Commodity Market Modified

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A

Project Study ReportOn

Contemporary Issue on Seminar

on

Commodity Market

In The Partial Fulfillment of

MBA Degree

2010-2012

Rajasthan Technical University, Kota

Submitted to: SUBMITTED BY:FMS, MAIET, JAIPUR ANIL KUMAR MANGNANI

MBA II SEM.

Faculty of Management StudiesMaharishi arvind institute of engineering and

technology,jaipur

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Acknowledgement

Intellectual alertness, creativity goes side by side in making of a manager. In this context, the role of successful execution of the project work cannot be denied.

On this note I would like to take this opportunity to convey my respect and gratitude towards Mr. Ankur Rastogi (Faculty- MAIET) who considered me worthy of doing project commodity market in their esteemed

establishment and never failed to satisfy my over-zealous thirst to obtaininformation.

Finally, I would like to thank Col. C.D. Sharma , Dean of Faculty of Management Studies, Maharishi Arvind Institute of Engineering and Technology, Jaipur and all the other people who are directly or indirectlyassociated with my project for the support provided during the course of my project.

No language is ever adequate to express my gratitude towards my familymembers for their dedicated and enthusiastic encour.

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PREFACE

As a part of subject requirement of my MBA from MAIET, I have prepared a project report on requirement and selection in any orgnisation so as to give exposure to practical management and to get familiar withvarious activities taking place in the organisation.

I have done my project report on the commodity market. The report hasbeen prepared to deliver as much information as I could gather fromwhatsoever resources I had.

It is necessary for all the organisations. Commodity market is the processby which the organisation manages a wider impact, such as mediarelations, and enables it to commence recovery. Irrespective of the size of an institution affected.

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COMMODITYMARKET

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INDEX

S. No Topic PageNo.

1 Introduction to Commodity Market 04

2 History of Evolution of Commodity Markets 08

3 India and the Commodity Market 10

4 International Commodity Exchanges 15

5 How Commodity Market Works? 17

6 How to Invest in a Commodity Market 19

7 Current Scenario in Indian CommodityMarket

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8 Commodities 28

9 Analysis 38

10 ANNAXTURE 47

11 conclusion 55

12 Bibliography 56

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Introduction to Commodity Market

What is Commodity?Any product that can be used for commerce or an article

of commerce which is traded on an authorized commodity exchange isknown as commodity. The article should be movable of value,something which is bought or sold and which is produced or used asthe subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952defines goods as every kind of movable property other thanactionable claims, money and securities.

In current situation, all goods and products of agricultural(including plantation), mineral and fossil origin are allowed forcommodity trading recognized under the FCRA. The nationalcommodity exchanges, recognized by the Central Government,permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton,oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur,potatoes and onions, coffee and tea, rubber and spices. Etc.

What is a commodity exchange?A commodity exchange is an association or a company or

any other body corporate organizing futures trading in commodities forwhich license has been granted by regulating authority.

What is Commodity Futures? A Commodity futures is an agreement between two parties tobuy or sell a specified and standardized quantity of a commodity at acertain time in future at a price agreed upon at the time of enteringinto the contract on the commodity futures exchange.

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The need for a futures market arises mainly due to thehedging function that it can perform. Commodity markets, like anyother financial instrument, involve risk associated with frequent pricevolatility. The loss due to price volatility can be attributed to thefollowing reasons:

Consumer Preferences: - In the short-term, their influence on pricevolatility 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 bringingabout wild fluctuations in prices. This can especially noticed inagricultural commodities where the weather plays a major role inaffecting the fortunes of people involved in this industry. The futuresmarket 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 thepossession of physical assets through any adverse moments inprice. Liquidity and Price discovery to ensure base minimumvolume in trading of a commodity through market informationand demand supply factors that facilitates a regular andauthentic price discovery mechanism.

Maintaining buffer stock and better allocation of resources as itaugments reduction in inventory requirement and thus theexposure to risks related with price fluctuation declines.Resources can thus be diversified for investments.

Price stabilization along with balancing demand and supplyposition. Futures trading leads to predictability in assessing thedomestic prices, which maintains stability, thus safeguardingagainst any short term adverse price movements. Liquidity inContracts of the commodities traded also ensures in maintainingthe equilibrium between demand and supply.

Flexibility, certainty and transparency in purchasing commodities

facilitate bank financing. Predictability in prices of commoditywould lead to stability, which in turn would eliminate the risksassociated with running the business of trading commodities.This would make funding easier and less stringent for banks tocommodity market players.

Benefits of Commodity Futures Markets:-

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The primary objectives of any futures exchange are authenticprice discovery and an efficient price risk management. Thebeneficiaries include those who trade in the commodities being offeredin the exchange as well as those who have nothing to do with futurestrading. It is because of price discovery and risk management through

the existence of futures exchanges that a lot of businesses andservices are able to function smoothly.

1. Price Discovery:- Based on inputs regarding specific marketinformation, the demand and supply equilibrium, weatherforecasts, expert views and comments, inflation rates,Government policies, market dynamics, hopes and fears, buyersand sellers conduct trading at futures exchanges. Thistransforms in to continuous price discovery mechanism. Theexecution of trade between buyers and sellers leads to

assessment of fair value of a particular commodity that isimmediately disseminated on the trading terminal.

2. Price Risk Management: - Hedging is the most commonmethod of price risk management. It is strategy of offering pricerisk that is inherent in spot market by taking an equal butopposite position in the futures market. Futures markets areused as a mode by hedgers to protect their business fromadverse price change. This could dent the profitability of theirbusiness. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers,manufacturers, exporters, importers etc.

3. Import- Export competitiveness: - The exporters can hedgetheir price risk and improve their competitiveness by making useof futures market. A majority of traders which are involved inphysical trade internationally intend to buy forwards. Thepurchases made from the physical market might expose them tothe risk of price risk resulting to losses. The existence of futuresmarket would allow the exporters to hedge their proposedpurchase by temporarily substituting for actual purchase till the

time is ripe to buy in physical market. In the absence of futuresmarket it will be meticulous, time consuming and costly physicaltransactions.

4. Predictable Pricing: - The demand for certain commodities ishighly price elastic. The manufacturers have to ensure that theprices should be stable in order to protect their market sharewith the free entry of imports. Futures contracts will enable

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predictability in domestic prices. The manufacturers can, as aresult, smooth out the influence of changes in their input pricesvery easily. With no futures market, the manufacturer can becaught between severe short-term price movements of oils andnecessity to maintain price stability, which could only be possible

through sufficient financial reserves that could otherwise beutilized for making other profitable investments.

5. Benefits for farmers/Agriculturalists: - Price instability has adirect bearing on farmers in the absence of futures market.There would be no need to have large reserves to cover againstunfavorable price fluctuations. This would reduce the riskpremiums associated with the marketing or processing marginsenabling more returns on produce. Storing more and being moreactive in the markets. The price information accessible to the

farmers determines the extent to which traders/processorsincrease price to them. Since one of the objectives of futuresexchange is to make available these prices as far as possible, itis very likely to benefit the farmers. Also, due to the time lagbetween planning and production, the market-determined priceinformation disseminated by futures exchanges would be crucialfor their production decisions.

6. Credit accessibility: - The absence of proper risk managementtools would attract the marketing and processing of commoditiesto high-risk exposure making it risky business activity to fund.Even a small movement in prices can eat up a huge proportionof capital owned by traders, at times making it virtuallyimpossible to payback the loan. There is a high degree of reluctance among banks to fund commodity traders, especiallythose who do not manage price risks. If in case they do, theinterest rate is likely to be high and terms and conditions verystringent. This posses a huge obstacle in the smooth functioningand competition of commodities market. Hedging, which ispossible through futures markets, would cut down the discountrate in commodity lending.

7. Improved product quality: - The existence of warehouses forfacilitating delivery with grading facilities along with otherrelated benefits provides a very strong reason to upgrade andenhance the quality of the commodity to grade that isacceptable by the exchange. It ensures uniform standardizationof commodity trade, including the terms of quality standard: thequality certificates that are issued by the exchange-certified

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warehouses have the potential to become the norm for physicaltrade

History of Evolution of commodity markets

Commodities future trading was evolved from need of

assured continuous supply of seasonal agricultural crops. The conceptof organized trading in commodities evolved in Chicago, in 1848. Butone can trace its roots in Japan. In Japan merchants used to store Ricein warehouses for future use. To raise cash warehouse holders soldreceipts against the stored rice. These were known as rice tickets.Eventually, these rice tickets become accepted as a kind of commercialcurrency. Latter on rules came in to being, to standardize the tradingin rice tickets. In 19 th century Chicago in United States had emerged

as a major commercial hub. So that wheat producers from Mid-westattracted here to sell their produce to dealers & distributors. Due tolack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealersdiscretion. These situations lead to need of establishing a commonmeeting place for farmers and dealers to transact in spot grain todeliver wheat and receive cash in return.

Gradually sellers & buyers started making commitments toexchange the produce for cash in future and thus contract for futurestrading evolved. Whereby the producer would agree to sell hisproduce 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 hisproduce and dealer would know about his cost involved, in advance.This kind of agreement proved beneficial to both of them. As if dealeris not interested in taking delivery of the produce, he could sell hiscontract to someone who needs the same. Similarly producer who notintended to deliver his produce to dealer could pass on the sameresponsibility to someone else. The price of such contract woulddependent on the price movements in the wheat market. Latter on bymaking some modifications these contracts transformed in to aninstrument to protect involved parties against adverse factors such as

unexpected price movements and unfavorable climatic factors. Thispromoted traders entry in futures market, which had no intentions tobuy or sell wheat but would purely speculate on price movements inmarket to earn profit.

Trading of wheat in futures became very profitable whichencouraged the entry of other commodities in futures market. Thiscreated a platform for establishment of a body to regulate andsupervise these contracts. Thats why Chicago Board of Trade (CBOT)

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was established in 1848. In 1870 and 1880s the New York Coffee,Cotton and Produce Exchanges were born. Agricultural commoditieswere mostly traded but as long as there are buyers and sellers, anycommodity can be traded. In 1872, a group of Manhattan dairymerchants got together to bring chaotic condition in New York market

to a system in terms of storage, pricing, and transfer of agriculturalproducts. In 1933, during the Great Depression, the CommodityExchange, Inc. was established in New York through the merger of four small exchanges the National Metal Exchange, the RubberExchange of New York, the National Raw Silk Exchange, and the NewYork Hide Exchange.

The largest commodity exchange in USA is Chicago Boardof Trade, The Chicago Mercantile Exchange, the New York MercantileExchange, 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.

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India and the commodity market

History of Commodity Market in India:- The history of organized commodity derivatives in Indiagoes back to the nineteenth century when Cotton Trade Associationstarted futures trading in 1875, about a decade after they started inChicago. Over the time datives market developed in severalcommodities in India. Following Cotton, derivatives trading started inoilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912),Wheat in Hapur (1913) and Bullion in Bombay (1920).

However many feared that derivatives fuelled unnecessaryspeculation and were detrimental to the healthy functioning of themarket for the underlying commodities, resulting in to banning of commodity options trading and cash settlement of commoditiesfutures after independence in 1952. The parliament passed theForward Contracts (Regulation) Act, 1952, which regulated contractsin Commodities all over the India. The act prohibited options trading inGoods along with cash settlement of forward trades, rendering acrushing blow to the commodity derivatives market. Under the actonly those associations/exchanges, which are granted reorganizationfrom the Government, are allowed to organize forward trading in

regulated commodities. The act envisages three tire regulations: (i)Exchange which organizes forward trading in commodities canregulate trading on day-to-day basis; (ii) Forward Markets Commissionprovides regulatory oversight under the powers delegated to it by thecentral Government. (iii) The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and PublicDistribution- is the ultimate regulatory authority.

The commodities future market remained dismantledand remained dormant for about four decades until the newmillennium when the Government, in a complete change in a policy,started actively encouraging commodity market. After Liberalizationand Globalization in 1990, the Government set up a committee (1993)to examine the role of futures trading. The Committee (headed byProf. K.N. Kabra) recommended allowing futures trading in 17commodity groups. It also recommended strengthening ForwardMarkets Commission, and certain amendments to Forward Contracts(Regulation) Act 1952, particularly allowing option trading in goodsand registration of brokers with Forward Markets Commission. The

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Government accepted most of these recommendations and futures trading was permitted in all recommended commodities. It is timelydecision since internationally the commodity cycle is on upswing andthe next decade being touched as the decade of Commodities.Commodity exchange in India plays an important role where the prices

of any commodity are not fixed, in an organized way. Earlier only thebuyer of produce and its seller in the market judged upon the prices.Others never had a say.

Today, commodity exchanges are purely speculative innature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings aprice transparency and risk management in the vital market. A bigdifference between a typical auction, where a single auctioneerannounces the bids and the Exchange is that people are not onlycompeting to buy but also to sell. By Exchange rules and by law, no

one can bid under a higher bid, and no one can offer to sell higherthan someone elses lower offer. That keeps the market as efficient aspossible, and keeps the traders on their toes to make sure no one getsthe purchase or sale before they do. Since 2002, the commoditiesfuture market in India has experienced an unexpected boom in termsof modern exchanges, number of commodities allowed for derivativestrading as well as the value of futures trading in commodities, whichcrossed $ 1 trillion mark in 2006. Since 1952 till 2002 commoditydatives market was virtually non- existent, except some negligibleactivities on OTC basis.

In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. Aftera gap of almost three decades, Government of India has allowedforward transactions in commodities through Online CommodityExchanges, a modification of traditional business known as Adhat andVayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai, Multi CommodityExchange of India Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL) Ahmedabad.Thereare other regional commodity exchanges situated in different parts of

India.

Legal framework for regulating commodity futures in India:- The commodity futures traded in commodity exchangesare regulated by the Government under the Forward ContractsRegulations Act, 1952 and the Rules framed there under. The

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regulator for the commodities trading is the Forward MarketsCommission, situated at Mumbai, which comes under the Ministry of Consumer Affairs Food and Public Distribution

Forward Markets Commission (FMC):-

It is statutory institution set up in 1953 under ForwardContracts (Regulation) Act, 1952. Commission consists of minimumtwo and maximum four members appointed by Central Govt. Out of these members there is one nominated chairman. All the exchangeshave been set up under overall control of Forward Market Commission(FMC) of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX)National Commodities & Derivatives Exchange Limited

(NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life Insurance

Corporation of India (LIC), National Bank of Agriculture and RuralDevelopment (NABARD) and National Stock Exchange of India Limited(NSC). Punjab National Bank (PNB), Credit Ratting Information Serviceof India Limited (CRISIL), Indian Farmers Fertilizer CooperativeLimited (IFFCO), Canara Bank and Goldman Sachs by subscribing tothe equity shares have joined the promoters as a share holder of exchange. NCDEX is the only Commodity Exchange in the countrypromoted by national level institutions.

NCDEX is a public limited company incorporated on 23April 2003. NCDEX is a national level technology driven on lineCommodity Exchange with an independent Board of Directors andprofessionals not having any vested interest in Commodity Markets.It is committed to provide a world class commodity exchange platformfor market participants to trade in a wide spectrum of commodityderivatives driven by best global practices, professionalism andtransparency.

NCDEX is regulated by Forward Markets Commission(FMC). NCDEX is also subjected to the various laws of land like theCompanies Act, Stamp Act, Contracts Act, Forward ContractsRegulation Act and various other legislations.

NCDEX is located in Mumbai and offers facilities to its

members in more than 550 centers through out India. NCDEXcurrently facilitates trading of 57 commodities.

Commodities Traded at NCDEX:- Bullion:-

Gold KG, Silver, Brent

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Minerals:- Electrolytic Copper Cathode, Aluminum Ingot, Nickel

Cathode, Zinc Metal Ingot, Mild steel Ingots Oil and Oil seeds:- Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell),

Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RMseed oil cake, Refined soya oil, Rape seeds, Mustard seeds,Caster seed, Yellow soybean, Meal

Pulses:- Urad, Yellow peas, Chana, Tur, Masoor, Grain:-

Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellowred maize

Spices:-

Jeera, Turmeric, Pepper Plantation:-Cashew, Coffee Arabica, Coffee Robusta

Fibers and other:- Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28

mm cotton, Indian 31mm cotton, Lemon, Grain Bold, MediumStaple, Mulberry, Green Cottons, , , Potato, Raw Jute,Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334

Energy:- Crude Oil, Furnace oil

Multi Commodity Exchange of India Limited (MCX)Multi Commodity Exchange of India Limited (MCX) is an

independent and de-mutulized exchange with permanentreorganization from Government of India, having Head Quarter inMumbai. Key share holders of MCX are Financial Technologies (India)Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of India and Cnnara Bank. MCX facilitates online trading,clearing and settlement operations for commodity futures marketacross the country.

MCX started of trade in Nov 2003 and has built strategic

alliance with Bombay Bullion Association, Bombay Metal Exchange,Solvent Extractors Association of India, pulses Importers Associationand Shetkari Sanghatana.

MCX deals wit about 100 commodities.

Commodities Traded at MCX:- Bullion:-

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Gold, Silver, Silver Coins, Minerals:-

Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead Oil and Oil seeds:-

Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein,Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soymeal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil,Sunflower Oil cake, Tamarind seed oil,

Pulses:- Chana, Masur, Tur, Urad, Yellow peas Grains:-

Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley, Spices:-

Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove,Ginger,

Plantation:-Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,Coffee,

Fiber and others:-Kapas, Kapas Khalli, Cotton (long staple, medium staple,

short staple), Cotton Cloth, Cotton Yarn, Gaur seed andGuargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, ArtSilk Yarn, Chara or Berseem, Raw Jute, Jute Goods, JuteSacking,

Petrochemicals:-High Density Polyethylene (HDPE), Polypropylene (PP), Poly

Vinyl Chloride (PVC) Energy:-

Brent Crude Oil, Crude Oil, Furnace Oil, Middle East SourCrude Oil, Natural Gas

National Multi Commodity Exchange of India Limited(NMCEIL) National Multi Commodity Exchange of India Limited(NMCEIL) is the first de-mutualised Electronic Multi CommodityExchange in India. On 25 th July 2001 it was granted approval byGovernment to organize trading in edible oil complex. It is beingsupported by Central warehousing Corporation Limited, GujaratState Agricultural Marketing Board and Neptune OverseasLimited. It got reorganization in Oct 2002. NMCEIL Head Quarteris at Ahmedabad.

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INTERNATIONAL COMMODITY EXCHANGES

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

The New York Mercantile Exchange (NYMEX):-

The New York Mercantile Exchange is the worlds biggestexchange for trading in physical commodity futures. It is a primarytrading forum for energy products and precious metals. The exchangeis in existence since last 132 years and performs trades trough twodivisions, the NYMEX division, which deals in energy and platinum andthe COMEX division, which trades in all the other metals.Commodities traded: - Light sweet crude oil, Natural Gas, Heating

Oil, Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper,Aluminum, Platinum, Palladium, etc.

London Metal Exchange:- The London Metal Exchange (LME) is the worldspremier non-ferrous market, with highly liquid contracts. Theexchange was formed in 1877 as a direct consequence of the industrialrevolution witnessed in the 19 th century. The primary focus of LME is inproviding a market for participants from non-ferrous based metalsrelated industry to safeguard against risk due to movement in basemetal prices and also arrive at a price that sets the benchmarkglobally. The exchange trades 24 hours a day through an inter officetelephone market and also through a electronic trading platform. It isfamous for its open-outcry trading between ring dealing members that

takes place on the market floor.Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc,Aluminum Alloy, North American Special Aluminum Alloy (NASAAC),Polypropylene, Linear Low Density Polyethylene, etc.

The Chicago Board of Trade:- The first commodity exchange established in the worldwas the Chicago Board of Trade (CBOT) during 1848 by group of

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Chicago merchants who were keen to establish a central market placefor trade. Presently, the Chicago Board of Trade is one of the leadingexchanges in the world for trading futures and options. More than 50contracts on futures and options are being offered by CBOT currentlythrough open outcry and/or electronically. CBOT initially dealt only in

Agricultural commodities like corn, wheat, non storable agriculturalcommodities and non-agricultural products like gold and silver.Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat,Oats, Ethanol, Rough Rice, Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM):-The Tokyo Commodity Exchange (TOCOM) is the second

largest commodity futures exchange in the world. It trades in tometals and energy contracts. It has made rapid advancement incommodity trading globally since its inception 20 years back. One of

the biggest reasons for that is the initiative TOCOM took towardsestablishing Asia as the benchmark for price discovery and riskmanagement in commodities like the Middle East Crude Oil. TOCOMsrecent tie up with the MCX to explore cooperation and businessopportunities is seen as one of the steps towards providing platformfor futures price discovery in Asia for Asian players in Crude Oil sincethe demand-supply situation in U.S. that drives NYMEX is differentfrom demand-supply situation in Asia. In Jan 2003, in a majoroverhaul of its computerized trading system, TOCOM fortified itsclearing system in June by being first commodity exchange in Japan tointroduce an in-house clearing system. TOCOM launched options ongold futures, the first option contract in Japanese market, in May2004.Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver,Platinum, Aluminum, Rubber, etc

Chicago Mercantile Exchange:- The Chicago Mercantile Exchange (CME) is the largestfutures exchange in the US and the largest futures clearing house inthe world for futures and options trading. Formed in 1898 primarily totrade in Agricultural commodities, the CME introduced the worlds first

financial futures more than 30 years ago. Today it trades heavily ininterest rates futures, stock indices and foreign exchange futures. Itsproducts often serves as a financial benchmark and witnesses thelargest open interest in futures profile of CME consists of livestock,dairy and forest products and enables small family farms to large Agri-business to manage their price risks. Trading in CME can be doneeither through pit trading or electronically.

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Commodities Traded: - Butter milk, Diammonium phosphate, Feedercattle, frozen pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk,Urea, Urea Ammonium Nitrate, etc

How Commodity market works?

There are two kinds of trades in commodities. The first is thespot trade, in which one pays cash and carries away the goods. Thesecond is futures trade. The underpinning for futures is the warehousereceipt. A person deposits certain amount of say, good X in a warehouse and gets a warehouse receipt. Which allows him to ask forphysical delivery of the good from the warehouse. But some onetrading in commodity futures need not necessarily posses such areceipt to strike a deal. A person can buy or sale a commodity futureon an exchange based on his expectation of where the price will go.Futures have something called an expiry date, by when the buyer orseller either closes (square off) his account or give/take delivery of thecommodity. The broker maintains an account of all dealing parties inwhich the daily profit or loss due to changes in the futures price isrecorded. Squiring off is done by taking an opposite contract so thatthe net outstanding is nil.

For commodity futures to work, the seller should be able todeposit the commodity at warehouse nearest to him and collect thewarehouse receipt. The buyer should be able to take physical delivery

at a location of his choice on presenting the warehouse receipt. But atpresent in India very few warehouses provide delivery for specificcommodities.

Following diagram gives a fair idea about working of theCommodity market.

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Today Commodity trading system is fully computerized.Traders need not visit a commodity market to speculate. With onlinecommodity trading they could sit in the confines of their home or officeand call the shots.

The commodity trading system consists of certainprescribed 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.

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

How to invest in a Commodity Market?

With whom investor can transact a business? An investor can transact a business with the approved clearingmember of previously mentioned Commodity Exchanges. The investorcan ask for the details from the Commodity Exchanges about the listof approved members.

What is Identity Proof? When investor approaches Clearing Member, the member will askfor identity proof. For which Xerox copy of any one of the following canbe given

a) PAN card Numberb) Driving Licensec) Vote IDd) Passport

What statements should be given for Bank Proof? The front page of Bank Pass Book and a canceled cheque of aconcerned bank. Otherwise the Bank Statement containing details canbe given.

What are the particulars to be given for address proof? In order to ascertain the address of investor, the clearing memberwill insist on Xerox copy of Ration card or the Pass Book/ BankStatement where the address of investor is given.

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What are the other forms to be signed by the investor? The clearing member will ask the client to sign

a) Know your client formb) Risk Discloser Document

The above things are only procedure in character and the riskinvolved and only after understanding the business, he wants totransact business.

What aspects should be considered while selecting acommodity broker? While selecting a commodity broker investor should ideally keepcertain aspects in mind to ensure that they are not being missed inany 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 calculatethe credibility of commodity broker.

Broker:- The Broker is essentially a person of firm that liaisons betweenindividual traders and the commodity exchange. In other words theCommodity Broker is the member of Commodity Exchange, havingdirect connection with the exchange to carry out all trades legally. Heis also known as the authorized dealer.

How to become a Commodity Trader/Broker of CommodityExchange?

To become a commodity trader one needs to complete certainlegal and binding obligations. There is routine process followed, whichis stated by a unit of Government that lays down the laws and actswith regards to commodity trading. A broker of Commodities is alsorequired to meet certain obligations to gain such a membership inexchange.

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

How to become a Member of Commodity Exchange?

To become member of Commodity Exchange the personshould comply with the following Eligibility Criteria.

1. He should be Citizen of India.2. He should have completed 21 years of his age.3. He should be Graduate or having equivalent qualification.4. He should not be bankrupt.5. He has not been debarred from trading in Commodities by

statutory/regulatory authority,There are following three types of Memberships of Commodity

Exchanges.

Trading-cum-Clearing Member (TCM):- A TCM is entitled to trade on his own account as well as on accountof his clients, and clear and settle trades himself. A sole proprietor,Partnership firm, a joint Hindu Undivided Family (HUF), a corporateentity, a cooperative society, a public sector organization or any otherGovernment or non-Government entity can become a TCM.

There are two types of TCM, TCM-1 and TCM-2. TCM-1refers to transferable non-deposit based membership and TCM-2refers to non-transferable deposit based membership.

A person desired to register as TCM is required to submitan application as per the format prescribed under the business rules,along with all enclosures, fee and other documents specified therein.He is required to go through interview by Membership AdmissionCommittee and committee is also empowered to frame rules or criteriarelating to selection or rejection of a member.

Institutional Trading-cum-clearing Member (ITCM):-Only an Institution/ Corporate can be admitted by the Exchange

as a member, conferring upon them the right to trade and clearthrough the clearing house of exchange as an Institutional Trading-

cum-clearing Member (ITCM). The member may be allowed to makedeals for himself as well as on behalf of his clients and clear and settlesuch deals. ITCMs can also appoint sub-brokers, authorized personsand Trading Members who would be registered as trading members.

Professional Clearing Member (PCM):- A PCM entitled to clear and settle trades executed by othermembers of the exchange. A corporate entity and an institution only

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can apply for PCM. The member would be allowed to clear and settletrades of such members of the Exchange who choose to clear andsettle their trades through such PCM.

Membership Details for NCDEX:- 1

Trading-cum-clearing Member: - TCMSr.No . Particulars NCDEX: TCM

1 Interest Free CashSecurity Deposit 15.00 Lakhs

2 Collateral SecurityDeposit 15.00 Lakhs

3 Admission Fee 5.00 Lakhs4 Annual Membership Fees 0.50 Lakhs

5Advance MinimumTransaction Charges 0.50 Lakhs

6 Net worth Requirement 50.00 Lakhs

Professional Clearing Membership: - PCMSr.No. Particulars NCDEX: PCM

1 Interest Free CashSecurity Deposit 25.00 Lakhs

2 Collateral Security Deposit 25.00 Lakhs

3 Annual SubscriptionCharges 1.00 Lakhs

4 Advance MinimumTransaction Charges 1.00 Lakhs

5 Net worth Requirement 5000.00 Lakhs

Membership Details for MCX:- 2

1 www.ncdex.com 2 MCX Certified Commodity Professional Reference Material

24
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Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India:- India is among top 5 producers of most of the Commodities, inaddition to being a major consumer of bullion and energy products.Agriculture contributes about 22% GDP of Indian economy. Itemployees around 57% of the labor force on total of 163 millionhectors of land Agriculture sector is an important factor in achieving aGDP growth of 8-10%. All this indicates that India can be promoted asa major centre for trading of commodity derivatives.

Trends in volume contribution on the three NationalExchanges:-

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 inbullion and second largest in silver future trading in the world.

Coming to trade pattern, though there are about 100commodities traded on MCX, only 3 or 4 commodities contribute for

Category AdmissionFees

InitialSecurityDeposit

AnnualSubscription

Net worth Criteria

Corporate Partnership Individual

TCM-1 Rs. 10LakhsRs. 15Lakhs Rs 50,000 Rs 50 Lakhs Rs. 50 Lakhs

Rs. Lakhs

TCM-2 Rs. 5LakhsRs. 50Lakhs Rs 50,000

Rs. 50Lakhs Rs. 50 Lakhs

Rs. Lakhs

ITCM Rs. 10LakhsRs. 50Lakhs Rs 50,000

Rs. 50Lakhs N.A. N.A.

PCM Nil Rs. 50Lakhs Rs 1,00,000 Rs. 5Crores N.A. N.A.

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more than 80 percent of total trade volume. As per recent data thelargely traded commodities are Gold, Silver, Energy and base Metals.Incidentally the futures trends of these commodities are mainly drivenby international futures prices rather than the changes in domesticdemand-supply and hence, the price signals largely reflect

international scenario.Among Agricultural commodities major volume contributors

include Gur, Urad, Mentha Oil etc. Whose market sizes areconsiderably small making then vulnerable to manipulations.

Pattern on National Commodity & Derivatives Exchange(NCDEX):- NCDEX is the second largest commodity exchange in thecountry after MCX. However the major volume contributors on NCDEXare agricultural commodities. But, most of them have common

inherent problem of small market size, which is making themvulnerable to market manipulations and over speculation. About 60percent 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 beenlargely trading in Agricultural Commodities. Trade on NMCE hadconsiderable proportion of commodities with big market size as juterubber etc. But, in subsequent period, the pattern has changed andslowly moved towards commodities with small market size or narrowcommodities.

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

Major volume contributors: - Majority of trade has beenconcentrated in few commodities that are

Non Agricultural Commodities (bullion, metals and energy) Agricultural commodities with small market size (or narrow

commodities) like guar, Urad, Mentha etc.

Trade strategy:-It appears that speculators or operators choose commodities or

contracts where the market could be influenced and extremespeculations possible.

In view of extreme volatilities, the FMC directs the exchanges toimpose restrictions on positions and raise margins on those

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commodities. Consequently, the operators/speculators chose anothercommodity and start operating in a similar pattern. When FMC bringsrestrictions on those commodities, the operators once again move tothe other commodities. Likewise, the speculators are moving from onecommodity to other (from methane to Urad to guar etc) where the

market could be influenced either individually or with a group.

Beneficiaries: - So far the beneficiaries from the current nature of trading are

Exchangers: - making profit from mounting volumesArbitragersOperators

In order to understand the extent of progress the trading thetrading in Commodity Derivatives has made towards its specified

objectives (price discovery and price risk management), the currenttrends are juxtaposed against the specification

Specified and actual pattern of futures trade:- 3

Process Aught to be ActualCommodities There should be large

demand for and supply of the commodity- noindividual or a group of

persons acting in concertshould be in a position toinfluence the demand or

supply, and consequentlythe price substantiallyTowards this, the majorProduced or consumedCommodities in theCountry such as wheat,rice, jute etc. and India isthetop first or secondproducer of these

Commodities.

Largely Traded are

Bullion, Metals and Commodities with small

market size (or narrowCommodities) like guar,

Burmese Urad, Mentha etc.

TradeStrategy

Hedging together withModerate speculation toSmoothen the priceFluctuations.

Over speculation andManipulation leading to wideFluctuations.

Beneficiaries Farmers/producers,,Consumers and traders

So far exchangers,arbitrageurs,

3 FMC & TECL research

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Either through directParticipation or throughPrice signals.

Operators etc.,Further there were instances of

Wrong price signals accruinglosses to farmers in case of menthe, and to traders in case

Of imported pulses.

Objectives

Price Discovery Pure replication of International trends notTaking in account of Domestic D-S in case of Non-agril. Commodities

Wide fluctuations fromOver speculation andManipulation in case of Largely traded agril.commodities

Risk Management No such evidences andcontrarily, the extremevolatilities in certaincommodities are making futuresMore risky for participants.

Thus it is evident that the realization of specified objectives isstill a distinct destination. It is further, evident from the nature of thecommodities largely traded on national exchanges that the factorsdriving the current pattern of futures trade are purely speculative. Reasons for prevailing trade pattern:-

No wide spread participation of all stake holders of commoditymarkets. The actual benefits may be realized only when all the stakeholders in commodity market including producers, traders, consumersetc trade actively in all major commodities like rice, wheat, cotton etc. Some Suggestions to make futures market as a level playing fieldfor all stake holders:-

Creation of awareness among farmers and other ruralparticipants to use the futures trading platform for riskmitigation.

Contract specifications should have wider coverage, so thata large number of varieties produced across the countrycould be included.

Development of warehousing and facilities to use thewarehouse receipt as a financial instrument to encourageparticipation farmers.

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Development of physical market through uniform gradingand standardization and more transparent pricemechanisms.

Delivery system of exchanges is not good enough to attractinvestors. E.g.- In many commodities NCDEX forces thedelivery on people with long position and when they tend togive back the delivery in next month contract the exchangesimply refuses to accept the delivery on pretext of qualitydifference and also auctions the product. The traders haveto take a delivery or book losses at settlement as there arehuge differences between two contracts and also sometimesfew contracts are not available for trading for no reason atall.

Contract sizes should have an adequate range so thatsmaller traders can participate and can avoid control of

trading by few big parties. Setting of state level or district level commodities tradinghelpdesk run by independent organization such as reputedNGO for educating farmers.

Warehousing and logistics management structure also needsto be created at state or area level whenever commodityproduction is above a certain share of national level.

Though over 100 commodities are allowed for Derivativestrading, in practice only a few commodities derivatives arepopular for trading. Again most of the trade takes place onlyon few exchanges. This problem can possibly solved byconsolidating some exchanges.

Only about 1% to 5% of total commodity derivatives tradedin country are settled in physical delivery due toinsufficiencies in present warehousing system. As gooddelivery system is the back bone of any Commodity trade,warehousing problem has to be handled on a war footing.

At present there are restrictions in movement of certaingoods from one state to another. These needs to beremoved so that a truly national market could develop forcommodities and derivatives.

Regulatory changes are required to bring about uniformity inOctri and sales tax etc. VAT has been introduced in countryin 2005, but, has not yet been uniformly implemented by allstates.

A difficult problem in Cash settlement of CommoditiesDerivatives contract is that, under Forward ContractsRegulation Act 1952 cash settlement of outstandingcontracts at maturity is not allowed. That means

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outstanding contracts at maturity should be settled inphysical delivery. To avoid this participants square off theirtheir positions before maturity. So in practice contracts aresettled in Cash but before maturity. There is need to modifythe law to bring it closer to the wide spread practice and

save participants from unnecessary hassle.

Commodities

Steel: -

General Characteristics: - Steel is an alloy of iron and carbon, containing less than 2%carbon, 1% manganese and small amount of silicon, phosphorus,sulphur and oxygen. Steel is most important engineering andconstruction material in the world. It is most important, multifunctional and the most adaptable of materials. Steel production is 20times higher a compared to production of all non-ferrous metals puttogether.

Steel compared to other materials of its type has lowproduction costs. The energy required for extracting iron from ore isabout 25% of what is needed for extracting aluminum.

There are altogether about 2000 grades of steel

developed of which 1500 grades are high-grade steels. The largenumber of grades gives steel the characteristics of basic productionmaterial.

Categories of Steel: - Steel market is primarily divided in to two main categories-flat and long. A flat carbon steel product is a plate product or a (hot orcold) rolled strip product. Plate products vary in dimensions from 10

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distribution of iron & steel and lowering import duty on capital goodsand raw materials, since liberalization for the growth and developmentof Indian iron & steel industry.

After liberalization India has seen huge scale addition to its

steel making capacity. The country faces shortage of iron and steelmaterials.

Factors Influencing Demand & Supply of Steel Long and SteelFlat: -

The demand for steel is dependent on the overall health of theeconomy and the in fracture development activities being undertaken.The steel prices in the Indian market primarily depend on the domesticdemand and supply conditions, and international prices. Governmentand different producer and consumer associations regularly monitorsteel prices.

The duty imposed on import of steel and its fractions also havean impact on steel prices. The price trend in steel in Indian marketshas been a function of Worlds economic activity. Prices of inputmaterials of iron and steel such as power tariff, fright rates and coal

prices, also contribute to the rise in the input costs for steel making.Monthly Variations in Steel Prices from Feb 2005- Dec 2006: - 4

Contract specifications of Steel FlatSymbol STEELFLATDescription STEELFLATMMMYY

4 MCX certified Commodity Professional Reference Material.

Percentage Change > 5% 2-5% < 2%No. of TimesIngots- Mandi 2 10 10HRC 2.5 Mumbai 8 3 11HRC 2.0 Imported 12 4 6HRC fob- Europe 5 9 8

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Trading Period Mondays through SaturdaysTrading session Monday to Friday:

1 st session: 10.00 am to 5.00 pm2 nd session: 5.30 pm to 8.00 pmSaturday: 10.00 am to 2.00 pm

No. of contracts a year 12Contact Duration 4 monthsTradingTrading unit 25 MTPrice Quote Rs./ton, Ex-Taloj Kalambo

(excluding execise duty and sales tax).Maximum order size 200 MTTick size (minimumPrice movement)

Rs. 10

Daily price limits 4%Initial margin 5%Special margin In case of additional volatility, a special

margin of 2% or such other percentage, asdeemed fit, will be imposed immediately on,both buy and sale side in respect of alloutstanding position, which will remain inforce of next three days, after which thespecial margin will be relaxed.

Maximum Allowable OpenPosition

For individual clients: 1,00,000 MTFor a member collectively for all clients:25% of open market position.

DeliveryDelivery unit 25 MT with tolerance limit

Between 23.5 MT to 26.5 MTDelivery Center(s) Warehouses at Taloja/ KalamboliQuality SpecificationsHR coil conforming to the following specification:

Thickness 2 mmWidth either 1250mm or 910 mm at sellers option.

It should confirm to IS 11513 Grade D/SAE 1008 (Internationalequivalent)

Delivery is acceptable only in coil form.

Contract specifications of Steel LongSymbol STEELLONGDescription STEELLONGMMMYY

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Degree of Metallization: 88 +/- 2%. Total Iron: 91%. Carbon: 0.2% to 0.3%. Sulphur: 0.05% Max. Phosphorus: 0.06 Max.

Sio2 + Al2o3: 6% or Max.

Char & other process Contaminants: 1% Max.

Size: 3 to 20 mm

Undersize arising during tailings (-3mm): 5% Max

Steel Flat: -

HR Coil confirming to the following specification: -

Thickness 2mm

Width either 1250 mm or 910 mm at sellers option.

It should confirm to IS 11513 Grade D/ SALE 1008

(international equivalent)

Delivery is acceptable only in coil form.

Steel Long (Bhavnagar): -

Mild steel ingots 3 * 4 inch.

Carbon composition: Below 0.25%

Manganese: Above 0.45%

Material should be physically sound. It should have no

hollowness, no piping and no rising. Its surface should be plain.

Steel Long (Govindgarh): -

Mild steel ingots 3 * 4 inch .

Carbon composition: Below 0.25% Manganese: Above 0.45%

Material should be physically sound. It should have no

hollowness, no piping and no rising. Its surface should be plain.

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WHEAT

Wheat is cereal grain and consumed worldwide. Wheat is

more popular than any other cereal grain for use in baked goods. Itspopularity stems from the gluten that forms when lour is mixes with

water. Wheat is the most widely grown cereal grain in the world.

Global and Indian Scenario: -

The world wheat production in the recent years has been

observed to be hovering between 555 million tons to 625 million tons

a year. The biggest cultivators of wheat are EU 25, China, India, USA,Russia, Australia, Canada, Pakistan, Turkey and Argentina. EU 25,

China, India and US are the four largest producers account for around

60% of total global production.

Worlds wheat consumption is continuously growing with

growth in a population, as it is one of the major staple foods across

the world. The major consuming countries of wheat are EU, China,

India, Russia, USA and Pakistan. India has largest area in the worldunder wheat. However, in terms of production, India is second largest

behind China. In India, Wheat is sown during October to December

and harvested during March to May. The wheat marketing season in

India is assumed to begin from April every year.

The major wheat producing states in India are Utter Pradesh,

Punjab, Haryana, Madhya Pradesh, Rajastan and Bihar. Which

together account for around 93% of total production. In terms of productivity, Punjab stands first followed by Haryana, Rajastan, UP,

Gujarat, Bihar and MP. Indian wheat is largely soft/medium hard,

medium protein, bread wheat. India is also produces around 1.5

million tons of durum wheat, mostly in central and western India,

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which is not segregated and marketed separately. India consumes

around 72-74 million tons of Wheat every year.

There are around 1000 large flourmills in India, with a

milling capacity of around 15 million tons. The total procurement of

wheat by Government agencies during last 15 years from 8 to 20

million tons, accounting for only 15-20% of the total production. India

exported around 5 m illion tons subsidized by Government in 2004-05,

as a result of surplus stock. Recently Govt. took decision to import

wheat in view of, declining stocks and increasing demand.

Key market moving Factors: -Price tends to be lower as harvesting progresses and produce

starts coming in to the market. At the time sowing and before

harvesting price tend to rise in a view of tight supply situation.

Weather has profound influence on wheat production. Temperature

plays crucial role towards maturity of wheat and productivity.

Change in Minimum Support Price (MSP) by Govt. and the stock

available with Food corporation of India and the release from officialstock influence of the price. Though, international trade is limited, the

ups and downs in the production and consumption at all the

major/minor producing and consuming nation dose influence the long

term price trend.

Contract specifications of WheatContract Period Five MonthsTrading Period Mondays through SaturdaysTrading session Monday to Friday:

10.00 am to 5.00 pmSaturday:10.00 am to 2.00 pm

TradingTrading unit 10 MTQuotation based value 1 Quintal

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Maximum order size 500 MTTick size (minimumPrice movement)

10 Paise

Price Quotation Ex-warehouse Delhi (including all taxes, leviesand sales tax/ VAT, as the case may be)

Daily price limits 4%Initial margin 5%Special margin In case of additional volatility, a special

margin at such other percentage, as deemedfit will be imposed immediately on, both buyand sale side in respect of all outstandingposition, which will remain in force of next 2days, after which the special margin will berelaxed.

Maximum Allowable OpenPosition

Clientwise- 20000 MT, Member wise-80000MT or 20% of open position, which ever ishigher.

DeliveryDelivery unit 10 MT with tolerance limit of 5%

Delivery Margin 25%Delivery Center(s) Warehouses at DelhiQuality Specifications

Wheat of Standard Mill variety confirming to the following qualitystanderds will be delieverable. The material will be tested using a 3mmsieve.

Defects(a) Foreign Matter

(organic/inorganic)

2.0% (Max)

(b) Damaged Kernels 2.00 (Max) provided that infestation damaged

not to exceed 1 per 100 kernels.(c) Shrunken Shriveled

& broken grains

3.00% (Max)

Total defects (a+b+c)Acceptable up to

Rejected total defect is

Below 6%8% With rebate on 1:1 basis

Above 8%Teat weight up to 76 kg/hl 76kg/hl. Min. acceptable with rebate of 150

grams per kg/hl or pro-rata variance in hector

liter weight deducted per quintal Below 74 kg/hl

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Rejected Below 74 kg/hl

Moisture

Acceptable

Reject able

11%

(Max)13% With rebate 1:1

Above 13%

Quality Specifications: -

Wheat of Standard Mill variety conforming to the following quality standardswill be deliverable; The material will be tested by using 3 mm sieve.Defects: -1. Foreign Matter (organic/inorganic)2. Damaged Kernel

3. Sunken, Shriveled andBroken grainsTotal Defects (a+b+c)AcceptableRejected if total defects

2.0% (maximum)2.0% (maximum) provided thatinfestation damaged not exceed 1Per 100 kernels.3.00% (maximum)Below 6%Up to 8% with rebate on 1:1 basisAbove 8%

Total WeightUp to 74 kg/hl

Below 74 kg/hl

76 kg/hl. (minimum)Acceptable with rebate of 150grams per kg/hl or pro-ratavariance in hector liter weightdeducted per quintal weight

delivered.Rejected

MoistureAcceptableReject able

11% (maximum)Up to 13% with rebate 1:1Above 135

Packing Packing should be in B Twill onceused 100kg jute bags, the tareweight deduction per bag for netweight calculation shall be 1 kg perquintal of gross weight.

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ANALYSIS

Survey was conducted across Mumbai City (in areas likeAndheri, Santacruz, Bandra Church gate) to judge the awareness of peoples regarding investment in Commodity Market .

Sample size 30 peoples

COMMODITY MARKET Questionnaire for Investors

1. Do you have any investment plan?a. YES b. NO(if no move to question no. 4)

2. If, yes, where you would like to invest your money?a. Bank F.D. b. Share Market c. Commodity Market d. Other (specify)

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3. Why you prefer specific investment?------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4. If no, why?a. Not aware about invest avenues b. Insufficient income c. Other (specify)

5. Do you aware about Commodity Market?a. YES b. NO(if no move to question no 12)

6. Are you willing to invest in Commodity Market?(If in Q. 2 Commodity Market, skip this question)

a. If YES, why?

------------------------------------------------------------------------------b. If NO, why? ------------------------------------------------------------------------------(If no move to the Question no.10)

7. If yes, which Commodity Exchange you will prefer for investment?a. MCX b. NCDEX c. NMCE d. Other (specify) f. Cant Say

8. Why you prefer specific Commodity Exchange for investment?(if answer to Q.7 f, skip this question)----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

--

9. In which Commodities you will prefer to Invest? And why?a. Bullion b. Agricultural c. Metals d. Fossils/Energy---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10. What is your perception about Commodity Market?

a. Less Risky b. Risky c. Very Risky

11. What you think Commodity Market Advertisements (hoardings, prints etc) areexplanatory enough to give needed useful information?

a. YES b. NO

12. Gender a. Male b. Female

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Investment Prefrences specified in other category

67%

30%

3%

Real Estate

Jwelary

Not Specifi

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

2. Peoples knowledge about Commodity Market: -

13%

87%

Know

Dont Kno

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

3. Investors interested to invest in Commodity Market: -

(Out of those, who know Commodity Market)

50%50%

Interested

Not Intereste d

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

4.Commodity Market InvestorsPreferences

37%

30%

20%

13%Bullion

Metals

Agricultural

Fossils/Ener

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

5. Perception about Commodity Market

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25%

25%

50%

Less Ri

Risky

Very Ris

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

commodity investment.

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

100

No t Informative

There is no second opinion amongst commodity investors, thatcommodity market advertisements do not give all the necessaryinformation.

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Qualitative Analysis

1. Investment preferences: -Most of the investors prefer least risky investment which

gives higher returns. That is why majority (70% of sample) of people interested in investments other than Share and commoditymarket.

Very less number of people (only 7%) showed theirinterest in investment in commodity market. Main reason for this islack of awareness and complete information about commoditymarket.

2. Commodity Exchanges: -People who are interested in commodity investment

showed more concern towards NCDEX; for its brand name andpeople think there might be surety of transaction at NCDEX.

3. Commodities: - Bullion is most preferred commodity for investment. Because

one can expect maximum returns from such investment due torapidly increasing prices of bullion in market.

4. Advertisements: -Commodity market Advertisements should be more

informative. And it is the failure of commodity marketsadvertisement campaign to attract peoples attention; as majorityof people are not aware about commodity market.

------------------------------------------------------------------------------------------------------------------------------------------------------

Questionnaire for Brokers

1. Since how many years you are working as a broker?

---------------------------------------------------------------------------------------------------

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2. How does one become broker?

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------

3. Which Commodity Exchange you prefer to work?a. MCX b. NCDEX c. NMCE d. Other (specify)

4. Why do you prefer the specific Commodity Exchange?

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------

5. In which commodities do you deal?

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-

6. Why do you prefer those commodities?

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------

-

7. If one wants to invest in Commodity Market, how to go about it?

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------

-

10. What is your perception about Commodity Market?a. Less Risky b. Risky c. Very Risky

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11. Any suggestion for commodity market?

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12. Gender a. Male b. Female

13. Age Groupa. Below 21 years b. 21 years 30 yearsc. 31 years 40 yearsd. 41 years 50 yearse. Above 50 years

14. Income Group (per year)a. Below 1,00,000/-

b. 1,00,000 1,50,000/-c. 1,50,000 - 2,50,000/-

d. Above 2,50,000/-

------------------------------------------------------------------------------------------------------------------------------------------------------

COMMODITY MARKETQuestionnaire for Officials

1. What is MCX/ NCDX/ NMCE/.

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---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2. History behind formation of MCX/ NCDX/ NMCE/..

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3. What are the departments at MCX/ NCDX/ NMCE/.

--------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4. How work is done in each department?

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5. How one can become broker at MCX/ NCDX/ NMCE/.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ANNEXURE

Terms and Definitions related to Commodity Market: - Accruals:- Commodities on hand ready for shipment, storage

and manufacture

Arbitragers: - Arbitragers are interested in making purchaseand sale in different markets at the same time to profit fromprice discrepancy between the two markets.

At the Market: - An order to buy or sell at the best pricepossible at the time an order reaches the trading pit.

Basis: - Basis is the difference between the cash price of anasset and futures price of the underlying asset. Basis can be

negative or positive depending on the prices prevailing in thecash and futures.

Basis grade: - Specific grade or grades named in theexchanges future contract. The other grades deliverable aresubject to price of underlying futures

Bear: - A person who expects prices to go lower.

Bid: - A bid subject to immediate acceptance made on the floor

of exchange to buy a definite number of futures contracts at aspecific price.

Breaking: - A quick decline in price.

Bulging: - A quick increase in price.

Bull: - A person who expects prices to go higher.

Buy on Close: - To buy at the end of trading session at theprice within the closing range.

Buy on opening: - To buy at the beginning of trading session ata price within the opening range.

Call: - An option that gives the buyer the right to a long positionin the underlying futures at a specific price, the call writer

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(seller) may be assigned a short position in the underlyingfutures if the buyer exercises the call.

Cash commodity: - The actual physical product on which afutures contract is based. This product can include agriculturalcommodities, financial instruments and the cash equivalent of index futures.

Close: - The period at the end of trading session officiallydesignated by exchange during which all transactions areconsidered made at the close.

Closing price: - The price (or price range) recorded during theperiod designated by the exchange as the official close.

Commission house: - A concern that buys and sells actualcommodities or futures contract for the accounts of customers.

Consumption Commodity: - Consumption commodities areheld mainly for consumption purpose. E.g. Oil, steel

Cover: - The cancellation of the short position in any futurescontract buys the purchase of an equal quantity of the samefutures contract .

Cross hedge: - When a cash commodity is hedged by usingfutures contract of other commodity.

Day orders: - Orders at a limited price which are understood tobe good for the day unless expressly designated as an openorder or good till canceled order.

Delivery: - The tender and receipt of actual commodity, or incase of agriculture commodities, warehouse receipts coveringsuch commodity, in settlement of futures contract. Somecontracts settle in cash (cash delivery). In which case open

positions are marked to market on last day of contract based oncash market close.

Delivery month: - Specified month within which delivery maybe made under the terms of futures contract.

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Delivery notice: - A notice for a clearing members intention todeliver a stated quantity of commodity in settlement of a shortfutures position.

Derivatives: - These are financial contracts, which derive theirvalue from an underlying asset. (Underlying assets can beequity, commodity, foreign exchange, interest rates, real estateor any other asset.) Four types of derivatives are trades forward,futures, options and swaps. Derivatives can be traded either inan exchange or over the counter.

Differentials: - The premium paid for grades batter than thebasis grade and the discounts allowed for the grades. Thesedifferentials are fixed by the contract terms on most exchanges.

Exchange: - Central market place for buyers and sellers.Standardized contracts ensure that the prices mean the same toeveryone in the market. The prices in an exchange aredetermined in the form of a continuous auction by members whoare acting on behalf of their clients, companies or themselves.

Forward contract: - It is an agreement between two parties tobuy or sell an asset at a future date for price agreed upon whilesigning agreement. Forward contract is not traded on anexchange. This is oldest form of derivative contract. It is tradedin OTC Market. Not on an exchange. Size of forward contract iscustomized as per the terms of agreement between buyer andseller. The contract price of forward contract is not transparent,as it is not publicly disclosed. Here valuation of open position isnot calculated on a daily basis and there is no requirement of MTM. Liquidity is the measure of frequency of trades that occurin a particular commodity forward contract is less liquid due toits customized nature. In forward contracts, counter- party riskis high due to customized & bilateral nature of the transaction.Forward contract is not regulated by any exchange. Forwardcontract is generally settled by physical delivery. In this case

delivery is carried out at delivery center specified in thecustomized bilateral agreement.

Futures Contract:- It is an agreement between two parties tobuy or sell a specified and standardized quantity and quality of an asset at certain time in the future at price agreed upon at thetime of entering in to contract on the futures exchange. It isentered on centralized trading platform of exchange. It is

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standardized in terms of quantity as specified by exchange.Contract price of futures contract is transparent as it is availableon centralized trading screen of the exchange. Here valuation of Mark-to-Mark position is calculated as per the official closingprice on daily basis and MTM margin requirement exists. Futures

contract is more liquid as it is traded on the exchange. In futurescontracts the clearing-house becomes the counter party to eachtransaction, which is called novation. Therefore, counter partyrisk is almost eliminated. A regulatory authority and theexchange regulate futures contract. Futures contract is generallycash settled but option of physical settlement is available.Delivery tendered in case of futures contract should be of standard quantity and quality as specified by the exchange.

Futures commission merchant: - A broker who is permitted

to accept the orders to buy and sale futures contracts for theconsumers.

Futures Funds: - Usually limited partnerships for investors whoprefer to participate in the futures market by buying shares in afund managed by professional traders or commodity tradingadvisors.

Futures Market:- It facilitates buying and selling of standardized contractual agreements (for future delivery) of underlying asset as the specific commodity and not the physicalcommodity itself. The formulation of futures contract is veryspecific regarding the quality of the commodity, the quantity tobe delivered and date for delivery. However it does not involveimmediate transfer of ownership of commodity, unless resultingin delivery. Thus, in futures markets, commodities can bebought or sold irrespective of whether one has possession of theunderlying commodity or not. The futures market trade infutures contracts primarily for the purpose of risk managementthat is hedging on commodity stocks or forward buyers andsellers. Most of these contracts are squared off before maturity

and rarely end in deliveries. Hedging: - Means taking a position in futures market that is

opposite to position in the physical market with the objective of reducing or limiting risk associated with price.

In the money: - In call options when strike price is below theprice of underlying futures. In put options, when the strike price

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is above the underlying futures. In-the-money options are themost expensive options because the premium includes intrinsicvalue.

Index Futures: - Futures contracts based on indexes such asthe S & P 500 or Value Line Index. These are the cashsettlement contracts.

Investment Commodities: - An investment commodity isgenerally held for investment purpose. e.g. Gold, Silver

Limit: - The maximum daily price change above or below theprice close in a specific futures market. Trading limits may bechanged during periods of unusually high market activity.

Limit order: - An order given to a broker by a customer whohas some restrictions upon its execution, such as price or time.

Liquidation: - A transaction made in reducing or closing out along or short position, but more often used by the trade to meana reduction or closing out of long position.

Local: - Independent trader who trades his/her own money onthe floor of the exchanges. Some local act as a brokers as well,but are subject to certain rules that protect customer orders.

Long: - (1) The buying side of an open futures contract orfutures option; (2) a trader whose net position in the futures oroptions market shows an excess of open purchases over opensales.

Margin: - Cash or equivalent posted as guarantee of fulfillmentof a futures contract (not a down payment).

Margin call: - Demand for additional funds or equivalentbecause of adverse price movement or some other contingency.

Market to Market: - The practice of crediting or debating atraders account based on daily closing prices of the futurescontracts he is long or short.

Market order: - An order for immediate execution at the bestavailable price.

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Nearby: - The futures contract closest to expiration.

Net position: - The difference between the open contracts longand the open contracts short held in any commodity by anyindividual or group.

Offer: - An offer indicating willingness to sell at a given price(opposite of bid).

On opening: - A term used to specify execution of an orderduring the opening.

Open contracts: - Contracts which have been brought or soldwithout the transaction having been completed by subsequentsale, repurchase or actual delivery or receipt of commodity.

Open interest: - The number of open contracts. It refers tounliquidated purchases or sales and never to their combinedtotal.

Option: - It gives right but not the obligation to the optionowner, to buy an underlying asset at specific price at specifictime in the future.

Out-of-the money: - Option calls with the strike prices abovethe price of the underlying futures, and puts with strike pricesbelow the price of the underlying futures.

Over the counter: - It is alternative trading platform, linked tonetwork of dealers who do not physically meet but insteadcommunicates through a network of phones & computers.

Pit: - An octagonal platform on the trading floor of an exchange,consisting of steps upon which traders and brokers stand whiletrading (if circular called ring).

Point: - The minimum unit in which changes in futures pricesmay be expressed (minimum price fluctuation may be inmultiples of points).

Position: - An interest in the market in the form of opencommodities.

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Premium: - The amount by which a given futures contracts priceor commoditys quality exceeds that of another contract orcommodity (opposite of discount). In options, the price of a callor put, which the buyer initially pays to the option writer (seller).

Price limit: - The maximum fluctuation in price of futurescontract permitted during one trading session, as fixed by therules of a contract market.

Purchase and sales statement: - A statement sent by FMC to acustomer when his futures option has been reduced or closedout (also called P and S)

Put: - In options the buyer of a put has the right to continue ashort position in an underlying futures contract at the strike

price until the option expires; the seller (writer) of the putobligates himself to take a long position in the futures at thestrike price if the buyer exercises his put.

Range: - The difference between high and low price of thefutures contract during a given period.

Ratio hedging: - Hedging a cash position with futures on a lessor more than one-for-one basis.

Reaction: - The downward tendency of a commodity after anadvance.

Round turn: - The execution of the same customer of apurchase transaction and a sales transaction which offset eachother.

Round turn commission: - The cost to the customer forexecuting a futures contract which is charged only when theposition is liquidated.

Scalping: - For floor traders, the practice of trading in and outof contracts through out the trading day in a hopes for making aseries of small profits.

Settlement price: - The official daily closing price of futurescontract, set by the exchange for the purpose of setting marginsaccounts.

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Short: - (1) The selling of an option futures contract. (2) Atrader whose net position in the futures market shows an excessof open sales over open purchases.

Speculator: - Speculator is an additional buyer of thecommodities whenever it seems that market prices are lowerthan they should be.

Spot Markets:- Here commodities are physically brought or soldon a negotiated basis.

Spot price: - The price at which the spot or cash commodity isselling on the cash or spot market.

Spread: - Spread is the difference in prices of two futurescontracts.

Striking price: - In options, the price at which a futuresposition will be established if the buyer exercises (also calledstrike or exercise price).

Swap: - It is an agreement between two parties to exchangedifferent streams of cash flows in future according topredetermined terms.

Technical analysis (charting): - In price forecasting, the useof charts and other devices to analyze price-change patters andchanges in volume and open interest to predict future markettrends (opposite of fundamental analysis).

Time value: - In options the value of premium is based on theamount of time left before the contract expires and the volatilityof the underlying futures contract. Time value represents theportion of the premium in excess of intrinsic value. Time valuediminishes as the expiration of the options draws near and/or if

the underlying futures become less volatile. Volume of trading (or sales): - A simple addition of

successive futures transactions (a transaction consists of apurchase and matching sale).

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Writer: - A sealer of an option who collects the premiumpayment from the buyer .

Conclusion

This decade is termed as Decade of Commodities.

Prices of all commodities are heading northwards due to rapidincrease in demand for commodities. Developing countries likeChina are voraciously consuming the commodities. Thats whyglobally commodity market is bigger than the stock market.

India is one of the top producers of large number of commodities and also has a long history of trading incommodities and related derivatives. The Commodities

Derivatives market has seen ups and downs, but seems tohave finally arrived now. The market has made enormousprogress in terms of Technology, transparency and tradingactivity. Interestingly, this has happened only after theGovernment protection was removed from a number of Commodities, and market force was allowed to play their role.This should ac

Documents

Commodity Market Modified