Commodity Market Final

8/4/2019 Commodity Market Final

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Introduction

Financial Market and Commodity Market

Commodities

Commodities Market

Need

Table of Content

Difference between Financial and Commodity Market

Indian Commodity Market and Global Commodity Market

Difference between Indian and Global Commodity

Commodities Exchange

Commodities Futures

Commodities Traded

History

Special Commodities Traded


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Procedure for trading

Regulation for trading

Comparative study

Bibliography

Summary

Annexure

Terms and Definitions

Gold and commodity

Dollar and commodity

Dollar and Gold

How to invest


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A physical substance, such as food, grains, and metals, which is interchangeable with

another product of the same type, and which investors buy or sell, usually through futures

contracts. The price of the commodity is subject to supply and demand. Riskis actually the

reason exchange trading of the basic agricultural products began. For example, a farmer risks

the cost of producing a product ready for market at sometime in the future because he doesn't

know what the selling price will be. This would also include foreign currencies and financial

instruments and indexes.

One of the characteristics of a commodity good is that its price is determined as a function of its

market as a whole. Well-established physical commodities have actively

traded spot and derivative markets. Generally, these are basic resources and agricultural products

such as iron ore, crude oil, coal, salt, sugar, coffee

beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft

commodities are goods that are grown, while hard commodities are the ones that are extracted

through mining.

There is another important class of energy commodities which includes electricity, gas, coal and

oil. Electricity has the particular characteristic that it is either impossible or uneconomical to

store; hence, electricity must be consumed as soon as it is produced.

Commodity markets are markets where raw or primary products are exchanged. These raw

commodities are traded on regulated commodities exchanges, in which they are bought and sold

in standardized contracts.

There are numerous ways to invest in commodities. An investor can purchase stock in

corporations whose business relies on commodities prices, or purchase mutual funds, index fundsor exchange-traded funds (ETFs) that have a focus on commodities-related companies. The most

direct way of investing in commodities is by buying into a futures contract.

Since no one really wants to transport all those heavy materials, what is actually traded are

commodities futures contracts or options. These are agreements to buy or sell at an agreed upon

price on a specific date.

Introduction

Commodities

Commodities Market
http://www.investorwords.com/2630/investor.htmlhttp://www.investorwords.com/636/buy.htmlhttp://www.investorwords.com/4467/sell.htmlhttp://www.investorwords.com/2136/futures_contract.htmlhttp://www.investorwords.com/2136/futures_contract.htmlhttp://www.investorwords.com/5873/Commodities.htmlhttp://www.investorwords.com/13901/subject_to.htmlhttp://www.investorwords.com/12668/supply_and_demand.htmlhttp://www.investorwords.com/4292/risk.htmlhttp://www.investorwords.com/1797/exchange.htmlhttp://www.investorwords.com/5030/trading.htmlhttp://www.businessdictionary.com/definition/agricultural.htmlhttp://www.businessdictionary.com/definition/farmer.htmlhttp://www.investorwords.com/1148/cost.htmlhttp://www.investorwords.com/10798/ready.htmlhttp://www.investorwords.com/2962/market.htmlhttp://www.investorwords.com/9809/future.htmlhttp://www.investorwords.com/16736/selling_price.htmlhttp://en.wikipedia.org/wiki/Spot_markethttp://en.wikipedia.org/wiki/Iron_orehttp://en.wikipedia.org/wiki/Coalhttp://en.wikipedia.org/wiki/Salthttp://en.wikipedia.org/wiki/Mininghttp://en.wikipedia.org/wiki/Mininghttp://en.wikipedia.org/wiki/Salthttp://en.wikipedia.org/wiki/Coalhttp://en.wikipedia.org/wiki/Iron_orehttp://en.wikipedia.org/wiki/Spot_markethttp://www.investorwords.com/16736/selling_price.htmlhttp://www.investorwords.com/9809/future.htmlhttp://www.investorwords.com/2962/market.htmlhttp://www.investorwords.com/10798/ready.htmlhttp://www.investorwords.com/1148/cost.htmlhttp://www.businessdictionary.com/definition/farmer.htmlhttp://www.businessdictionary.com/definition/agricultural.htmlhttp://www.investorwords.com/5030/trading.htmlhttp://www.investorwords.com/1797/exchange.htmlhttp://www.investorwords.com/4292/risk.htmlhttp://www.investorwords.com/12668/supply_and_demand.htmlhttp://www.investorwords.com/13901/subject_to.htmlhttp://www.investorwords.com/5873/Commodities.htmlhttp://www.investorwords.com/2136/futures_contract.htmlhttp://www.investorwords.com/2136/futures_contract.htmlhttp://www.investorwords.com/4467/sell.htmlhttp://www.investorwords.com/636/buy.htmlhttp://www.investorwords.com/2630/investor.html


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A commodity exchange is an association or a company or any other body corporate

organizing futures trading in commodities for which license has been granted by regulating

authority.

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 inprices. 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.

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.

Commodities Exchange

Commodities Futures


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Price stabilization along with balancing demand and supply position. Futures trading leads to

predictability in assessing the domestic prices, which maintains stability, thus safeguarding

against any short term adverse price movements. Liquidity in Contracts of the commodities

traded also ensures in maintaining the equilibrium between demand and supply.

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.

The diversification benefits equal or surpass those of other asset classes like fixed income and

real estate. The primary reason for this is their correlation, or lack thereof, to the stock market as

represented by the S&P 500 (Correlation describes how similar the price movement is between

two investments). Commodities have historically exhibited absolutely no correlation whatsoever

to the stock market or any of the bond market indices. In fact, they have a negative correlation.

This non-similar pattern of performance allows an investor to minimize volatility and protect

capital in down markets. Overall, these factors help to decrease overall risk in a portfolio of

investments.

This is not to say that this asset class has not earned a spot in a well-diversified portfolio. It has.

At a time when stocks and bonds are predicted by most academics and investment gurus such as

Warren Buffet, Bill Gross of PIMCO, and Jeremy Grantham of Grantham, Mayer, and Van

Otterloo, to produce 5.0% returns or less over the next decade due to historically high market

valuations. With commodities being inexpensively priced, substantial upside potential is

possible. U.S. inflation is historically low right now but with the effects of massive fiscal and

monetary policy colliding with expected interest rate increases and already robust consumer

spending, undoubtedly raw goods prices will inevitably increase. When they do, commodity

indices will no doubt follow suit. As inflation gradually rises in 2004 and 2005, industrial metals

prices will rise as investors begin to direct large amounts of money into these hard assetcommodities. The high correlation between commodities and inflation provide an important

hedge against considerable losses in traditional financial instruments such as stocks and bonds.

Commodities also provide a tactical play on the current weakness in the Dollar. As other

currencies such as the Euro and Yen appreciate versus the dollar, foreign buyers can buy fewer

goods with the same amount of currency. This artificially increases demand, and subsequently

Need


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drives up the prices of commodities. Currently, effects of this phenomenon can be seen best in

the gold and silver markets as prices have risen dramatically over the past year.

Commodities provide a play on globalization by their ability to aid in the improvement of the

global economy. This is due to the fact that prices for industrial materials will increase as

demand for industrial goods increase. As countries such as China and other emerging marketeconomies develop, they will require more raw staples. This is especially true for industrial

metals. China continues to develop at a rapid pace and consequently, their demand for raw

materials continues to rise. In fact, Chinas iron ore demand has increased from 5% of the

worlds supply to almost 50% over the past twelve years.

Indian markets have recently thrown open a new avenue for retail investors and traders to

participate: commodity derivatives. For those who want to diversify their portfolios beyond

shares, bonds and real estate, commodities are the best option.

Till some months ago, this wouldn't have made sense. For retail investors could have done verylittle to actually invest in commodities such as gold and silver -- or oilseeds in the futures market.

This was nearly impossible in commodities except for gold and silver as there was practically no

retail avenue for punting in commodities.

However, with the setting up of three multi-commodity exchanges in the country, retail investors

can now trade in commodity futures without having physical stocks!

Commodities actually offer immense potential to become a separate asset class for market-savvy

investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity

markets, may find commodities an unfathomable market. But commodities are easy to

understand as far as fundamentals of demand and supply are concerned. Retail investors should

understand the risks and advantages of trading in commodities futures before taking a leap.

Historically, pricing in commodities futures has been less volatile compared with equity and

bonds, thus providing an efficient portfolio diversification option.

In fact, the size of the commodities markets in India is also quite significant. Of the country's

GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent)

industries constitute about 58 per cent.

Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000

crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commoditiesmarket grows many folds here on.

Like any other market, the one for commodity futures plays a valuable role in information

pooling and risk sharing. The market mediates between buyers and sellers of commodities, and

facilitates decisions related to storage and consumption of commodities. In the process, they

make the underlying market more liquid.


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Benefits

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.

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. Thistransforms in to continuous price discovery mechanism. The execution of trade between buyers

and sellers leads to assessment of fair value of a particular commodity that is immediately

disseminated on the trading terminal.

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. Hedging

benefits who are involved in trading of commodities like farmers, processors, merchandisers,

manufacturers, exporters, importers etc.

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. The existence of futures

market would allow the exporters to hedge their proposed purchase by temporarily substituting

for actual purchase till the time is ripe to buy in physical market. In the absence of futures marketit will be meticulous, time consuming and costly physical transactions.

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


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prices. The manufacturers can, as a result, smooth out the influence of changes in their input

prices very easily. With no futures market, the manufacturer can be caught between severe short-

term price movements of oils and necessity to maintain price stability, which could only be

possible through sufficient financial reserves that could otherwise be utilized for making other

profitable investments.

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. Storing more and being

more active in the markets. The price information accessible to the farmers determines the extent

to which traders/processors increase price to them. Since one of the objectives of futures

exchange is to make available these prices as far as possible, it is very likely to benefit the

farmers. Also, due to the time lag between planning and production, the market-determined priceinformation disseminated by futures exchanges would be crucial for their production decisions.

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.

Even a small movement in prices can eat up a huge proportion of capital owned by traders, at

times making it virtually impossible to pay back the loan. There is a high degree of reluctance

among banks to fund commodity traders, especially those who do not manage price risks. If in

case they do, the interest rate is likely to be high and terms and conditions very stringent. Thisposses a huge obstacle in the smooth functioning and competition of commodities market.

Hedging, which is possible through futures markets, would cut down the discount rate in

commodity lending.

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. It ensures uniform

standardization of commodity trade, including the terms of quality standard: the quality

certificates that are issued by the exchange-certified warehouses have the potential to become the

norm for physical trade.


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The modern commodity markets have their roots in the trading of agricultural products.

While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th

century in the United States, other basic foodstuffs such as soybeans were only added quite

recently in most markets. For a commodity market to be established there must be very broadconsensus on the variations in the product that make it acceptable for one purpose or another.

The economic impact of the development of commodity markets is hard to overestimate.

Through the 19th century "the exchanges became effective spokesmen for, and innovators of,

improvements in transportation, warehousing, and financing, which paved the way to expanded

interstate and international trade.

Commodities future trading was evolved from need of assured continuous supply of seasonal

agricultural crops. The concept of organized trading in commodities evolved in Chicago, in

1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehousesfor future use. To raise cash warehouse holders sold receipts against the stored rice. These were

known as rice tickets. Eventually, these rice tickets become accepted as a kind of commercial

currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19th

century Chicago in United States had emerged as a major commercial hub. So that wheat

producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to

lack of organized storage facilities, absence of uniform weighing & grading mechanisms

producers often confined to the mercy of dealers discretion. These situations lead to need of

establishing a common meeting place for farmers and dealers to transact in spot grain to deliver

wheat and receive cash in return.

Gradually sellers & buyers started making commitments to exchange the produce for

cash in future and thus contract for futures trading evolved. Whereby the producer would agree

to sell his produce to the buyer at a future delivery date at an agreed upon price. In this way

producer was aware of what price he would fetch for his produce and dealer would know about

his cost involved, in advance. This kind of agreement proved beneficial to both of them. As if

dealer is not interested in taking delivery of the produce, he could sell his contract to someone

who needs the same. Similarly producer who not intended to deliver his produce to dealer could

pass on the same responsibility to someone else. The price of such contract would dependent on

the price movements in the wheat market. Latter on by making some modifications these

contracts transformed in to an instrument to protect involved parties against adverse factors suchas unexpected price movements and unfavorable climatic factors. This promoted traders entry in

futures market, which had no intentions to buy or sell wheat but would purely speculate on price

movements in market to earn profit.

Trading of wheat in futures became very profitable which encouraged the entry of

other commodities in futures market. This created a platform for establishment of a body to

History


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regulate and supervise these contracts. Thats why Chicago Board of Trade (CBOT) was

established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges

were born. Agricultural commodities were mostly traded but as long as there are buyers and

sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got

together to bring chaotic condition in New York market to a system in terms of storage, pricing,

and transfer of agricultural products. In 1933, during the Great Depression, the Commodity

Exchange, Inc. was established in New York through the merger of four small exchanges the

National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange,

and the New York Hide Exchange.

The largest commodity exchange in USA is Chicago Board of Trade, The Chicago

Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange

and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading

exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan,

Australia and New Zealand

Early history of commodity markets

Historically, dating from ancient Sumerian use of sheep or goats, other peoples using pigs, rare

seashells, or other items as commodity money, people have sought ways to standardize and trade

contracts in the delivery of such items, to render trade itself more smooth and predictable.

Commodity money and commodity markets in a crude early form are believed to have originated

in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed

in clay vessels with a certain number of such tokens, with that number written on the outside,

they represented a promise to deliver that number. This made them a form of commodity money- more than an I.O.U. but less than a guarantee by a nation-state or bank. However, they were

also known to contain promises of time and date of delivery - this made them like a modern

futures contract. Regardless of the details, it was only possible to verify the number of tokens

inside by shaking the vessel or by breaking it, at which point the number or terms written on the

outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained

on flat tablets. This represented the first system of commodity accounting.

Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood

and weapons, most of which had standards of quality and timeliness. Considering the many

hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the traderoutes, it was a major focus of these civilizations to keep markets open and trading in these

scarce commodities. Reputation and clearing became central concerns, and the states which

could handle them most effectively became very powerful empires, trusted by many peoples to

manage and mediate trade and commerce.


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Size of the market

The trading of commodities consists of direct physical trading and derivatives trading. Exchange

traded commodities have seen an upturn in the volume of trading since the start of the decade.

This was largely a result of the growing attraction of commodities as an asset class and a

proliferation of investment options which has made it easier to access this market.

The global volume of commodities contracts traded on exchanges increased by a fifth in 2010,

and a half since 2008, to around 2.5 billion million contracts. During the three years up to the

end of 2010, global physical exports of commodities fell by 2%, while the outstanding value of

OTC commodities derivatives declined by two-thirds as investors reduced risk following a five-

fold increase in value outstanding in the previous three years. Trading on exchanges in China and

India has gained in importance in recent years due to their emergence as significant commodities

consumers and producers. China accounted for more than 60% of exchange-traded commodities

in 2009, up on its 40% share in the previous year.

Commodity assets under management more than doubled between 2008 and 2010 to nearly

$380bn. Inflows into the sector totaled over $60bn in 2010, the second highest year on record,

down from the record $72bn allocated to commodities funds in the previous year. The bulk of

funds went into precious metals and energy products. The growth in prices of many commodities

in 2010 contributed to the increase in the value of commodities funds under management.


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The difference lies in the item that is being traded.

F> In the financial market, stocks and mutual funds are traded.

C> Whereas in the commodity market, commodities like gold, coal, rice

are traded.

2.)F>Ownership in companies is traded in the financial market.

C> Ownership of raw, unprocessed goods is traded in the commodity market.

3.) Regulating body of both the types of market-finance-SEBI, commodities-

4.)F>Trading is limited to the operating time in financial market.

C>There is no limitation of timing in the commodity market.

5.)F>Speculation can be more precise in the financial market.

C>It is difficult to predict the future situation in the commodity market.

6.)F>Financial assets are not bulky; they do not need special facility for storage case of

physical settlement.

C>On the other hand, due to the bulky nature of the underlying assets, physical settlement in

commodity derivatives creates the need for warehousing.

7.) F>the concept of varying quality of asset does not really exist as far as financial underlying

are concerned.

Financial Market and Commodity Market

Difference between Financial and Commodity Market


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C> In the case of commodities, the quality of the asset underlying a contract can vary largely.

8.) The process of taking physical delivery in commodities is quite different from the process of

taking physical delivery in financial assets.

Unlike in the case of equity futures, typically a seller of commodity futures has the option to

give notice of delivery.

9.) One of the main differences between financial and commodity derivative is the need for

warehousing.

F>In case of most exchange-traded financial derivatives, all the positions are cash settled.

C>In case of commodity derivatives however, there is a possibility of physical settlement.

10.) A derivatives contract is written on a given underlying.

F>Variance in quality is not an issue in case of financial derivatives as the physical attribute is

missing.

C>When the underlying asset is a commodity, the quality of the underlying asset is of prime

importance.


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before discussing the difference between the Indian and Global commodity market, its better to

have a understanding of the stand of India in this world commodity market.

Indian Commodity Market and Global Commodity Market

Difference between Indian and Global Commodity


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SR.NO

Indian commodity market Global commodity market

1 India does not have a calibrated policy

framework for commodity market

The US and the European market

have pretty good calibratedframework.

2 India has less commodity-intensive growthprofile compared to other growing powerhouselike china.

China, Russia, Brazil have bettercommodity intensive growth profileas compared to India.

3 Indian demand for crude oil has accelerated andthe consumption of oil will be at its peak in thecoming decade.

Leaving the middle east and the US,almost all other countries are largeimporter of crude oil.

4 India is quite vulnerable to global commodityprices. Our whole macro economic frameworkcomes under pressure if commodity prices surge,

with the current account, fiscal balance andinflation all under stress.

Comparatively, the macro economicframework of other countries in theBRIC is better which allows them to

be less vulnerable to global prices.

5 The pricing mechanism needs reform for thecommodity market

There is a good pricing mechanism inthe European market and US.However, in the developing countrieslike China, it needs reform.

6 Indias energy efficiency is pathetic Globally, the energy efficiency isbetter.

7 In agriculture, producers do not receive true andremunerative market-based prices

In the European market and UScommodity market, the manufacturergets remunerative market based price.

8 Indias yields are well below global averages formost crops except cotton

Global average yields are highcompared to India.

9 India has plenty of scope for technological inputsto lift yields and boost farm-level economics

The farm level economics have beenrising more rapidly globally.

10 India takes nine or ten years to operationalisemines.

The time to operationalise a mine isshorter in other countries as the legalframework is better organized

11 The absence of formalized mining bill Almost all major countries (other thanChina and Brazil) commodity tradingcountries have a mining bill.

12 In other commodities like iron ore and coal, we

have huge reserves, but again a very poor policyframework in place.

Reverse scenario in global market

where the resourese are usedoptimally.

13 The whole approach towards the allocation ofmineral resources is opaque and open to abuse

Its more transparent in the developedcountries where proper accountabledisclosures are made.

14 We do not seem to have a holistic commoditysecurity strategy in place.

Other BRIC countries do have aholistic commodity security strategy


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in place.

15 Our policy framework is inadequate to ensurefull and effective utilization of domesticresources, and we do not have the infrastructureor global assets to ensure uninterrupted access to

critical raw materials

the European countries are active inensuring long-term access to key rawmaterials

16 India is also an important consumer ofcommodities, ranking fifth in overall energy useand third largest consumer of coal.

In comparison, China consumes 13percent of the worlds energy,

including nearly one-third of theWorlds coal output.


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Active Commodities (Global market)

There are many agricultural and industrial commodities now being traded in the commodities

market. The list of the most common commodities and the exchanges they are normally dealt

through are given below:

The most commonly traded commodity is Crude Oil, and its various derivatives such as heating

oil and gasoline. These commodities are mostly traded in the New York Mercantile Exchange

[NYMEX], ICE Futures, the Dubai Mercantile Exchange [DME] and the Central Japan

Commodity Exchange [C-COM].

The second most traded commodity is Coffee [value wise]. Coffee is mainly traded through the

New York Board of Trade [NYBOT], the Kansai Commodities Exchange [in Osaka, Japan], the

Singapore Commodities Exchange [SICOM] and Euronext [London].

Common commodities in agriculture include wheat, corn, maize, oats, rice, soybeans and they

are traded in the Chicago Board of Trade [CBOT], the Kansai Commodities Exchange [in Osaka,

Japan], the Risk Management Exchange [RMX-in Hannover], the Minneapolis Grain Exchange,

the Winnipeg Commodity Exchange [WCE], The Tokyo Grain Exchange [TGE] and Euronext.

Animals and animal products such as live and feeder cattle, beef, frozen and fresh pork

bellies, and eggs are mainly traded in the Chicago Mercantile Exchange [CME], Euronext, the

Risk Management Exchange [RMX-in Hannover] and the Central Japan Commodity Exchange

[C-COM].

Items like cocoa, butter, orange juice and sugar are also commonly traded in the New York

Board of trade [NYBOT] and Euronext.

Metals such as aluminum, nickel, copper, lead and ferrous scrap are mainly traded in the New

York Mercantile Exchange [NYMEX], the London Metal Exchange [LME], the Shangai Futures

Exchange [SFE], the Central Japan Commodities Exchange, Hedgestreet Exchange [in

California], and the Tokyo Commodities Exchange [TOCOM].

The other commonly traded commodities are precious metals such as gold, silver and

platinum and they are traded in the New York Mercantile Exchange [NYMEX], the Brazilian

Mercantile and Futures Exchange [BMF], the Dubai Gold and Commodities Exchange [DGCX],

the National Commodity Exchange Limited [in Karachi, Pakistan] and the Tokyo Commodities

Exchange[TOCOM].

Plastic is traded in the London Metal Exchange [LME] and the Dalian Community Exchange

[DCE-China]

Commodities Traded


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Natural gas is traded in the New York Mercantile Exchange [NYMEX] and ICE Futures

List of traded commodities

Agricultural (grains, and food and fiber)

Commodity Main Exchange Contract

Size

Trading Symbol

Corn CBOT 5000 bu C/ZC (Electronic)Corn EURONEXT 50 tons EMAOats CBOT 5000 bu O/ZO (Electronic)Rough Rice CBOT 2000 cwt RRSoybeans CBOT 5000bu S/ZS (Electronic)Rapeseed EURONEXT 50 tons ECOSoybean Meal CBOT 100 short

tonsSM/ZM(Electronic)

Soybean Oil CBOT 60,000 lb BO/ZB(Electronic)

Wheat CBOT 5000 bu W/ZW(Electronic)

Milk Chicago MercantileExchange

200,000 lbs DC

Cocoa ICE 10 tons CCCoffee C ICE 37,500 lb KCCotton No.2 ICE 50,000 lb CTSugar No.11 ICE 112,000 lb SBSugar No.14 ICE 112,000 lb SEFrozen Concentrated OrangeJuice

ICE 15,000 lbs FCOJ-A

Livestock and meat

Commodity Contract Size Currency Main Exchange Trading

Symbol

Lean Hogs 40,000 lb (20

tons)

USD ($) Chicago Mercantile

Exchange

LH

Frozen PorkBellies

40,000 lb (20tons)

USD ($) Chicago MercantileExchange

PB

Live Cattle 40,000 lb (20tons)


LC

Feeder Cattle 50,000 lb (25tons)


FC
http://en.wikipedia.org/wiki/Bushelhttp://en.wikipedia.org/wiki/Bushelhttp://en.wikipedia.org/wiki/Bushelhttp://en.wikipedia.org/wiki/Lean_Hogshttp://en.wikipedia.org/wiki/Lean_Hogshttp://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Pork_bellyhttp://en.wikipedia.org/wiki/Pork_bellyhttp://en.wikipedia.org/wiki/Pork_bellyhttp://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Cattlehttp://en.wikipedia.org/wiki/Cattlehttp://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/w/index.php?title=Feeder_Cattle&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Feeder_Cattle&action=edit&redlink=1http://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/w/index.php?title=Feeder_Cattle&action=edit&redlink=1http://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Cattlehttp://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Pork_bellyhttp://en.wikipedia.org/wiki/Pork_bellyhttp://en.wikipedia.org/wiki/Pound_%28mass%29http://en.wikipedia.org/wiki/Lean_Hogshttp://en.wikipedia.org/wiki/Bushel


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Energy

Commodity Main

Exchange

Contract Size Trading Symbol

WTI Crude Oil NYMEX,

ICE

1000 bbl

(42,000 U.S.gal)

CL (NYMEX), WTI

(ICE)

Brent Crude ICE 1000 bbl(42,000 U.S.gal)

B

Ethanol CBOT 29,000 U.S. gal AC (Open Auction)ZE (Electronic)

Natural Gas NYMEX 10,000mmBTU NGHeating Oil NYMEX 1000 bbl

(42,000 U.S.gal)

HO

Gulf Coast Gasoline NYMEX 1000 bbl(42,000 U.S.gal)

LR

RBOB Gasoline (reformulatedgasoline blendstock for oxygenblending)

NYMEX 1000 bbl(42,000 U.S.gal)

RB

Propane NYMEX 1000 bbl(42,000 U.S.gal)

PN

Purified Terephthalic Acid (PTA) ZCE 5 Tons TA

Precious metals

Commodity Unit Currency Main Exchange

Gold troy ounce USD ($) NYMEXPlatinum troy ounce USD ($) NYMEXPalladium troy ounce USD ($) NYMEXSilver troy ounce USD ($) NYMEX

Industrial metals

Commodity Unit Currency Main ExchangeCopper Metric Ton USD ($) London Metal Exchange, New York

Lead Metric Ton USD ($) London Metal Exchange

Zinc Metric Ton USD ($) London Metal Exchange

Tin Metric Ton USD ($) London Metal Exchange

Aluminum Metric Ton USD ($) London Metal Exchange, New York

Aluminum alloy Metric Ton USD ($) London Metal Exchange
http://en.wikipedia.org/wiki/British_Thermal_Unithttp://en.wikipedia.org/wiki/British_Thermal_Unithttp://en.wikipedia.org/wiki/British_Thermal_Unithttp://en.wikipedia.org/wiki/Propanehttp://en.wikipedia.org/wiki/Propanehttp://en.wikipedia.org/wiki/Propanehttp://en.wikipedia.org/wiki/British_Thermal_Unit


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Nickel Metric Ton USD ($) London Metal Exchange

Cobalt Metric Ton USD ($) London Metal Exchange

Molybdenum Metric Ton USD ($) London Metal Exchange

Recycled steel Metric Ton USD ($) Rotterdam (source?)

Rare metals

The following metals are not, at present, traded on any exchange, such as the London Metal

Exchange (LME), and, therefore, no spot or futures market, where producers, consumers and

traders can fix an official or settlement price exists for these metals The only price information

that is available globally is published by, among others, London-based Metal Bulletin and is

based on information from producers, consumers and traders. Germanium, Cadmium,

Chromium, Magnesium, Manganese, Silicon, Rhodium, Selenium, Titanium, Vanadium,

Wolframite, Niobium, Lithium, Indium, Gallium, Tantalum, Tellurium, and Beryllium.

[The following minerals and materials are not, at present (2008), traded on any exchange, and,

therefore, no spot or futures market where producers, consumers and traders can fix an official or

settlement price exists for these minerals. Generally the only price information that is available

globally is published privately by, among others, the London Metal Bulletin and is based on

information from producers, consumers and traders.

Asphalt, Aggregate, Arsenic, Borax, Boron, Gypsum, Asbestos, Chlorine, Fluoride, Cement,

Sulfuric Acid, Carbon Dioxide, Fluorspar, Bromine, and Titanium Dioxide.

Agricultural products

The following agricultural products are not, at present (2008), traded on any exchange, and,

therefore, no spot or futures market where producers, consumers and traders can fix an official or

settlement price exists for these minerals. Generally the only price information that is available is

based on information from producers, consumers and traders.

Fresh Flowers, Cut Flowers, Melons, Lemons, Tung Oil, Gum Arabic, Pine Oil, Xanthan,

Tomatoes, Grapes, Eggs, Potatoes, and Figs.

Other

Commodity Unit Currency BourseRubber 1 kg US cents () *Singapore Commodity

Exchange

Palm Oil 1000 kg Malaysian Ringgit(RM)

Bursa Malaysia

Wool 1 kg AUD ($) ASX

Polypropylene 1000 kg USD ($) London Metal Exchange


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Linear Low DensityPolyethylene (LL)

1000 kg USD ($) London Metal Exchange

In 2007, steel began being traded as a commodity in the London Metal Exchange.

Environmental commodities

In the last decade, a number of environmental commodities have been created. These include

carbon offsets, Renewable Energy Certificates, and white certificates (energy efficiency credits).

Active commodity market (Indian Commodity Market)

Majority of commodities traded on global commodity exchanges are agro-based. Commodity

markets therefore are of great importance and hold a great potential in case of economies like

India, where more than 65 percent of the people are dependent on agriculture.

Despite having a robust economy, India's share in the global commodity market is not as big asestimated. Except gold the share in other sectors of the commodity market is not very significant.

India accounts for 3% of the global oil demands and 2% of global copper demands. In

agriculture India's contribution to international trade volume is rather less compared to the huge

production base available. Various infrastructure development projects that are being undertaken

in India are being seen as a key growth driver in the coming days.

There is a huge domestic market for commodities in India since India consumes a major portion

of its agricultural produce locally. Indian commodities market has an excellent growth potential

and has created good opportunities for market players. India is the worlds leading producer of

more than 15 agricultural commodities and is also the worlds largest consumer of edible oilsand gold. It has major markets in regions of urban conglomeration (cities and towns) and nearly

7,500+ Agricultural Produce Marketing Cooperative (APMC) mandis. To add to this, there is a

network of over 27,000+ haats (rural bazaars) that are seasonal marketplaces of various

commodities. These marketplaces play host to a variety of commodities every day. The

commodity trade segment employs more than five million traders. The potential of the sector has

been well identified by the Central government and the state governments and they have invested

substantial resources to boost production of agricultural commodities. Many of these

commodities would be traded in the futures markets as the food-processing industry grows at a

phenomenal pace. Trends indicate that the volume in futures trading tends to be 5-7 times the

size of spot trading in the country (internationally, it is much higher at 15 to 20 times).

Many nationalized and private sector banks have announced plans to disburse substantial

amounts to finance businesses related to commodity trading. The Government of India has

initiated several measures to stimulate active trading interest in commodities. Steps like lifting

the ban on futures trading in commodities, approving new exchanges, developing exchanges with

modern infrastructure and systems such as online trading, and removing legal hurdles to attract


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more participants have increased the scope of commodities derivatives trading in India. This has

boosted both the spot market and the futures market in India. The trading volumes are increasing

as the list of commodities traded on national commodity exchanges also continues to expand.

The volumes are likely to surge further as a result of the increased interest from the international

participants in Indian commodity markets. If these international participants are allowed to

participate in commodity markets (like in the case of capital markets), the growth in commodity

futures can be expected to be phenomenal. It is expected that foreign institutional investors

(FIIs), mutual funds, and banks may be able to participate in commodity derivatives markets in

the near future. The launch of options trading in commodity exchanges is also expected after the

amendments to the Forward Contract Regulation Act (1952). Commodity trading and commodity

financing are going to be rapidly growing businesses in the coming years in India.

Indian Commodity Study

AGRO PRODUCTS

Basmati Rice Castor Oil Chana Coffee Cotton Crude OilGaur Gur Jeera Jute Maize MustardPeas Pepper Red Chilli Rice Rubber SoyabeanSugar Turmeric Urad Wheat - -

METALS

Copper Gold Silver Steel - -

With the liberalization of the Indian economy in 1991, the commodity prices (especially

international commodities such as base metals and energy) have been subject to price volatility

in international markets, since India is largely a net importer of such commodities. Commodity

derivatives exchanges have been established with a view to minimize risks associated with such

price volatility.

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 8-10%. 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


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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.

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.

Commodities trading

Spot trading

Spot trading is any transaction where delivery either takes place immediately, or with a

minimum lag between the trade and delivery due to technical constraints. Spot trading normally

involves visual inspection of the commodity or a sample of the commodity, and is carried out in

markets such as wholesale markets. Commodity markets, on the other hand, require the existence

of agreed standards so that trades can be made without visual inspection.


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Forward contracts

A forward contract is an agreement between two parties to exchange at some fixed future date a

given quantity of a commodity for a price defined today. The fixed price today is known as the

forward price.

Futures contracts

A futures contract has the same general features as a forward contract but is transacted through a

futures exchange.

Commodity and futures contracts are based on whats termed forward contracts. Early on these

forward contracts agreements to buy now, pay and deliver later were used as a way of

getting products from producer to the consumer. These typically were only for food and

agricultural products. Forward contracts have evolved and have been standardized into what we

know today as futures contracts. Although more complex today, early forward contracts for

example, were used for rice in seventeenth century Japan. Modern forward, or futures

agreements began in Chicago in the 1840s, with the appearance of the railroads. Chicago, being

centrally located, emerged as the hub between Midwestern farmers and producers and the east

coast consumer population centers.

In essence, a futures contract is a standardized forward contract in which the buyer and the seller

accept the terms in regards to product, grade, quantity and location and are only free to negotiate

the price.

Hedging

Hedging, a common practice of farming cooperatives insures against a poor harvest by

purchasing futures contracts in the same commodity. If the cooperative has significantly less of

its product to sell due to weather or insects, it makes up for that loss with a profit on the markets,

since the overall supply of the crop is short everywhere that suffered the same conditions.


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Water as a Commodity

Global shortages of water could lead to the precious liquid being exchanged in a similar way to

permission schemes used by countries for carbon dioxide, the head of one of the worlds leadingexchanges said yesterday.

Craig Donohue, chief executive of the Chicago Mercantile Exchange (CME), said that water

could become a commodity as droughts and demand place huge pressures on river systems and

water tables.

Trading water as a commodity would, it is argued, put financial pressure on users to keep

consumption down, in the same way that carbon emission trading schemes penalise the biggest

polluters.

It would be a market-based mechanism to force greater efficiency among business users bypenalising heavy consumption. While offering a lucrative option for traders, the market would be

designed to reduce the pressures that are already said to have contributed to war and starvation.

How it would work

A water future would be an agreement to buy or sell a certain number of litres of water at a

pre-agreed price on a certain date

Futures are priced, like shares, with a bid and an offer price bid being the price at which a

trader is willing to buy a futures contract and offer being the price at which they are willing to

sell

They are used to hedge against risk. In the case of water, risk that water would not be

available

They are also used for speculating. A speculator might invest in water futures in the hope that

farmers would need it in the summer and be prepared to pay more

If a farmer wanted to protect himself against rising water prices, he would buy futures to

cover the amount he is likely to need

Information on the availability of water in local storage facilities would help buyers andsellers to determine the risk of water shortagesand therefore the price of the asset

There are now, however, several water-sector tracking indexes available to help address

just this issue: the ISE Water Index (HHO), the Palisades Water Indices (PIIWI and ZWI)

and the S&P Global Water Index (SPGTAQUA). Backtested data on each of these stocks

shows water has been a strong-performing theme already; moreover, water stocks have had only

Special Commodities Traded


30/70

a weak correlation to the S&P 500, and have been negatively correlated with other commodities,

making them a strong diversification option for new portfolios.

These indexes are currently investable' through four different exchange-traded funds, or ETFs:

First Trust ISE Water (FIW), Powershares Global Water (PIO), Powershares Water

Resources (PHO) and Claymore S&P Global Water (CGW).

Indexes

Like any other scarcity, the water shortage creates investment opportunities. Here are some of

the more popular indexes designed to track various water-related investment opportunities:

Palisades Water Index - This index was designed to track the performance of companies

involved in the global water industry, including pump and filter manufacturers, water utilities

and irrigation equipment manufacturers. The index was set at 1000 as of December 31, 2003 and

not even 10 years later is has fluctuated around the 2,000 mark.

Dow Jones U.S. Water Index - Composed of approximately 29 stocks, this barometer is

comprised of a large number of international and domestic companies which are affiliated with

the water business and have a minimum market capitalization of $150 million.

ISE-B&S Water Index - Launched in January 2006, this index represents water distribution,

water filtration, flow technology and other companies that specialize in water-related solutions. It

contains over 35 stocks.

S&P 1500 Water Utilities Index - A sub-sector of the Standard & Poor's 1500 Utilities Index,

this index is composed of just two companies, American States Water (NYSE:AWR) and

Aqua America (NYSE: WTR) .

The Bloomberg World Water Index and the MSCI World Water Index provide a look at the

water industry from an international perspective, although it can be rather difficult to find current

information about either index. There are also a variety of utility indexes that include some water

stocks.

Conclusion

Recent years have seen an upswing in the demand for investments that seek to profit from the

need for fresh, clean water. If the trend continues, and by all indications it will, investors can

expect to see a host of new investments that provide exposure to this precious commodity and to

the firms that deliver it to the marketplace. There are currently numerous ways to add water

exposure to your portfolio - most simply require a bit of research.

Just as with any other investment in commodities or sector funds, wise investors should limit

their exposure to water. Generally speaking, highly concentrated investments such as these

should not represent more than 10% of the assets in a well-diversified portfolio. Limiting


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exposure to concentrated positions provides some opportunity to capture positive returns while

limiting overall portfolio volatility.

Carbon offset

A carbon offset is a reduction in emissions of carbon dioxide or greenhouse gases made in order

to compensate for or to offset an emission made elsewhere.

Carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO2e) and may

represent six primary categories of greenhouse gases. The categories include: carbon dioxide

(CO2), methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), hydroflourocarbons

(HFCs), and sulfur hexaflouride (SF6). One carbon offset represents the reduction of one metric

ton of carbon dioxide or its equivalent in other greenhouse gases.

The World Resources Institute defines a carbon offset as a unit of carbon dioxide-equivalent(CO2e) that is reduced, avoided, or sequestered to compensate for emissions occurring

elsewhere.

The Collins English Dictionary defines a carbon offset as a compensatory measure made by an

individual or company for carbon emissions, usually through sponsoring activities or projects

which increase carbon dioxide absorption, such as tree planting.

The Environment Protection Authority of Victoria (Australia) defines a carbon offset as: a

monetary investment in a project or activity elsewhere that abates greenhouse gas (GHG)

emissions or sequesters carbon from the atmosphere that is used to compensate for GHGemissions from your own activities. Offsets can be bought by a business or individual in the

voluntary market (or within a trading scheme), a carbon offset usually represents one tonne of

CO2-e.

The Stockholm Environment Institute defines a carbon offset as a credit for negating or

diminishing the impact of emitting a ton of carbon dioxide by paying someone else to absorb or

avoid the release of a ton of CO2 elsewhere.

The University of Oxford Environmental Change Institute defines a carbon offset as mechanism

whereby individuals and corporations pay for reductions elsewhere in order to offset their own

emissions.

Renewable Energy Certificates (United States)

Renewable Energy Certificates (RECs), also known as Green tags, Renewable Energy

Credits, Renewable Electricity Certificates, or Tradable Renewable Certificates (TRCs), are

tradable, non-tangible energy commodities in the United States that represent proof that 1


32/70

megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource

(renewable electricity). Solar Renewable Energy Certificates (SRECs) are RECs that are

specifically generated by solar energy.

These certificates can be sold and traded or bartered, and the owner of the REC can claim to

have purchased renewable energy. According to the U.S. Department of Energy's Green PowerNetwork, RECs represent the environmental attributes of the power produced from renewable

energy projects and are sold separate from commodity electricity. While traditional carbon

emissions trading programs promote low-carbon technologies by increasing the cost of emitting

carbon, RECs can incentivize carbon-neutral renewable energy by providing a production

subsidy to electricity generated from renewable sources. It is important to understand that the

energy associated with a REC is sold separately and is used by another party. The consumer of a

REC receives only a certificate.

In states that have a REC program, a green energy provider (such as a wind farm) is credited

with one REC for every 1,000 kWh or 1 MWh of electricity it produces (for reference, anaverage residential customer consumes about 800 kWh in a month). A certifying agency gives

each REC a unique identification number to make sure it doesn't get double-counted. The green

energy is then fed into the electrical grid (by mandate), and the accompanying REC can then be

sold on the open market.

White certificates

In environmental policy, white certificates are documents certifying that a certain reduction of

energy consumption has been attained. In most applications, the white certificates are tradable

and combined with an obligation to achieve a certain target of energy savings. Under such asystem, producers, suppliers or distributors of electricity, gas and oil are required to undertake

energy efficiency measures for the final user that are consistent with a pre-defined percentage of

their annual energy deliverance. If energy producers do not meet the mandated target for energy

consumption they are required to pay a penalty. The white certificates are given to the producers

whenever an amount of energy is saved whereupon the producer can use the certificate for their

own target compliance or can be sold to (other) parties who cannot meet their targets. Quite

analogous to the closely related concept of emissions trading, the tradability in theory guarantees

that the overall energy saving is achieved at least cost, while the certificates guarantee that the

overall energy saving target is achieved.

A white certificate, also referred to as an Energy Savings Certificate (ESC), Energy Efficiency

Credit (EEC), or white tag, is an instrument issued by an authorized body guaranteeing that a

specified amount of energy savings has been achieved. Each certificate is a unique and traceable

commodity carrying a property right over a certain amount of additional energy savings and

guaranteeing that the benefit of these savings has not been accounted for elsewhere.


33/70

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 ware house and gets a

warehouse receipt. This allows him to ask for physical delivery of the good from the warehouse.But someone 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 takephysical 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.

Procedure for trading


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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 follows-

Marking to market

Receipts and payments

Reporting

Delivery upon expiration or maturity.


35/70

Delivery and condition guarantees

In addition, delivery day, method of settlement and delivery point must all be specified.

Typically, trading must end two (or more) business days prior to the delivery day, so that the

routing of the shipment can be finalized via ship or rail, and payment can be settled when the

contract arrives at any delivery point.

Standardization

U.S. soybean futures, for example, are of standard grade if they are "GMO or a mixture of GMO

and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced in the

U.S.A. (Non-screened, stored in silo)," and of deliverable grade if they are "GMO or a mixture of

GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and Wisconsin origin produced in

the U.S.A. (Non-screened, stored in silo)." Note the distinction between states, and the need to

clearly mention their status as GMO (Genetically Modified Organism) which makes them

unacceptable to most organic food buyers.

Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork

bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats,

poultry, eggs, or any other commodity which is so traded

How an investor get started with trading:

Choose Brokers Many already established equity brokers have sought membership with

MCX. Check out the list of commodity brokers

Minimum Investment Amount The minimum investment amount is approximately Rs. 6,

000. It varies for different commodities. For example, if you want to trade on Mini gold (100g),

you need approximately Rs. 8, 000/- and for Mini zinc, you need ~ Rs. 5, 500. But starting your

trading with Rs. 10, 000 will be ideally good.

Transferring money to trade You can directly deposit to Brokers company account, Net-

banking, Demand draft and cheques are all possible ways. Most of the brokers will allow all the

above mentioned options, only few brokers have restricted cheques.

Basic things to open trading account -

Bank account

PAN Card

Address Proof

Note: The brokers will charge Rs. 250 to 500 for opening the trading account.


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Basic needs for Trading All you need is Internet connection and trading application. Dont

bother about trading application, brokers will install it to your computer and they will guide you

to operate the platform, even brokers give you daily tips. But premium tips are always best and

also you can gain more.

Trading TimeMCX will open at 10 AM and will close at 11.30 PM. Within these times youcan trade.

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

PAN card Number, Driving License, Vote ID, 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

Know your client form

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?


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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.

Explaining the trading through F.A.Qs

Where do I need to go to trade in commodity futures?

You have three options - the National Commodity and Derivative Exchange, the Multi

Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd.

All three have electronic trading and settlement systems and a national presence.

How do I choose my broker?

Several already-established equity brokers have sought membership with NCDEX and MCX.

The likes of Refco Sify Securities, SSKI (Sharekhan) and ICICIcommtrade (ICICIdirect), ISJ

Comdesk (ISJ Securities) and Sunidhi Consultancy are already offering commodity futures

services. Some of them also offer trading through Internet just like the way they offer equities.

You can also get a list of more members from the respective exchanges and decide upon the

broker you want to choose from.

What is the minimum investment needed?

You can have an amount as low as Rs 5,000. All you need is money for margins payable upfront

to exchanges through brokers. The margins range from 5-10 per cent of the value of the

commodity contract. While you can start off trading at Rs 5,000 with ISJ Commtrade other

brokers have different packages for clients.


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For trading in bullion, that is, gold and silver, the minimum amount required is Rs 650 and Rs

950 for on the current price of approximately Rs 65,00 for gold for one trading unit (10 gm) and

about Rs 9,500 for silver (one kg).

The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg,

quintals or tonnes), but again the minimum funds required to begin will be approximately Rs5,000.

Do I have to give delivery or settle in cash?

You can do both. All the exchanges have both systems - cash and delivery mechanisms. The

choice is yours. If you want your contract to be cash settled, you have to indicate at the time of

placing the order that you don't intend to deliver the item.

If you plan to take or make delivery, you need to have the required warehouse receipts. The

option to settle in cash or through delivery can be changed as many times as one wants till the

last day of the expiry of the contract.

What do I need to start trading in commodity futures?

As of now you will need only one bank account. You will need a separate commodity demat

account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.

What are the other requirements at broker level?

You will have to enter into a normal account agreements with the broker. These include the

procedure of the Know Your Client format that exist in equity trading and terms of conditions of

the exchanges and broker. Besides you will need to give you details such as PAN no., bankaccount no, etc.

What are the brokerage and transaction charges?

The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges

range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different

commodities. It will also differ based on trading transactions and delivery transactions. In case of

a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract value. The

brokerage cannot exceed the maximum limit specified by the exchanges.

Where do I look for information on commodities?

Daily financial newspapers carry spot prices and relevant news and articles on most

commodities. Besides, there are specialised magazines on agricultural commodities and metals

available for subscription. Brokers also provide research and analysis support.


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But the information easiest to access is from websites. Though many websites are subscription-

based, a few also offer information for free. You can surf the web and narrow down you search.

Who is the regulator?

The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets,brokers don't need to register themselves with the regulator.

The FMC deals with exchange administration and will seek to inspect the books of brokers only

if foul practices are suspected or if the exchanges themselves fail to take action. In a sense,

therefore, the commodity exchanges are more self-regulating than stock exchanges. But this

could change if retail participation in commodities grows substantially.

Who are the players in commodity derivatives?

The commodities market will have three broad categories of market participants apart from

brokers and the exchange administration - hedgers, speculators and arbitrageurs. Brokers willintermediate, facilitating hedgers and speculators.

Hedgers are essentially players with an underlying risk in a commodity - they may be either

producers or consumers who want to transfer the price-risk onto the market.

Producer-hedgers are those who want to mitigate the risk of prices declining by the time they

actually produce their commodity for sale in the market; consumer hedgers would want to do the

opposite.

For example, if you are a jewellery company with export orders at fixed prices, you might want

to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profitfrom price variations are essentially speculators. They serve as counterparties to hedgers and

accept the risk offered by the hedgers in a bid to gain from favourable price changes.

In which commodities can I trade?

Though the government has essentially made almost all commodities eligible for futures trading,

the nationwide exchanges have earmarked only a select few for starters. While the NMCE has

most major agricultural commodities and metals under its fold, the NCDEX, has a large number

of agriculture, metal and energy commodities. MCX also offers many commodities for futures

trading.

Do I have to pay sales tax on all trades? Is registration mandatory?

No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case

of trade resulting into delivery. Normally it is the seller's responsibility to collect and pay sales

tax.


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The sales tax is applicable at the place of delivery. Those who are willing to opt for physical

delivery need to have sales tax registration number.

What happens if there is any default?

Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchangeshave a penalty clause in case of any default by any member. There is also a separate arbitration

panel of exchanges.

Are any additional margin/brokerage/charges imposed in case I want to take delivery of

goods?

Yes. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the

contract value. The member/ broker will levy extra charges in case of trades resulting in delivery.

Is stamp duty levied in commodity contracts? What are the stamp duty rates?

As of now, there is no stamp duty applicable for commodity futures that have contract notes

generated in electronic form. However, in case of delivery, the stamp duty will be applicable

according to the prescribed laws of the state the investor trades in. This is applicable in similar

fashion as in stock market.

How much margin is applicable in the commodities market?

As in stocks, in commodities also the margin is calculated by (value at risk) VaR system.

Normally it is between 5 per cent and 10 per cent of the contract value.

The margin is different for each commodity. Just like in equities, in commodities also there is asystem of initial margin and mark-to-market margin. The margin keeps changing depending on

the change in price and volatility.

Are there circuit filters?

Yes the exchanges have circuit filters in place. The filters vary from commodity to commodity

but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity


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A commodities exchange is an exchange where various commodities and derivatives

products are traded. Most commodity markets across the world trade in agricultural products and

other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork

bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices,forwards, futures and options on futures. Other sophisticated products may include interest rates,

environmental instruments, swaps, or ocean freight contracts.

Commodities exchanges across the world

Africa

Exchange Abbreviation Location Product Types

Ethiopia CommodityExchange

ECX Addis Ababa,Ethiopia

Agricultural

Africa MercantileExchange

AfMX Nairobi, Kenya Agricultural,equities and energyproducts

Americas


Brazilian Mercantile andFutures Exchange

BMF So Paulo, Brazil Agricultural, Biofuels,Precious Metals

Chicago Board of Trade(CME Group)

CBOT Chicago, US Grains, Ethanol, Treasuries,Equity Index, Metals

Chicago MercantileExchange (CME Group)

CME Chicago, US Meats, Currencies,Eurodollars, Equity Index

Chicago Climate Exchange CCX Chicago, US Emissions

HedgeStreet Exchange California, US Energy, industrial Metals

Intercontinental Exchange ICE Atlanta, Georgia,US

Energy, Emissions,Agricultural, Biofuels

Integrated Nano-ScienceCommodity Exchange

INSCX United Kingdom Engineered nanomaterials

Kansas City Board of Trade KCBT Kansas City, US Agricultural

Memphis Cotton Exchange Memphis, US Agricultural

Mercado a Termino deBuenos Aires

MATba Buenos Aires,Argentina

Agricultural

Mercado a Termino deRosario

ROFEX Rosario,Argentina

Financial, Agricultural

Minneapolis Grain Exchange MGEX Minneapolis Agricultural

New York MercantileExchange (CME Group)

NYMEX New York, US Energy, Precious Metals,Industrial Metals

U.S. Futures Exchange USFE Chicago, US Energy

Regulation for trading


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Asia


AgriculturalFutures

Exchange ofThailand

AFET BangkokThailand

Agricultural

Bursa Malaysia MDEX Malaysia Biofuels

CambodianMercantileExchange

CMEX Phnom Penh,Cambodia

Energy, Industrial Metals, Rubber,Precious Metals, Agri Commodities.

Central JapanCommodityExchange

Nagoya,Japan Energy, Industrial Metals, Rubber

DalianCommodity

Exchange

DCE Dalian, China Agricultural, Plastics, Energy, AgriCommodities

Dubai MercantileExchange

DME Dubai Energy

Dubai Gold &CommoditiesExchange

DGCX Dubai Precious Metals

Hong KongMercantileExchange

HKMEx Hong Kong Gold

Iranian oil bourse IOB Kish Island,Iran

Oil, Gas, Petrochemicals

KansaiCommoditiesExchange

KANEX Osaka,Japan Agricultural

Commodities &Metal ExchangeNepal Ltd.

COMEN Nepal Gold and Silver

National SpotExchangeLimited

[NSEL] Mumbai, India Spot Trading in commodities, E-Series

Nepal DerivativeExchange

Limited

[NDEX] Kathmandu,Nepal

Agricultural, Precious Metals, BaseMetals, Energy

National SpotExchangeLimited Nepal

[NSX] Kathmandu,Nepal

E-Gold, E-Silver, E-Copper, E-Iron, E-CRUDE OIL, and Local Agro Products

MercantileExchange NepalLimited

MEX Kathmandu,Nepal

Agricultural, Bullion, Base Metals,Energy


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Nepal SpotExchangeLimited

NSE Kathmandu,Nepal

Agricultural, Bullion

Ace Derivatives& Commodity

Exchange

ACE India Agricultural

IndianCommodityExchangeLimited

ICEX India Energy, Precious Metals, Base Metals,Agricultural

MultiCommodityExchange

MCX India Precious Metals, Metals, Energy,Agricultural Products

National Multi-CommodityExchange of

India Ltd

NMCE India Precious Metals, Metals, Agricultural

NationalCommodityExchangeLimited

NCEL Pakistan Precious Metals, Agriculture

Bhatinda Om &Oil ExchangeLtd.

BOOE India Agricultural

Karachi PreciousMetals,Agricultural

NationalCommodity andDerivativesExchange

NCDEX India All

Shanghai FuturesExchange

Shanghai,China

Industrial metals, Gold, Fuel Oil, Rubber

SingaporeCommodityExchange

SICOM Singapore Agricultural, Rubber

SingaporeMercantile

Exchange

SMX Singapore Futures & Options contracts in PreciousMetals such as physically delivered Gold,

Base Metals, Agriculture Commodities,Energy such as WTI and Brentdenominated in Euro, Currencies such asEuro-US Dollar Contract, CommodityIndices

TokyoCommodity

TOCOM Tokyo, Japan Energy, Precious Metals, IndustrialMetals, Agricultural


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Exchange

Tokyo GrainExchange

TGE Tokyo, Japan Agricultural

ZhengzhouCommodity

Exchange

CZCE Zhengzhou,China

Agricultural, PTA

Buon Ma ThuotCoffee ExchangeCenter

BCEC Buon MaThuot,Vietnam

Coffee

Europe


APX-ENDEX APX-ENDEX

Amsterdam, theNetherlands

Energy

Commodity ExchangeBratislava, JSC

CEB Bratislava, Slovakia Emissions, Agricultural,Diamonds

Climex CLIMEX Amsterdam, theNetherlands

Emissions

NYSE Liffe Europe Agricultural

European ClimateExchange

ECX Europe Emissions

Energy Exchange Austria EXAA Vienna, Austria Electricity, EmissionAllowances

London Metal Exchange LME London, UK Industrial Metals, Plastics

Risk Management

Exchange

RMX Hannover,

Deutschland

Agricultural

European Energy Exchange EEX Leipzig, Germany Energy, Emissions

Oceania


Australian SecuritiesExchange

ASX Sydney,Australia

Agricultural, Electricity, Thermal Coal& Natural Gas

Commodity Exchanges in India

MCXMulti Commodity Exchange of IndiaLimited (MCX) is an independent and de-mutilated exchange with a permanentrecognition from Government of India.

NMCEILNational Multi Commodity Exchange ofIndia Limited (NMCEIL) is the firstdemutualized, Electronic Multi-CommodityExchange in India.


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NCDEXNational Commodity & DerivativesExchange Limited (NCDEX) is a public

limited company in Mumbai and the onlycommodity exchange in the countrypromoted by national level institutions. It ismanaged by online multi commodityexchange.

India Bullion MarketLive price charts of Gold, Silver, IndianRupee, Gold INR oz & 100g 995, Silver

Rupees and Global Bullion news, stories. &graphs.

LEADING COMMODITY MARKETS OF INDIA

The government has now allowed national commodity exchanges, similar tothe BSE & NSE, to

come up and let them deal in commodity derivatives in anelectronic trading environment. These

exchanges are expected to offer anation-wide anonymous, order driven, screen based tradingsystem fortrading. The Forward Markets Commission (FMC) will regulate these exchanges.

Consequently four commodity exchanges have been approved to commence

business in this regard. They are:

Commodity Market in India

1. Multi CommodityExchange (MCX), Mumbai

2. National Commodities and Derivatives Exchange Ltd (NCDEX), Mumbai

3. National Board of Trade (NBOT), Indore

4. National Multi Commodity Exchange (NMCE), Ahmedabad

Country Regulatory agency

Australia Australian Securities and InvestmentsCommission

Chinese mainland China Securities Regulatory Commission

Hong Kong Securities and Futures Commission

India Securities and Exchange Board of India and

Forward Markets Commission (FMC)Pakistan Securities and Exchange Commission of

Pakistan

Singapore Monetary Authority of Singapore

UK Financial Services Authority

USA Commodity Futures Trading Commission


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Regulators

Each exchange is normally regulated by a national governmental (or semi-governmental)

regulatory agency:

GUIDELINES BY THE RBI PERTAINING TO COMMODITY FUTURE TRADING

The guidelines are: -

These guidelines cover the Indian entities that are exposed to commodity price risk.

Name and address of the organization

I. A brief description of the hedging strategy proposed:

Description of business activity and nature of risk.

Instruments proposed to be used for hedging.

Exchanges and brokers through whom the risk is proposed to be hedged and credit lines

proposed to be available. The name and address of th

Documents

Commodity Market Final