Commodity

Derivatives
Whats a Derivative ?
A Financial Contract which derives its value from an underlying
asset.

Asset could be stocks, commodity, currency etc.

Why is it required ?
Price risk Management
High volatility in commodity prices

Quality and quantity risk management

Fundamentals including demographic changes and weather
patterns that affect the supply and demand of commodities are
the key drivers.
As the G20 Study Group on Commodities has noted: The large
changes in physical supply and demand conditions provide plausible
explanations for commodity price swings...Moreover, the prices of
commodities that are only traded OTChave risen as much as major
commodity index components. This may suggest that changes in
physical demand and supply, rather than growing financial
investments, have been the main drivers of commodity prices.
IOSCO also stated: reports suggest that economic fundamentals,
rather than speculative activity, are a plausible explanation for recent
price changes.

* IOSCO-International Organization of Securities Commissions
What drives commodity price changes?
Price Risk Management-Why ?
Hedging-
Global Scenario
.
How much to
stock .. The risk/
reward
What is the right
price and time ?
Future Price
trends ??
Price and Margin
Uncertainty
How much
capital to be
blocked ??
Quality and
Storage ?
Where to buy ??
Price risk Management- How ?

Hedging-The activity of trading futures with the objective of reducing
or controlling price risk (due to uncertainty about future price levels) is
called hedging.
Price Risk Management
Hedging typically involves taking a position in futures that is
opposite either to
A position that one already has in the cash market, or
A futures cash obligation that one has or will incur
There are two basic types of hedges: Short hedge and long hedge
Short Hedge: A short hedge occurs when a firm which owns or
is purchasing or producing a cash commodity ( Cotton stock)
sells futures to hedge the cash position.
Cash price risk is declining cash prices
Long Hedge: A long hedge occurs when a firm which plans to
purchase a cash commodity in either cash or forward market at
a later date purchases futures to hedge the future cash position
Cash price risk is increasing cash prices
Shape of a contract
C:\Users\Sudarshan
Tiwari\Desktop\NMP27\Contract_specifications_of_Cotton_change_in_trade_timing_April_2014.p
df
Opportunities
Arbitrage
Cash and carry
Reverse cash and carry
Statistical arbitrage-Algo & Manual

Speculation
Benefits to the ecosystem
Farmers ( for agricultural commodities)

Physical Participants (Millers/Traders/Middlemen)

Government
How does this work ?
Member
Regulator
Exchange
Client
Questions ?


Thank You