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What is commodity?
Commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except actionable claims, money and securities. The Indian economy is witnessing a mini revolution in commodity derivatives and risk management. Commodity option trading and cash settlement of commodity futures had been banned since 1952 and until 2002 commodity derivatives market was virtually non existent.
After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952 which regulated forward contracts in commodities all over India. The Act applies to goods, which are defined as any movable property other than security, currency and actionable claims. Under the Act, only those associations/exchanges, which are granted recognition by the Government, are allowed to organize forward trading in regulated commodities. The Act envisages three-tier regulation: 1. The exchange which organize forward trading in commodities can regulate trading on a day-to-day basis; 2. The Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government, and 3. The Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution is the ultimate regulatory authority.
FMC
National Exchanges
MCX
NCDEX
NMCE
Government Policy:
After, the Indian economy embarked upon the process of liberalization and globalization in 1990, the Government set up a Committee in 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 of the Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing options trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and a future trading was permitted in all recommended commodities. Commodity futures trading in India remained in a state of hibernation for nearly four decades, mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do perform a role in risk management led the government to change its stance. The policy changes favoring commodity derivatives were also facilitated by the enhanced role assigned to free market forces under the new liberalization policy of the Government. Indeed, it was a timely decision too, since internationally the commodity cycle is on the upswing and the next decade is being touted as the decade of commodities.
Requirements of Commodity Derivatives: India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a
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GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets it was supposed to encourage and nurture to grow with times. It was a mistake other emerging economies of the world would want to avoid. Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes. A derivative is a financial contract whose price depends on, or is derived from, the price of another asset. Two important derivatives are futures and options. a) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a commodity for a predetermined delivery price at a specific future time. Futures are standardized contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. b) Commodity Options contracts: Like futures, options are also financial instruments used for hedging and speculation. The commodity option holder has the right, but not the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties the seller of the option writes the option in favor of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types
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of commodity options: a call option gives the holder a right to buy a commodity at an agreed price, while a put option gives the holder a right to sell a commodity at an agreed price on or before a specified date (called expiry date). The option holder will exercise the option only if it is beneficial to him; otherwise he will let the option lapse.
Indian Commodity Exchanges: To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting up of the commodity exchanges using the most modern systems and practices in the world. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee commodity fund, back-office computerization trading for for the the existing single Exchanges, online new Exchanges,
demutualization for the new Exchanges, and one-third representation of independent Directors on the Boards of existing Exchanges etc. Responding positively to the favorable policy changes, several, Nation-wide Multi-Commodity Exchanges (NMCE) have been set up since 2002, using modern practices such as electronic trading and clearing. The new commodity exchanges in India are 1. National Commodity And Derivative Exchange (NCDEX)
I.
National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations on December 15, 2003.This is the only commodity exchange in the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). It is a professionally managed online multi commodity exchange. NCDEX is regulated by Forward Market Commission and is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations.
II.
Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutualized exchange with a permanent recognition from Government of India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country. MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, Pulses Importers Association and Shetkari Sanghatana.
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III.
National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualized, Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it was granted approval by the Government to organize trading in the edible oil complex. It has operationalized from November 26, 2002. It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got its recognition in October 2002.
2) Competition from imports: Whether or not domestic producers like it, the competition from imported commodities is inevitable. This could be true in case of food crops, metals and energy. In the short/medium-term, indigenous output will trail consumption demand because of the lagged effect of investment. To fuel growth and rein in inflation, the government and the business houses will have to resort to imports. As imports are unrestricted (Quantitative Restrictions have been abolished), there will be liberal inflow of goods from abroad. Often, imports from developed countries are low-priced and subsidized. Such competition will result in inefficient domestic units falling by the wayside, but will eventually lead to greater efficiency among domestic producers. 3) Role of MNCs: Multinational corporations cannot be wished away. They bring with them a certain superior knowledge of operating in developing or emerging economies. They also have deep pockets and, often, are long-term players. In the Indian commodities sector, global companies will increasingly play a role as producers, suppliers, traders and service providers. Indian producers will have to learn to face competition from MNCs. 4) Consolidation of fragmented capacities: It is well-known that commodity producers and industrial consumers in India suffer poor scale economies because of their small size. Fragmentation of business that is resulting in scale-diseconomies and other infirmities is likely to give way to consolidation. Competition is now driving smaller players to explore opportunities for merger. Bigger companies with
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expansion plans follow the acquisition route. Mergers and acquisitions will lead to consolidation of fragmented businesses, albeit slowly. 5) Dominance by a few large firms: In the developed economies, a handful of companies share a big slice of the business pie. Typically, four-five companies would account for, say, 60-75 per cent of aggregate business and several smaller players compete for the rest. The commodity sector will inevitably move towards such a situation. The process of consolidation and dominance by a few large firms is already visible, however incipient. Take edible oil imports, for instance. Of the total imports of 45-50 lakh tones a year worth over Rs 10,000 crore, five companies (of which two are MNCs) account for roughly 70 per cent of business; the rest being shared by over 20 importers. 6) Waning role of government: As part of the economic liberalization process, the Government has not only freed the commodities market of controls and restrictions but has also, by and large, distanced itself from the market. The interventionist role of the government is now minimal. Of course, some restrictions still remain, like those on the sugar industry. 7) Use of information technology: Very clearly, IT will play a key role in bringing about greater transparency in the commodities market. The country's strengths in IT will increasingly be leveraged to connect stakeholders and link markets. IT will be used for delivering price and market information to primary producers (farmers). E-commerce will be the modern way of doing business.
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Several corporate have already begun to employ IT to derive value, ITC's echapel being a remarkable initiative.
Benefits of Commodities Futures Market: 1. Long term benchmark and price discovery. 2. Real time commodity prices for price fixing. 3. Enabling decisions on crop sowing and time of sale. 4. Increased bargaining power of farmers.
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5. Promoting gradation and quality of certification. 6. Promoting storage and logistics facilities. 7. Promoting warehouses receipts and financing. 8. Trade and payment guarantee with no counter party and quality risk.
Types of Commodities
Products of commodity market
Agriculturecommodity
Non-Agriculture commodity
Others
A. Agriculture Products :
1. Plantation Products
Rubber
Coffee Robusta
Cashew
2. Pulse
Chana Masoor
Yellow Peas
3. Cereals
Wheat Barley Maize
4. Spice
Pepper
Turmeric
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Jeera
Chili Coriander
5. Fibers
Indian 28.5mm Cotton V-797 Kapas
Raw jute
B. Non-Agriculture Products :
1 Polymers
Polypropylene Linear low density Polyethylene Polyvinyl chloride
2 Metals
Steel
3 Energy
Crude oil Furnace oil Thermal coal Brent crude oil Natural gas
4 Precious Metals
Gold Silver Platinum
C. Others Products :
Guar seed Guar gum Potato Sugar Menthe oil
Gold is the oldest precious metal known to man and for thousands of years it has been valued as a global currency, a commodity, an investment and simply an object of beauty.
Major Characteristics :
Gold is unique as it is both a commodity and a monetary asset. Its stability and high value makes it virtually indestructible and ensures that it is almost always recovered and recycled. There is no true consumption of gold in the economic sense as the stock of gold remains essentially constant while ownership shifts from one party to another. Although gold mine production is relatively inelastic, recycled gold (or scrap) ensures there is a potential source of easily traded supply when needed, and this helps to stabilise gold price. Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets.
China with a production of 276 tonnes, overtook South Africa as the world's largest gold producer in 2007 for the first time since 1905 that South Africa has not been the largest. The other major producers are USA, Australia, Russia and Peru.
Gold derivative exchanges at New York CME (COMEX), Tokyo (TOCOM),Mumbai(MCX) , Istanbul, Dubai, Hong Kong and Singapore are doorways to important consuming regions .
coins in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively. In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. At present, 13 banks are active in the import of gold. This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001.
General Characteristics :
Silver's unique properties make it a very useful 'Industrial
Commodity', despite it being classed as a precious metal. Demand for silver is built on three main pillars; industrial uses, photography and Jewellery & silverware accounting for 342, 205 and 259 million ounces respectively in 2002. Just over half of mined silver comes from Mexico, Peru and United States, respectively, the first, second and fourth largest producing countries. The third largest is Australia. Primary mines produce about 27 percent of world silver, zinc mining. The price of silver is not only a function of its primary output but more a function of the price of other metals also, as world mine production is more a function of the prices of other metals. The tie between silver and economic activity is strong, given that around two-thirds of total silver fabrication is in the industrial and photographic sectors.
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while
Often a faster growth in demand against supply leads to drop in stocks with government and investors.
Economically viable primary silver mine is a function of the world silver price level.
Indian Scenario :
Silver imports into India for domestic consumption in 2002 was 3,400 tons down 25 % from record 4,540 tons in 2001. Open General License (OGL) imports are the only significant source of supply to the Indian market. Non-duty paid silver for the export sector rose sharply in 2002, up by close to 200% year-on-year to 150 tons. Around 50% of India's silver requirements last year were met through imports of Chinese silver and other important sources of supply being UK, CIS, Australia and Dubai.
Indian industrial demand in 2002 is estimated at 1375 tons down by 13 % from 1,579 tons in 2001. In spite of this fall, India is still one of the largest users of silver in the world, ranking alongside Industrial giants like Japan and the United States.
By contrast with United States and Japan, Indian industrial offtake for fabrication in hardcore industrial applications like electronics and brazing alloys accounts for only 15 % and the rest being for foils for use in the decorative covering of food, plating of Jewellery and silverware and jari.
In India silver price volatility is also an important determinant of silver demand as it is for gold.
made us experts in understanding investor requirements. Arcadia's integrated and innovative use of technology provides clients with the ability to trade offline & online. Clients also have constant access to their account information via internet.
Top Management :
I. MR. ANTONY SEQUEIRA ( FOUNDER, MANAGING DIRECTOR) The chief promoter of Arcadia has been associated with capital markets for over26 years.Mr. Sequeira has a rich 19 years of banking experience with Corporation Bank & Syndicate Bank. For six years he was the Chief Executive of M/S Uday S. Kotak, now known as Kotak Securities. Mr. Sequeira is respected in the organization for being a complete taskmaster. His thrust for client satisfaction is an energizing force within the organization. He is completely committed towards making Arcadia a onestop financial service provider. II. MR. NITIN BRAHMBHATT ( DIRECTOR ) The director is an arbitrage consultant by profession, with 25 years experience in the capital market. Between 1985 and 1995, he played the role of a leading market maker in the Bombay Stock Exchange. He has a rich experience in the field of arbitrage. The credit for building the arbitrage team for Arcadia goes to him. It is his innovative ideas that have made Arcadia a leading arbitrage player in the country. Under his leadership, Arcadia has created a mammoth network of branches & franchisees.
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III.
Mr. Arjun has 14 years of practical experience in hard core operations client development, setting up retail business and customer service from the broking market. He is basically a self starter a team builder who had performed very well in the broking field by running the startup companies on his own efforts and took it to a highly progressive level. He has always shown to be the back bone of the company and continues to be the same. He has been instrumental in setting up and developing retail business. Since so many years, he has had hands on experience in building up good network and excellent relationship building in the market.
Head Office :
328, NINAD, Bldg No.7, Service Road, Near Bhavishya Nidhi Bhavan, Bandra (East), Mumbai-400051. CONTACT NUMBERS: +91 22 67739999 TOLL FREE: 1800 22 1555 FAX NUMBER: +91 22 26478988 EMAIL: info@arcadiashare.com WEBSITE: www.arcadiastock.com
CAPITAL MARKET
We offer trading in the National Stock Exchange (NSE) that has played a catalytic role in reforming the Indian securities market in teams of microstructure, market practices and trading volumes. Here we trade both in the capital and the futures & options markets. We also take you to trade in Bombay Stock Exchange Limited, the oldest exchange in Asia, with a world-famous index, the sensex.
COMMODITIES MARKET
We help you trade at the independent and de-mutulised Multi-Commodity Exchange (MCX) We facilitate trading in the National Commodity & Derivatives Exchange Limited (NCDEX), a professionally managed on-line commodity exchange.
NRI
We have a separate desk to guide Non-Resident Indian investors about Initial Public Offerings (IPO), the secondary market of listed stocks and mutual funds.
INTERNET-BASED TRADING
The biggest advantage of online trading is that investors command an expansive access to information. Corporate analysis and financial results are available at the click of the mouse. In order to facilitate smooth and safe trading on the Net, we employ the latest risk-management software. Also, our trading terminals are linked with HDFC Bank and UTI Bank systems to facilitate hassle-free transfer of funds.
MUTUAL FUNDS
Mutual funds are one of the best investments in the contemporary market because they are cost-efficient and easy to manage. Its the mutual fund manager who decides the direction of your investment. In fact, by pooling money together in a mutual fund, small investors themselves can purchase stocks and bonds playing much lower trading costs. This is where we came in and offer active involvement in overall investment strategy. We bring customized insights on how to handle your precious savings.
IPO
Timely investment in Initial Public Offerings, better known as IPOs, offer great opportunities for netting high returns in a short time span.
BOOK-KEEPING IN BACKOFFICE
Not for from the trading terminals are our 24 X 7 back office software =. Here the clients can access absolutely updated balances, stock holdings and contract notes round the clock.
DEPOSITORY SERVICES
In the times of T+2, having a demate account linked to your trading account becomes really convenient. You can open a demat account with us so that we can track your profile better.
Here are some reviews related with commodity market, commodity market investment, its risk and return etc. which can help us for conducting this project report. These are as follow:
palladium are modeled using daily data from January 1995 to November 2009. Value-at-Risk (VaR) is used to analyze the risk associated with precious metals, and to design optimal risk management strategies. We compute the VaR for all precious metals using the calibrated RiskMetrics, alternative empirical GARCH models, and the semi-parametric Filtered Historical Simulation approach. Different risk management strategies are suggested based on conditional and unconditional statistical tests. The economic importance of our results is highlighted by calculating the daily capital charges from the estimated VaRs using different methods for 19all precious metals. This exercise shows that portfolio managers engaged in precious metals who want to follow a conservative strategy should calculate VaR using GARCH-t as this will yield fewer violations, though with lower profitability. Our results are very timely and useful for financial market participants as the global financial markets continue to experience unprecedented volatility and the need for investment in precious metals remains high.
2. Expected commodity future returns : (BY Saqib Khan , Zeigham Khokher ,Timothy Simin in March 2008)
Abstract : In this article, they posit an empirical beta pricing model of expected
commodity futures returns to explore predictable variation in their returns. Their model allows commodity futures returns to vary with the holdings of hedgers and allows these holdings to vary with business conditions. The model also allows for time variation in expected returns with relative scarcity of the commodity. Their evidence suggests that a large portion of the predictable variation in futures returns is explainable by these asset specific factors and that movements in these factors are related to macroeconomic variables. This evidence is consistent with rational return predictability. Conclusion : There is a large literature debating the predictability of returns. One path to reconciling evidence of predictability and the efficient market hypothesis is by way of intertemporal equilibrium pricing models. related to the state of the macro-economy. In these models rational investors expect asset returns to vary with time varying risk premia Also consistent with return predictability are models of inefficient markets such as those by Shiller (1984) and Summers (1986). Irrational bubbles might be indistinguishable from rational timevarying risk premia, as Fama (1991) notes in a sequel to his seminal article on market efficiency. But, as he conjectures, exploring the link between expected returns and the demand for capital goods may be
fruitful in judging predictability. By incorporating holdings of hedgers that vary with standard predictor variables, we present evidence on this issue. The documented evidence suggests strong covariance between hedgers
holdings for capital goods like crude oil and macroeconomic state variables. To a lesser extent we find similar results for supply conditions of capital goods. Furthermore, variation in 15 expected commodity futures returns can be explained, in part, by hedging responses to changing macroeconomic conditions. This evidence is consistent with inter-temporal asset pricing models with time varying risk premia that provide a rational explanation for predictability in asset returns. While the evidence speaks directly to questions of market efficiency, precise judgments on the degree of efficiency remain subject to priors. Fama and French (1991) note that a problem that lurks on the horizon in all tests of multifactor ICAPMs, is trying to explain why a state variable that can explain common variation in returns might be of special hedging concern to investors and so earn a special premium. We have in some sense, circumvented this problem by directly incorporating proxies for hedgers holdings and supply conditions that vary with business conditions into a model of expected returns. Our preliminary evidence on net hedging pressure coupled with the cross-market effects of hedging pressure found in DeRoon et al. (2000) may lead to a better understanding of how hedging demands interact with the business conditions to move returns across assets. expectations of Most general equilibrium model of commodity
markets assume risk neutrality, our results on how commodity market scarcity relates to risk premia may be similarly beneficial.
3. Do Precious Metals Markets Influence Stock Markets? (A Volatility Approach by Luca Morales)
Abstract : This paper investigates the nature of volatility spillovers between stock returns and precious metals returns for the G-7 countries over the 19952006 period. They divide our sample into a number of sub periods, prior to, during and after the Asian crisis, with the objective to provide a wide analysis of the behaviour of these two markets taking into account the effects of the Asian crisis; they use EGARCH modelling which takes into account whether bad news has the same impact on volatility as good news. The results show that there is no evidence of volatility persistence from stock returns to precious metals returns, but overall the results are significant in the other way around. In terms of volatility spillovers effects, the main findings are that there is evidence of volatility spillovers running in a bidirectional way in almost all the cases. And finally, the results from asymmetric spillover effects show that negative news have a stronger impact in these financial markets than positive news. Conclusion : The existing literature shows that little attention has been paid to the study of interlinkages between stock markets and precious metals markets and in particular to the analysis of volatility spillovers between them. The relationships between stock returns and precious metals returns demand more research, as these two markets are very important in terms of portfolio and risk management decisions. Hillier, Draper and Faff (2006) notice that gold, platinum and silver have the potential to play a diversifying role in investment portfolios, as precious metals exhibit some hedging capability
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during periods of abnormal markets volatility. Wolfle (2006) analysed relationships between commodities and two stock markets and he concluded that information transmission between stock and commodity markets is rejected; consequently his findings support the use of commodities to diversify risk in stock portfolios. Therefore, our analysis is motivated but the results of previous studies, where precious metals markets appeared to be an interesting option for investors to diversify their portfolios and to implement their hedging techniques. The main findings could be summarised as follows: in terms of volatility persistence, our analysis shows that overall there are no significant coefficients from stock returns to precious metals returns, while there is an opposite result in the opposite case, where almost all the coefficients appear to be significant. The analysis of the coefficients for the volatility spillovers shows that the results are quite consistent across countries, and markets over time in most of the cases, meaning that information from stock markets affects precious metals markets and vice versa. The results from the asymmetric spillovers analysis show that overall good news have less of an impact in the markets than bad news. Our results are consistent with Wolfle (2006) with regard to insignificant evidence effects that were found running from the stock markets to the commodities markets, but our results differ in the opposite direction, where we found significant coefficients in some of the cases. After getting the results from our EGARCH methodology and taking into account that even the results are showing that stock returns and precious markets returns are influenced by the information, reactions, shocks, events that take place in any of them, a question that will be necessary to address in a future research is which markets are being affected to a greater
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extent. If we found that stock returns are affected more negatively than precious metals it will mean that investors will be able to use precious metals to diversify their portfolio. As even the economy becomes in crisis of shock, probably metal markets will suffer a lower effect than stock markets. This is because they are characterized as a store of value and they will tend to keep their value for a longer period than in the case of the stock markets; then the use of precious metals markets could be important in order to prevent bigger loses. Investors can use precious metals markets to diversify their portfolio in situations were the national currency is depreciating or where the stock markets returns decrease. Also it will be interesting to analyse if in some occasions it could be possible that the precious metals returns could be higher than the stock markets returns. Tully and Lucey (2006) found that dollar depreciation and a growing risk of dollar devaluation are likely to strengthen investors demand for gold. Financial analysts have attributed to the rise in golds price, the depreciation of the dollar value on international markets. Traditionally gold has played a significant role during times of political and economic crises and during equity market crashes. This is still the case in a post Bretton-Woods era. Our results provide evidence of the need for further research in this area. Possible extensions could focus to implement this analysis in the case of the European markets, using multivariate techniques where key indicators such as economic growth, the interest rates and exchange rates should be included in the analysis in order to get information of the reaction of the markets when changes in interest rates or currency depreciation/appreciation occur.
Conclusion: In this study, they can identify some of the broad trends in the literature on commodity pricing during the 1990s and early 2000s. Firstly, considering the main developments on term structure models of commodity prices, it is possible to determine indeed some specificity of commodities that distinguish them from other assets. Commodities are characterized by mean reversion in spot and futures prices. Moreover, because arbitrage relationships between the futures market and the physical market are limited, price volatility is positively correlated with the degree of backwardation. Prices are also sometimes affected by seasonality. Lastly, the term structure is characterized by the Samuelson effect. Secondly, independently of the number of state variables included, the term structure models of commodity prices are generally conceived in a partial equilibrium framework consequently, the .selection of the state variables can be considered as somehow arbitrary. However, the choice is most of the time based on the traditional theories. Moreover, autonomous spot price, convenience yield and long-term price may be regarded as the reduced form of a more general model in which these variables are endogenously determined by production, consumption and storage decisions. Still, until now, nobody has really proved that the convenience yield is a better choice than the long-term price as a second factor. The comparison between the models is quite difficult to undertake. Future developments in term structure model of commodity prices will probably introduce a more precise description of the prices behaviour. Until now, the leptokurtic nature of commodity returns (Dusak, 1973), and the fact that commodity returns distribution are negatively skewed were for
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example ignored. The introduction of such characteristics in term structure models could lead to animprovement of the performances. However, in that case, the question of the arbitrage between reality and simplicity arises. Although such an introduction may improve the performances of the models, there will be a balance to find between the fidelity of the prices models and the need for parsimony, especially when the models are conceived for the evaluation of more complex derivatives products, as real options. As far as the applications of term structure models are concerned, almost two directions can be drawn. For hedging purposes, to be adapted by practitioners, the literature could progress towards practical considerations, like the transactions costs associated with hedging
portfolios or the rebalancing of these portfolios. Moreover, there is a need to quantify the risk associated with these portfolios, using for example value at risk methods (Cabedo and Moya (2003)). For the valuation of real assets relying on the theory of real options, it could be interesting to introduce other sources of uncertainty in the valuation process. and the Until now, the commodity. analysis framework taken into consideration is most of the time simplistic, main source of uncertainty is the price of the However, the introduction of new sources of uncertainty prevents probably from pricing several options simultaneously. Once again, some arbitrages must be done.
5. Is the Gold-to-Silver Price Ratio a Valid Indicator for Investment Strategies based on Sector, Style, or Size? (Preliminary paper)
Abstract: Historically, gold and silver have been regarded as the most precious of all metals. However, their main uses in modern times are quite distinct: gold is mainly an investment vehicle, while silver is a key industrial commodity. Using the data from January 1972 to December 2008, we address whether the gold-to-silver price ratio is a viable indicator that can be used as the basis of size and style investing strategies. In addition, they examine the possibility of employing this ratio as the basis of a profitablerotation trading strategy among the ten sectors in S&P 500 indexes. Conclusion: In this preliminary paper they examine the relationship of average daily rate of return for gold, silver, and S&P 500 index from January 1972 to December 2008. They analyze and compare these relationships in the overall period and in periods defined by the NBER as contractionary or expansionary. They find evidence of the significant inverse relationship between returns on small firms and the gold-to-silver price ratio. This relationship also holds for small size growth size firms. These preliminary results indicate that gold-to-silver price ratio may serve as an indicator for the rotation strategies in time investing and sector investing. The complete version of the paper will have a fully developed literature review. They were investigate the risk-adjusted returns of the portfolios in the two sub-periods within the framework of Fama and French (1993) and Carhart (1997). Furthermore, they were adopt the change of gold-to-silver ratio/75-day
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average gold-to-silver ratio as a signal of the status of the economy and forecast the forward looking returns for the large capitalization portfolio, small-capitalization portfolio, and the ten sectors in the S&P 500 index. A modified ratio (that is the forward price of gold/forward price of silver) is also used. They expect that the paper, when completed, were provide insight into the suitability of employing the gold-to-silver price ratio as a leading indicator for the bullish and bearish markets. Further, the completed paper will show whether it is possible to create a profitable trading strategy based on the gold-to-silver price ratio.
To know the investment opportunity in commodity market. To know the relationship between precious metal in commodity market and U.S. dollar. To know risk and return from the investment in precious metal of commodity market. To know the performance of precious metal in Indian commodity market.
Secondary objective:
To get knowledge about commodity market. To understand about commodity derivatives. To know the fluctuation in gold price , silver price dollar. and also U.S.
Research design is the conceptual structure within which research is conducted; it constitutes the blue print for collection, measurement and analysis of data.
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Secondary data:
Secondary data is consists of information that already exists somewhere having being collected for some purposes and is been utilize for references. Here in this report, we have taken secondary data method and collected data from following sources.
Tools which we used for calculating risk and return are not enough. It contains only gold and silver commodity. For the very few contract of platinum, we cant consider platinum. Time duration is also one of the limitations of this project.
Month
Mar(2008) Apr May Jun Jul Aug Sep Oct Nov Dec Jan(2009) Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan(2010) Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Gold return
-26.4593 2.794901 23.36792 52.64727 -20.0125 31.73718 -24.5779 -18.1964 20.79492 25.13762 9.761239 18.15151 -42.3536 -5.56652 -5.39547 -18.9733 -19.5256 55.53869 -0.69858 39.5817 23.34543 -26.5893 9.162497 -1.10203 -14.8791 48.25176 7.543677 -5.91412 -22.9201 7.622559 6.934748 1.344065
(x- x)
-29.817273 -0.5630391 20.0099801 49.2893259 -23.370428 28.3792388 -27.935836 -21.554322 17.4369827 21.7796777 6.40329892 14.7935739 -45.711519 -8.9244628 -8.7534104 -22.331208 -22.883561 52.1807531 -4.0565239 36.2237564 19.9874887 -29.947231 5.80455675 -4.4599708 -18.237025 44.8938233 4.18573685 -9.2720605 -26.278003 4.26461899 3.57680782 -2.0138748
(x- x)2
889.0697752 0.317012978 400.3993045 2429.437643 546.1769083 805.3811964 780.410938 464.5887926 304.0483655 474.3543597 41.00223711 218.8498287 2089.542999 79.64603566 76.62219433 498.6828667 523.6573776 2722.830996 16.45538621 1312.160529 399.499706 896.8366418 33.69287905 19.89133959 332.5890715 2015.455372 17.520393 85.97110509 690.5334483 18.1869751 12.79355415 4.055691865 46
Performance of Precious Metals in Commodity Market Dec Jan(2011) Feb Mar S.D 14738043.13 -24.841 -28.198965 795.1815989 17572472.02 19.23206 15.8741169 251.987588 14083970.99 -19.8521 -23.210019 538.7049972 16308243.58 15.79294 12.4349961 154.6291292 24.11843707
S.D = -
/n
CHART: 1
Gold Return
80 60 40 20 Series1 0 -20 -40 -60 mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar r
Interpretation:
The above table shows the contract closing price of the gold in commodity market and it also shows the risk and return on the contract by calculating the standard deviation. And chart shows the fluctuation on return of gold contract price.
Month
Mar(2008) Apr May Jun Jul Aug Sep Oct Nov Dec Jan(2009) Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan(2010) Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Silver return
-31.5912 -13.9577 15.85457 28.5224 -12.589 18.68065 -24.4863 -28.305 2.25879 31.27386 18.62334 -2.61806 -29.0782 21.6341 45.29748 -39.6429 28.88992 45.59568 -3.4056 21.52004 -6.39476 -10.5553 14.42489 -8.83816 -9.7664 24.59409 10.52122 -6.94861 11.65427 8.044652 56.3706 36.96576
(x- x)
-38.5154 -20.8818 8.930424 21.59825 -19.5131 11.7565 -31.4104 -35.2292 -4.66536 24.34971 11.69919 -9.54221 -36.0023 14.70995 38.37333 -46.5671 21.96577 38.67153 -10.3297 14.59589 -13.3189 -17.4794 7.500742 -15.7623 -16.6906 17.66994 3.59707 -13.8728 4.730122 1.120502 49.44645 30.04161
(x- x)2
1483.433 436.0502 79.75247 466.4846 380.7622 138.2154 986.6155 1241.096 21.76558 592.9083 136.8711 91.05372 1296.168 216.3826 1472.512 2168.493 482.4952 1495.487 106.7036 213.0399 177.3933 305.5303 56.26113 248.4504 278.5746 312.2268 12.93891 192.4534 22.37406 1.255525 2444.951 902.4985 48
Performance of Precious Metals in Commodity Market Dec Jan(2011) Feb Mar S.D 22289596.26 25132683.5 26894510.54 35948167.34 23.43354449 -16.7087 12.75522 7.010103 33.66359 -23.6328 5.831071 0.085953 26.73944 558.5112 34.00139 0.007388 714.9975
CHART: 2
Silvar Return
80 60 40 20 Series1 0 -20 -40 -60 mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar r
Interpretation:
The above table shows the contract closing price of the silver in commodity market and it also shows the risk and return on the contract by calculating the standard deviation. And chart shows the fluctuation on return of silver contract price.
Month
Mar(2008) Apr May Jun Jul Aug Sep Oct Nov Dec Jan(2009) Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan(2010) Feb Mar Apr May Jun Jul Aug Sep Oct Nov
$ Price
40.14 39.97 41.88 42.76 42.72 42.92 45.42 48.62 48.79 48.48 48.73 49.19 51.21 50.06 48.55 47.75 48.44 48.33 48.36 46.72 46.56 46.16 45.92 46.35 45.5 44.47 45.87 46.58 46.84 46.58 45.99 44.43 45
$ Return
-0.423518 4.7785839 2.1012416 -0.093545 0.4681648 5.8247903 7.0453545 0.3496503 -0.635376 0.5156766 0.943977 4.1065257 -2.245655 -3.01638 -1.647786 1.4450262 -0.227085 0.0620732 -3.391232 -0.342466 -0.859107 -0.519931 0.9364111 -1.833873 -2.263736 3.1481898 1.5478526 0.5581795 -0.555081 -1.266638 -3.392042 1.2829169 50
Performance of Precious Metals in Commodity Market Dec Jan(2011) Feb Mar 45.12 45.4 45.42 44.97 0.2666667 0.6205674 0.0440529 -0.990753
Ri = Current Month Closing Price- Previous Month Closing Price *100 Previous Months Closing Price
CHART: 3
$ Returm
8 6 4 Series1 2 0 mar mar mar may may may mar
jul
jul
nov
nov
jul
nov
jan
jan
sep
sep
-2 -4
Interpretation:
The above table shows the dollar price and its average return during 2008 to 2011. And above chart shows the fluctuation in average dollar return.
sep
jan
Return
-0.423518 4.7785839 2.1012416 -0.093545 0.4681648 5.8247903 7.0453545 0.3496503 -0.635376 0.5156766 0.943977 4.1065257 -2.245655 -3.01638 -1.647786 1.4450262 -0.227085 0.0620732 -3.391232 -0.342466 -0.859107 -0.519931 0.9364111 -1.833873 -2.263736 3.1481898 1.5478526 0.5581795 -0.555081 -1.266638 -3.392042 1.2829169 0.2666667
Gold Return
-26.4593 2.794901 23.36792 52.64727 -20.0125 31.73718 -24.5779 -18.1964 20.79492 25.13762 9.761239 18.15151 -42.3536 -5.56652 -5.39547 -18.9733 -19.5256 55.53869 -0.69858 39.5817 23.34543 -26.5893 9.162497 -1.10203 -14.8791 48.25176 7.543677 -5.91412 -22.9201 7.622559 6.934748 1.344065 -24.841
x2
0.179367 22.83486 4.415216 0.008751 0.219178 33.92818 49.63702 0.122255 0.403703 0.265922 0.891093 16.86355 5.042967 9.09855 2.715198 2.088101 0.051568 0.003853 11.50046 0.117283 0.738064 0.270328 0.876866 3.363089 5.124502 9.911099 2.395848 0.311564 0.308115 1.604372 11.50595 1.645876 0.071111
Y2
700.0946 7.811472 546.0597 2771.735 400.5002 1007.249 604.0732 331.109 432.4287 631.8999 95.28179 329.4773 1793.827 30.98614 29.1111 359.9861 381.2491 3084.546 0.488014 1566.711 545.0091 706.9909 83.95135 1.21447 221.3876 2328.232 56.90706 34.97682 525.331 58.10341 48.09073 1.806511 617.0753
XY
11.20598 13.35567 49.10165 -4.92491 -9.36915 184.8624 -173.16 -6.36238 -13.2126 12.96288 9.214385 74.53964 95.11158 16.79074 8.890579 -27.4169 4.433972 3.447467 2.369047 -13.5554 -20.0562 13.82459 8.579864 2.020983 33.68236 151.9057 11.6765 -3.30114 12.72251 -9.65502 -23.523 1.724324 -6.62427 52
Performance of Precious Metals in Commodity Market Jan(2011) Feb Mar r r2 0.6205674 19.23206 0.385104 369.8721 11.93479 0.0440529 -19.8521 0.001941 394.1059 -0.87454 -0.990753 15.79294 0.981591 249.417 -15.6469 -0.180438 0.032558
CHART: 4
Gold v/s $
80 60 40 20 0 Series1 Series2
mar
mar
mar
may
may
may
mar
jul
jul
nov
nov
jul
nov
jan
jan
sep
sep
Interpretation:
The above table and chart shows the return on silver contract closing price as well as dollar and also shows co-relation between them. From the above table we can say that there are negative relation between gold and dollar.
sep
jan
Return
-0.423518 4.7785839 2.1012416 -0.093545 0.4681648 5.8247903 7.0453545 0.3496503 -0.635376 0.5156766 0.943977 4.1065257 -2.245655 -3.01638 -1.647786 1.4450262 -0.227085 0.0620732 -3.391232 -0.342466 -0.859107 -0.519931 0.9364111 -1.833873 -2.263736 3.1481898 1.5478526 0.5581795 -0.555081 -1.266638 -3.392042 1.2829169
Silver Return
-31.5912 -13.9577 15.85457 28.5224 -12.589 18.68065 -24.4863 -28.305 2.25879 31.27386 18.62334 -2.61806 -29.0782 21.6341 45.29748 -39.6429 28.88992 45.59568 -3.4056 21.52004 -6.39476 -10.5553 14.42489 -8.83816 -9.7664 24.59409 10.52122 -6.94861 11.65427 8.044652 56.3706 36.96576
x2
Y2
XY
0.179367 22.83486 4.415216 0.008751 0.219178 33.92818 49.63702 0.122255 0.403703 0.265922 0.891093 16.86355 5.042967 9.09855 2.715198 2.088101 0.051568 0.003853 11.50046 0.117283 0.738064 0.270328 0.876866 3.363089 5.124502 9.911099 2.395848 0.311564 0.308115 1.604372 11.50595 1.645876
998.0039 194.8174 251.3674 813.5273 158.4829 348.9667 599.5789 801.173 5.102132 978.0543 346.8288 6.854238 845.5417 468.0343 2051.862 1571.56 834.6275 2078.966 11.59811 463.1121 40.89296 111.4144 208.0775 78.11307 95.38257 604.8693 110.6961 48.28318 135.822 64.71643 3177.645 1366.467
13.37943 -66.698 33.31428 -2.66814 -5.89373 108.8109 -172.515 -9.89685 -1.43518 16.1272 17.58 -10.7511 65.29961 -65.2567 -74.6405 -57.285 -6.56047 2.830272 11.54918 -7.36988 5.49378 5.488024 13.50763 16.20806 22.10855 77.42686 16.2853 -3.87857 -6.46907 -10.1897 -191.211 47.424 54
Performance of Precious Metals in Commodity Market Dec Jan(2011) Feb Mar r r2 0.2666667 -16.7087 0.071111 279.1807 -4.45565 0.6205674 12.75522 0.385104 162.6956 7.915473 0.0440529 7.010103 0.001941 49.14154 0.308815 -0.990753 33.66359 0.981591 1133.237 -33.3523 -0.1703 0.029002
CHART: 5
Silvar v/s $
80 60 40 20 0 jul jul may may may mar mar mar jul mar nov nov nov jan jan sep sep -20 -40 -60 sep jan r Series1 Series2
Interpretation:
The above table and chart shows the return on silver contract closing price as well as dollar and also shows co-relation between them. From the above table we can say that there are negative relation between silver and dollar.
5.1 FINDINGS:
Major factors which affect the market price of gold & silver is world macro-economic factors- US Dollar, Interest Rate, Domestic & International demand based on output & market price. Worlds biggest gold manufacturing country is South Africa with 297 tones followed by United Nations and Australia. India is largest consumer of gold with annual demand of 800 tones followed by United States. The contract Price of the gold increased by 14.71 % during the period of Apr-2008 to Mar-2009. The contract Price of the gold increased by 22.77 % during the period of Apr-2009 to Mar-2010. The contract Price of the gold increased by 12.16 % during the period of Apr-2010 to Mar-2011 The contract Price of the silver decreased by 11.58 % during the period of Apr-2008 to Mar-2009. The contract Price of the silver increased by 10.52 % during the period of Apr-2009 to Mar-2010. The contract Price of the silver increased by 34.47 % during the period of Apr-2010 to Mar-2011. Price of dollar decreased by 1.12% in last year. Gold and US $ has negative relationship where r = -0.18.
56 Bhagavan Mahavir College of Management
Silver and US $ has negative relationship where r = -0.17. The standard deviation of gold contract is 23.43. The standard deviation of silver contract is 24.12.
5.2 CONCLUSIONS:
Members who have invested in share market should be explained about the commodity market. There should be some experts employed specially for analyzing performance of commodity such as precious metals to provide fruitful results to investors. In commodity there is only future and no other like option, swaps, credit derivative are available. The investors should be given protection for their investment in terms of increased margin. In commodity market there should be lower quantity available for precious metals so that investors can invest in precious metal commodities. The investor should invest in gold and silver rather than platinum because the risk is more in platinum as compare to gold and silver.
RECOMMENDATIONS
Gold :
Those investors who want to invest in Gold are advisable to do their investment in it because the contract price of gold is increased continuously during April-2008 to March-2011. There is negative relationship between Gold and U.S. Dollar. As we know that Gold price is going high day by day, so investor of gold can get maximum return at minimum risk as gold price increased day by day and the possibilities of decreasing the gold price is very low. So we can suggest that to invest in gold is beneficial for the investors.
Silver :
Those investors who want to invest in Silver are advisable to do their investment in it after knowing the market condition because during April-2008 to March-2011 in first year silver contract price was decreased but after that it is increased. So knowing the market condition is very much important aspect for the investor. There is also negative relationship between Silver and U.S. Dollar. But silver is also one of the good precious metal which can get higher return at lower risk. So investing in silver is also beneficial for the investors.
Platinum:
Platinum is very costliest metal and because of this there are very few contracts are held in every year. So we can not consider it in our report because it cannot give a right answer for investment. So we can suggest to investor that rather than investing in platinum they can invest in gold and silver.