no second opinion amongst commodity investors, that commodity market advertisements do not give all the necessary information.

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Qualitative Analysis
1. Investment preferences: Most of the investors prefer least risky investment which gives higher returns. That is why majority (70% of sample) of people interested in investments other than Share and commodity market. Very less number of people (only 7%) showed their interest in investment in commodity market. Main reason for this is lack of awareness and complete information about commodity market.

2. Commodity Exchanges: People who are interested in commodity investment showed more concern towards NCDEX; for its brand name and people think there might be surety of transaction at NCDEX.

3. Commodities: Bullion is most preferred commodity for investment. Because one can expect maximum returns from such investment due to rapidly increasing prices of bullion in market.

4. Advertisements: Commodity market Advertisements should be more informative. And it is the failure of commodity markets advertisement campaign to attract peoples attention; as majority of people are not aware about commodity market

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FINDINGS
From the analysis made in the previous chapter the following findings can be derived:
There are many types of risks involved commodity futures trading; the various risk management techniques can be used to minimize the risk, and henceforth benefit from the different price movements. The modus operandi of commodity futures is well defined at every level and standardized. Thus, there is very little scope for manipulation. Thus, the modus operandi of this derivative is efficient. By making use of both the fundamental and technical analysis, one can take a favorable position in the commodity futures market, and thus benefit from price movements. By making use of both the fundamental and technical analysis, one can take a favorable position in the commodity futures market, and thus benefit from price movements. The commodity futures markets are experiencing tremendous growth in the recent past. This can be emphasized by the fact that the trading volume of most commodities is increasing. Analysis of data revels that majority of people prefer investment in Real Estate (28.81% of total sample) which specified in other category investment and it is greater than share market`s investment preference. Majority of commodity investors like to invest in Bullion (Gold & Silver).

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

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RECOMMENDATION
Since commodity futures are a new concept, more awareness must be created by marketing this investment instrument appropriately. The people who have already invested in commodity futures, to recommend their friends and family to invest here too, can create this awareness. If the minimum investment is reduced, this might induce more people to invest in commodity futures. The facility to trade in Indian exchanges must also be made.

More commodities must be introduced for trading. More females should be induced to invest in commodity futures trading o All age groups of people must be asked to invest in commodity futures. o One must not trade in commodity futures every day, just for the sake of it, but should only trade only when there is a good price. o One must invest in commodity futures, because of very good returns too. o It is recommended that one should invest in commodity futures from a long-term position respective too. o It is not a necessity that one must be very educated to invest in commodity futures. So, it is recommended that those who are not so well educated also can invest in commodity futures. o It is recommended that people other than businessmen also should invest commodity futures. The clients must be advised not to make their opinion while trading, as a wrong position can prove to be very risky.

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QUESTIONNAIRE
Commodity Market Questionnaire for Officials
1. What is MCX/ NCDX/ NMCE/. -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------2. History behind formation of MCX/ NCDX/ NMCE/.. -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------3. What are the departments at MCX/ NCDX/ NMCE/. -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------4. How work is done in each department? -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------5. How one can become broker at MCX/ NCDX/ NMCE/. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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6. How one can become member of MCX/ NCDX/ NMCE.. ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PEOPLE QUESTIONNAIRE
PART A
1) Name:

2) Sex: o Male 3) Age: o 20-30 Years o 40-50 years 4) Education: o Higher secondary o Graduation 5) Occupation: o Government employee o Commodity futures analyst o Businessman 6) Income: o Pre-university o Post-graduation o 30-40 years o Above 50 years o Female

o Self-employee o Private sector employee o Others ____________

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Below 4 lakh 10,00,001 25,00,000

4,00,001 10,00,000 Above 25,00,000

PART -B
1) Have you invested in commodity futures?

Yes

No

2) Have you invested in any other security? Yes No

3) Which are the investments you have made (excluding commodity futures)? Shares Mutual funds Real estate Others ___________ 4) What is your experience in your previous investment (excluding commodity futures)? Good Bad 5) How often do you trade in commodity futures? Everyday Once a week Trade only when there is a good price Reasonable Bonds Bank deposits Jewelry

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6) What is your objective when trading in commodity futures? Less risky investment Diversification of portfolio

Very good returns

Others ______________

ANNEXURE
Terms and Definitions related to Commodity Market: Accruals:- Commodities on hand ready for shipment, storage and manufacture Arbitragers: - Arbitragers are interested in making purchase and sale in different markets at the same time to profit from price discrepancy between the two markets. At the Market: - An order to buy or sell at the best price possible at the time an order reaches the trading pit. Basis: - Basis is the difference between the cash price of an asset and futures price of the underlying asset. Basis can be negative or positive depending on the prices prevailing in the cash and futures. Basis grade: - Specific grade or grades named in the exchanges future contract. The other grades deliverable are subject to price of underlying futures Bear: - A person who expects prices to go lower. Bid: - A bid subject to immediate acceptance made on the floor of exchange to buy a definite number of futures contracts at a specific price. Breaking: - A quick decline in price. Bulging: - A quick increase in price. Bull: - A person who expects prices to go higher. Buy on Close: - To buy at the end of trading session at the price within the closing range.

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Buy on opening: - To buy at the beginning of trading session at a price within the opening range. Call: - An option that gives the buyer the right to a long position in the underlying futures at a specific price, the call writer (seller) may be assigned a short position in the underlying futures if the buyer exercises the call. Cash commodity: - The actual physical product on which a futures contract is based. This product can include agricultural commodities, financial instruments and the cash equivalent of index futures. Close: - The period at the end of trading session officially designated by exchange during which all transactions are considered made at the close. Closing price: - The price (or price range) recorded during the period designated by the exchange as the official close. Commission house: - A concern that buys and sells actual commodities or futures contract for the accounts of customers. Consumption Commodity: - Consumption commodities are held mainly for consumption purpose. E.g. Oil, steel Cover: - The cancellation of the short position in any futures contract buys the purchase of an equal quantity of the same futures contract. Cross hedge: - When a cash commodity is hedged by using futures contract of other commodity. Day orders: - Orders at a limited price which are understood to be good for the day unless expressly designated as an open order or good till canceled order. Delivery: - The tender and receipt of actual commodity, or in case of agriculture commodities, warehouse receipts covering such commodity, in settlement of futures contract. Some contracts settle in cash (cash delivery). In which case open positions are marked to market on last day of contract based on cash market close. Delivery month: - Specified month within which delivery may be made under the terms of futures contract. Delivery notice: - A notice for a clearing members intention to deliver a stated quantity of commodity in settlement of a short futures position. Derivatives: - These are financial contracts, which derive their value from an underlying asset. (Underlying assets can be equity, commodity, foreign exchange,

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interest rates, real estate or any other asset.) Four types of derivatives are trades forward, futures, options and swaps. Derivatives can be traded either in an exchange or over the counter. Differentials: - The premium paid for grades batter than the basis grade and the discounts allowed for the grades. These differentials are fixed by the contract terms on most exchanges. Exchange: - Central market place for buyers and sellers. Standardized contracts ensure that the prices mean the same to everyone in the market. The prices in an exchange are determined in the form of a continuous auction by members who are acting on behalf of their clients, companies or themselves. Forward contract: - It is an agreement between two parties to buy or sell an asset at a future date for price agreed upon while signing agreement. Forward contract is not traded on an exchange. Futures Contract:- It is an agreement between two parties to buy or sell a specified and standardized quantity and quality of an asset at certain time in the future at price agreed upon at the time of entering in to contract on the futures exchange. It is entered on centralized trading platform of exchange. Futures commission merchant: - A broker who is permitted to accept the orders to buy and sale futures contracts for the consumers. Futures Funds: - Usually limited partnerships for investors who prefer to participate in the futures market by buying shares in a fund managed by professional traders or commodity trading advisors. Futures Market:-It facilitates buying and selling of standardized contractual agreements (for future delivery) of underlying asset as the specific commodity and not the physical commodity itself. The formulation of futures contract is very specific regarding the quality of the commodity, the quantity to be delivered and date for delivery. Hedging: - Means taking a position in futures market that is opposite to position in the physical market with the objective of reducing or limiting risk associated with price. In the money: - In call options when strike price is below the price of underlying futures. In put options, when the strike price is above the underlying futures. Inthe-money options are the most expensive options because the premium includes intrinsic value. Index Futures: - Futures contracts based on indexes such as the S & P 500 or Value Line Index. These are the cash settlement contracts. Investment Commodities: - An investment commodity is generally held for investment purpose. e.g. Gold, Silver

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Limit: - The maximum daily price change above or below the price close in a specific futures market. Trading limits may be changed during periods of unusually high market activity. Limit order: - An order given to a broker by a customer who has some restrictions upon its execution, such as price or time. Liquidation: - A transaction made in reducing or closing out a long or short position, but more often used by the trade to mean a reduction or closing out of long position. Local: - Independent trader who trades his/her own money on the floor of the exchanges. Some local act as a brokers as well, but are subject to certain rules that protect customer orders. Long: - (1) The buying side of an open futures contract or futures option; (2) a trader whose net position in the futures or options market shows an excess of open purchases over open sales. Margin: - Cash or equivalent posted as guarantee of fulfillment of a futures contract (not a down payment). Margin call: - Demand for additional funds or equivalent because of adverse price movement or some other contingency. Market to Market: - The practice of crediting or debating a traders account based on daily closing prices of the futures contracts he is long or short. Market order: - An order for immediate execution at the best available price. Nearby: - The futures contract closest to expiration. Net position: - The difference between the open contracts long and the open contracts short held in any commodity by any individual or group. Offer: - An offer indicating willingness to sell at a given price (opposite of bid). On opening: - A term used to specify execution of an order during the opening. Open contracts: - Contracts which have been brought or sold without the transaction having been completed by subsequent sale, repurchase or actual delivery or receipt of commodity. Open interest: - The number of open contracts. It refers to unliquidated purchases or sales and never to their combined total. Option: - It gives right but not the obligation to the option owner, to buy an underlying asset at specific price at specific time in the future. Out-of-the money: - Option calls with the strike prices above the price of the underlying futures, and puts with strike prices below the price of the underlying futures. Over the counter: - It is alternative trading platform, linked to network of dealers who do not physically meet but instead communicates through a network of phones & computers. Pit: - An octagonal platform on the trading floor of an exchange, consisting of steps upon which traders and brokers stand while trading (if circular called ring). 78

Point: - The minimum unit in which changes in futures prices may be expressed (minimum price fluctuation may be in multiples of points). Position: - An interest in the market in the form of open commodities. Premium: - The amount by which a given futures contracts price or commoditys quality exceeds that of another contract or commodity (opposite of discount). In options, the price of a call or put, which the buyer initially pays to the option writer (seller). Price limit: - The maximum fluctuation in price of futures contract permitted during one trading session, as fixed by the rules of a contract market. Purchase and sales statement: - A statement sent by FMC to a customer when his futures option has been reduced or closed out (also called P and S) Put: - In options the buyer of a put has the right to continue a short position in an underlying futures contract at the strike price until the option expires; the seller (writer) of the put obligates himself to take a long position in the futures at the strike price if the buyer exercises his put. Range: - The difference between high and low price of the futures contract during a given period. Ratio hedging: - Hedging a cash position with futures on a less or more than onefor-one basis. Reaction: - The downward tendency of a commodity after an advance. Round turn: - The execution of the same customer of a purchase transaction and a sales transaction which offset each other. Round turn commission: - The cost to the customer for executing a futures contract which is charged only when the position is liquidated. Scalping: - For floor traders, the practice of trading in and out of contracts through out the trading day in a hopes for making a series of small profits. Settlement price: - The official daily closing price of futures contract, set by the exchange for the purpose of setting margins accounts. Short: - (1) The selling of an option futures contract. (2) A trader whose net position in the futures market shows an excess of open sales over open purchases. Speculator: - Speculator is an additional buyer of the commodities whenever it seems that market prices are lower than they should be. Spot Markets:-Here commodities are physically brought or sold on a negotiated basis. Spot price: - The price at which the spot or cash commodity is selling on the cash or spot market. Spread: - Spread is the difference in prices of two futures contracts. Striking price: - In options, the price at which a futures position will be established if the buyer exercises (also called strike or exercise price). Swap: - It is an agreement between two parties to exchange different streams of cash flows in future according to predetermined terms. Technical analysis (charting): - In price forecasting, the use of charts and other devices to analyze price-change patters and changes in volume and open interest to predict future market trends (opposite of fundamental analysis). 79

Time value: - In options the value of premium is based on the amount of time left before the contract expires and the volatility of the underlying futures contract. Time value represents the portion of the premium in excess of intrinsic value. Time value diminishes as the expiration of the options draws near and/or if the underlying futures become less volatile. Writer: - A sealer of an option who collects the premium payment from the buyer.

BIBLIOGRAPHY

Trading Commodities and Financial Futures: A Step by Step guide to Mastering the Market, 3rd Edition by George Kleinman Options, Futures and Other Derivatives by Johan C. Hull http://commodities.in http://finance.indiamart.com/markets/commodity/ http://www.commoditiescontrol.com http://www.mcxindia.com http://www.ncdex.com MCX Certified Commodity Professional Reference Material Business World (15th September 2003) Business World (4th December 2006) http://investmentz.co.in http://trade.indiainfoline.com http://www.finance.indiamart.com

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