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Fundamental and technical analysis in Crude Oil and Natural
Gas
(NAME)
(HT NO)
Project submitted in partial fulfillment for the award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
Internal guide: External gu
Asst. Professor
PRINCETON P.G COLLEGE
(Affiliated to Osmania University)
Hyderabad-500007
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DECLARATION
I hereby declare that this project report titled Fundamental and
technical analysis in Crude Oil and Natural Gas submitted by me to
the Department ofPRINCETON P.G COLLEGE, is a bonafide work undertaken by me
and it is not submitted to any other University or institution for the award of any degree/
diploma/certificate of published any time before.
Name and Address of the Student Signature of the student
Date:
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CERTIFICATE
This is to certify that the Project Report titled Fundamental and
technical analysis in Crude Oil and Natural Gas submitted in partial
fulfillment for the award ofMASTER OF BUSINESSADMINISTRATION was carried
by under my guidance.This has not been submitted to any other University or
Institution for the award of any degree/diploma/certificate.
Name and Address of the Supervisor Signature of the Supervisor
Date:
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ACKNOWLEDGEMENT
I convey my heartful thanks to every one who helped me directly
and indirectly in completing my project successfully.
I convey my heartful thanks to Mrs. for guiding me in
successful completion of my project.
I would like to thank Mrs ,Head of the
Department, Business management and all the faculty members, Princeton
P.G College for their valuable guidance throughout the completion of my
project.
I
convey my heartful thanks to , FCH for giving me anopportunity to undertake the project. Ialso thank ,FCH and the entire staff
for guiding me and extending their support in completion of my project.
I am indebted to my family members and friends for their moral
support in completing my project work.
()
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ABSTRACT
India has a long history of commodity futures trading, extending over 125
years. Commodity includes all kinds of goods. FCRA defines goods as every kind of
movable property other than actionable claims, money and securities. Futures trading is
organized in such goods or commodities as are permitted by the Central Government.
A futures contract is a type of forward contract. FCRA defines forward
contract as a contract for the delivery of goods and whish is not a ready delivery contract.
In India, the Commodity Futures Trading is gaining importance in the
market. To study how the Crude oil Natural gas are trading in MCX and NCDEX. Industry
and Economic Analysis of both the products. Technical analysis for both the products using
Moving averages, Resistance and Support, MACD (Moving Average and Converse
Diversion), RSI (Relative Strength Index). The data collected only on commodity
derivatives but not on the financial derivatives.
The share of GDP of crude oil was only 28.7 % while 71.3 %
were imports. And the total crude oil production in 2003-04 was 33 million tons, while
imports were as high as 90 million tons. The share of natural gas in Indias energy mix has
increased from 2.5 % in 1980s to more than 7 % now. The demand for natural gas in India
is 1.5 times the current levels of domestic production. Demand for gas is expected to rise at
CAGR of more than 5 % during 2000 to 2025.
Technical analysis is explained by using Moving averages,
Resistance and Support, MACD (Moving Average and Converse Diversion), RSI (Relative
Strength Index). In both the graphs crude oil and natural gas, Moving averages is plotted by
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taking 9-day (black) and 18-day (pink). If 18-day is crossing the 9-day, it is indicated that
market is falling down. If 9-day is crossing the 18-day, it is indicated that market is moving
upwards. .
Resistance is equivalent to supply line, and support is
equivalent to demand line. In the above chart we observe that, the above line shows
Resistance and below line shows Support. Here, both the 18-day and 9-day are
crossing the resistance, so resistance becomes support. In crude oil, the Resistance line is
above the point 3000 and Support line is near to the point 2750, where as in natural gas, the
Resistance line is at the point 345 and Support line is at the point 312, so we say that it
shows a good Resistance and Support lines.
MACD is done by taking the Difference between the 12-day & 26-day
EMAs. A 9-day EMAs, called the signal (or trigger) line is plotted on top of the MACD
to show buy/sell opportunities. MACD is indicated by red line and 9-day or signal line is
indicated by black line. If MACD is above its signal line, so it shows buy signal. Later, if
MACD is below its signal line, it shows a sell signal.
The RSI is a popular oscillator. It usually tells about the Overbought
and Oversold. If RSI is above 70, it is considered as Overbought. If RSI is below 30, it is
considered as Oversold.
So, I would like to conclude that, we cant expect how the prices are
fluctuating in futures market. I found that there are only futures contracts to the commodity
markets. I would like to suggest that it will be better if Options contract are included.
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TABLE OF CONTENTS
CONTENTS PAGE NO
List of Tables A
List of Charts B
1. INTRODUCTION 11
2.OBJECTIVE AND SCOPE OF THE STUDY
3.RESERACH AND METHODOLOGY
4.REVIEW OF LITERATURE 16
5. COMPANYPROFI LE
6. DATA ANALYSIS AND INTERPRETATION OF ENERGY
COMMODITIES
70
6.1 FUNDAMENTAL ANALYSIS OF Crude Oil 78
6.2 TECHNICAL ANALYSIS OF Crude Oil 97
6.3FUNDAMENTAL ANALYSIS OFNATURAL GAS 107
6.4 TECHNICAL ANALYSIS OF NATURAL GAS 125
7.FINDINGS AND SUGGESTIONS
8. CONCLUSIONS 130
9. BIBLIOGRAP HY
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(A)
LIST OF TABLE
CONTENTS PAGE NO
List of Exchanges for different products 26
Commodity Exchange registered in India 27
OilIntensity in Major Countries based on GDP 92
Impact of increase in Oil prices on growth and inflation levels in India 95
Future Contract specification of Crude oil 100
Future Contract specification of Natural Gas 128
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(B)
LIST OF CHARTS
CONTENTS PAGE NO
a) Crude OilPrices (1969 - 2009) 79b) U.S and WORLD Events and OilPrices 80c) WORLD Events and OilPrices 82d) Increase in Energy Demand 87e) World Oil Production 88f) Technical Analysis of Crude Oil 97g) Distribution of proved reserves in 1985 (NG) 112h) Distribution of proved reserves in 1995 and 2005 (NG) 113i) Share of Natural gas as primary source 114j) Demand and Supply Scenario 115k) Domestic scenario l) Share of Natural Gas 118m)Domestic Natural Gas Production 121n) Technical Analysis of Natural Gas 125
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CHAPTER-1
INTRODUCTION
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INTRODUCTION
HISTORY OF COMMODITY TRADING:
In the 1840s, Chicago had become a commercial center with railroad and telegraph lines
connecting it with the East. Around this same time, the McCormick reaper was invented
which eventually lead to higher wheat production. Midwest farmers came to Chicago to sell
their wheat to dealers who, in turn, shipped it all over the country.
He brought his wheat to Chicago hoping to sell it at a good price. The city had few storage
facilities and no established procedures either for weighing the grain or for grading it. In
short, the farmer was often at the mercy of the dealer.
1848 saw the opening of a central place where farmers and dealers could meet to deal in
spot grain that is, to exchange cash for immediate delivery of wheat.
The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers)
began to commit to futures exchanges of grain for cash. For instance, the farmer would
agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end of June.
The bargain suited both parties. The farmer knew how much he would be paid for his
wheat, and the dealer knew his costs in advance. The two parties may have exchanged a
written contract to this effect and even a small amount of money representing a
guarantee.
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Such contracts became common and were even used as collateral for bank loans. They also
began to change hands before the delivery date. If the dealer decided he didnt want the
wheat, he would sell the contract to someone who did. Or, the farmer who didnt want to
deliver his wheat might pass his obligation on to another farmer. The price would go up
and down depending on what was happening in the wheat market. If bad weather had
come, the people who had contracted to sell wheat would hold more valuable contracts
because the supply would be lower; if the harvest were bigger than expected, the sellers
contract would become less valuable. It wasnt long before people who had no intention of
ever buying or selling wheat began trading the contracts. They were speculators, hoping to
buy low and sell high and buy low.
NEED FOR THE STUDY
1. The Commodity Futures Trading is gaining immense importance in Secondary
market Investments.
2. while Crude Oil and Natural Gas are backbone of any economy in the world and
their trading and price fluctuations show retro- spective effect .
3. As such, commodity trading on these products has been gaining importance in the
market.
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CHAPTER-2
OBJECTIVES AND
SCOPE
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OBJECTIVES OF THE STUDY
1. Commodity trading at MCX and NCDEX in crude oil and Natural gas
2. To study the industry and economic analysis of both the products
3. Technical analysis of the products in commodity Future study of crude oil and
Natural Gas using five statistical methods with special reference to moving
averages method , RSI (Relative Strength Index), MACD (moving average
convergence divergence),Resistance and Support.
4. To study the fluctuations in commodity Futures markets using 4 technical methods.
SCOPE AND LIMITATIONS OF THE STUDY
1. Commodity trading at MCX on crude oil and natural gas
2. Commodity trading only for a period.
3. Technical analysis using to moving averages method, RSI (Relative Strength
Index), MACD (moving average convergence divergence), Resistance and Support.
4. The data collected only on commodity derivatives but not on the financial
derivatives.
5. The commodities covered under this project are limited to two; they are crude oil
and Natural gas.
6. In analysis we can say that, in coming 3 days we cant expect how the prices are
fluctuating in the Futures market.
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CHAPTER-3
RESEARCH AND
METHODOLOGY
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METHODOLOGY OF THE STUDY
RESEARCH OF THE STUDY
TYPE OF RESEARCHThe research is basically a descriptive research. In this project Descriptive researchmethodologies is u sed . The research methodology will be used fo r gatheringdetails of different aspects of CRUDEOIL AND NATURAL GAS ANALYSIS
SOURCE OF DATA COLLECTION
Secondary data will be collected from articles in journals and magazines. The databaseof MCX, NCDEX,OPEC and NYMEX will be taken. As this topic is very new, article fromother we b s i t e l i n k s i s r e q u i r e d . Report submitted b y MCX/FMC committee isused.
METHODOLOGY OF THE STUDY
Data collection instrument:
SecondaryData:
The data that is used in this project is also in the form of secondarynature. The data is collected from secondary sources such as various websites, journals, newspapers, books, etc. the analysis used in this project has been doneusing selective technical tools. In Equity market, risk is analyzed and tradingdecisions are taken on basis of technical analysis. It is collecting share prices ofselected companies for a period of five years.
TOOLS USED:
1. Win quote is using for charts building
2. Ms excel is using for demand and supply graphs.
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CHAPTER-4
REVIEW
OFLITERATURE
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LITERATURE REVIEW
COMMODITY FUTURESMARKET:
India has a long history of commodity futures trading, extending over 125 years. Still, such
trading was interrupted suddenly since the mid seventies in the fond hope of ushering in an
elusive socialistic pattern of society. As the country embarked on economic liberalization
policies and signed the GATT agreement in the early nineties, the government realized the
need for future trading to strengthen the competitiveness of Indian agriculture and the
commodity trade and industry. Futures trading began to be permitted in several
commodities, and the ushering in of the 21-century saw the emergence of new National
Commodity Exchange with country wide reach for trading in almost all primary
commodities and their products.
A commodity futures contract is essentially a financial instrument. Following the absence
of futures trading in commodities for nearly four decades, the new generation of
commodity producers, processors, market functionaries, financial organizations, broking
agencies and investors at large are, unfortunately, unaware at present of the economic
utility, the operational techniques and the financial advantage of such trading.
The futures markets are described as continuous auction markets and exchanges providing
the latest information about supply and demand with respect to individual commodities,
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financial instruments, and currencies. Futures exchanges are where buyers and sellers of an
expanding list of commodities, financial instruments, and currencies, come together to
trade. Trading has also been initiated in options on futures contracts. Thus, option buyers
participate in futures markets with different risk. The exact risk is known to the option
buyer. It is unknown to the futures trader.
STATURORY FRAME WORK FOR REGULATING COMMODITY FUTURES
EXISTS IN INDIA:
Commodity futures contracts and the commodity exchanges organizing trading in such
contracts are regulated by the government of India under the Forward Contracts
(Regulation) Act, 1952(FCRA or the Act),and the rules framed their under. The nodal
agency for such regulation is the Forward Markets Commission (FMC), situated at
Mumbai, which functions under the aegis of the Ministry of the Consumer Affairs, Food
and Public Distribution of the Central Government..
WHAT IS COMMODITY?
Commodity includes all kinds of goods. FCRA defines goods as every kind of movable
property other than actionable claims, money and securities. Futures trading is organized
in such goods or commodities as are permitted by the Central Government. At present, all
goods and products of agricultural (including plantation), mineral and fossil origin are
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allowed for futures trading under the auspices of the commodity exchanges recognized
under the FCRA. The National Commodity Exchanges have been recognized by the
Central Government for organizing trading in all permissible commodities which include
precious (gold & silver) and nonferrous metals; cereals and pulses; ginned and unginned
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 COMMODITY EXCHANGE?
A commodity exchange is an association, or a company or any other body corporate
organizing futures trading in commodities.
The National commodity & Derivatives Exchange of India Limited (NCDEX) and Multi
Commodity Exchange of India (MCX0 the premier exchanges of India have become
operational from December 15th of2003 in national level.
HOW FUTURESMARKETS CAME ABOUT:
Many people see pictures of the large crowd of traders standing in a crowd yelling and
signaling with their hands, holding pieces of paper, and writing frantically. To the outsider,
it looks like chaos. But do you really think that there is in fact chaos going on in the
worlds futures pits? Not a chance. Actually, everyone in the crowd knows exactly whats
going on.
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How does this differ from the way thinks operated in the old days? Before there were
organized grain and commodity markets, farmers would bring their harvested crops to
major population centers. There they would search for buyers. There were no storage
facilities; and many times the harvest would rot before buyers were found. Also, because
many farmers would bring their crops to market at the same time, the price of the crops or
commodities would be driven down. There was tremendous supply in relation to demand.
The reverse was true in the spring. Many times there would be a shortage of crops and
commodities and the price would rise sharply.
Initially, the first organized and central market places were created to provided spot prices
for immediate delivery. Shortly thereafter, forward contracts were also established. These
forwards were forerunners to the present day futures contract.
Futures prices and the bid and asked price are continuously transmitted throughout the
world electronically. Regardless of what geographic location the speculator or hedger is
located in, he has the same access to price information as everyone else. Farmers, bankers
manufactures, corporations, all have equal access. All they have to do is call their broker
and arrange for the purchase or sale of a futures contract. The person who takes the
opposite side of your trade may be a competitor who has a different outlook on the future
price, it may be a floor broker, or it could be a speculator.
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MEANING OF FUTURES CONTRACT:
A futures contract is a type of forward contract. FCRA defines forward contract as a
contract for the delivery of goods and whish is not a ready delivery contract. Under the
Act, a ready delivery contracts is one, which provides for the delivery of goods and the
payments of price therefore, either immediately or within such period not exceeding 11
days after the date of the contract, subject to such conditions as may be prescribed by the
Central Government. A ready delivery contract is required by law to be fulfilled by giving
and talking the physical delivery of goods. In market parlance, the ready delivery contracts
are commonly known as spot or cash contracts.
All contracts in commodities providing for delivery of goods and/or payment of price after
11 days from the date of the contract are forward contracts. Forward contracts are of two
types specific delivery contracts and futures contracts. Specific delivery contracts
provide future period, and in which the names of both the buyers and the sellers are
mentioned.
The term futures contract is nowhere defined in the FCRA. But the Act implies that is a
forward contract, it is necessarily a contract for the delivery of goods. A futures contract
in which delivery is not intended is void (i.e., not enforceable by law), and is, therefore, not
permitted for trading at any commodity exchange.
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SALIENT FEATURES OF A COMMODITY FUTURES CONTRACT:
Commodity futures contract is a tradable standardized contract, the terms of which are set
in advance by the commodity exchange organizing trading in it. The futures contracts is for
a specified variety of a commodity, known as the basis, though quite a few other similar
varieties, both inferior and superior, are allowed to be deliverable or tenderable for delivery
against the specified futures contract.
The quality parameters of the basis and the permissible tenderable varieties; the delivery
months and schedules; the places of delivery; the on and of allowances for the quality
differences and the transport costs; the tradable lots; the modes of price quotes; the
procedures for regular periodical (mostly daily) clearings; the payments of prescribed
clearing and margin monies; the transaction, clearing and other fees; the arbitration, survey
and other dispute redressing methods; the manner of settlement of outstanding transactions
after the last trading day, the penalties for nonissuance or non-acceptance of deliveries,
etc., are all predetermined by the rules and regulation of the commodity exchange.
Consequently, the parties to the contract are required to negotiate only the quantity to be
bought and sold the price. Everything else is prescribed by the Exchange. Because of the
standardized nature of the futures contract, it can traded with ease at a moments notice.
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BASICS OF FUTURES TRADING:
Trading commodity futures and options is not for everyone. It is a volatile, complex, and
risky business. Before you invest any money in futures or options contracts, you should:
yConsider your financial experience, goals, and financial resources and know
how much you can afford to lose above and beyond your initial payment.
yUnderstand commodity futures and option contracts and your obligations in
entering into those contracts.
WHO USES FUTURESMARKET:
The futures market participants comprise of farmers, traders, producers, processors,
exporters, importers and industry associated with commodities. The futures market is used
for hedging the price risk and for trading or arbitrage. Brokers of exchange, who are
located all across the country, serve the futures market users directly through their own
branch offices network or through the network of their franchisees or sub-brokers.
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COMMODITY FUTURES TRADING
EVOLUTION OF COMMODITY MARKET IN INDIA:
Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized futures
market. Bombay Cotton Exchange Ltd. was established in 1893 following the widespread
discontent amongst leading cotton mill owners and merchants over functioning of Bombay
Cotton Trade Association. The futures trading in oilseeds started in 1900 with the
establishment of the Gujarati Vyapuri Mandali, which carried on futures trading in
groundnut, castor seed and cotton. A future trading in wheat was existent at several places
in Punjab and Uttar Pradesh. But the most notable futures exchange for wheat was chamber
of commerce at Hapur set up in 1913. Futures trading in bullion began in Mumbai in 1920.
Calcutta Hessian Exchange Ltd. was established in 1919 for futures trading in raw jute
goods. But organized futures trading in raw jute began only in 1927 with the establishment
of east India Jute Association Ltd. to conduct organized trading in both raw jute and jute
goods. A forward contract (Regulation) Act was enacted in 1952 and the Forward Market
Commission (FMC) was established in 1953 under the Ministry of Consumer Affairs and
Public Distribution. In due course several other exchanges were created in the country to
trade in diverse commodities.
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EMERGING TRENDS IN COMMODITY MARKET IN INDIA:
Commodity markets have existed in India for a long time, below Table gives the list of
registered commodities exchanges in India. The table gives the total annualized volumes on
various exchanges.
While the implementation of the Kabra Committee recommendations were rather show,
today, the commodity derivative market in India seems poised for a transformation.
national level commodity derivatives exchanges seem to be the phenomenon. The Forward
Markets Commission accorded in principle approval for the following National Level Multi
Commodity Exchanges. The increasing markets in India seem to be a promising game.
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NATIONAL BOARD OF TRADE .
MULTI COMMODITY EXCHANGE OF TRADE.
NATIONAL COMMODITY &DERIVATIVES EXCHANGE OF INDIA LTD.
COMMOTITY EXCHANGE PRODUCTS APPROX. ANNUAL VOL
(RS. CRORE)
National Board ofTrade, Indore Soya, Mustard 80000
National Multi-Commodity
exchange, Ahmedabad
Multiple 40000
Rajdhani Oil & Oil Seeds Mustard 3500
Vijai Beopar Chamber Ltd,
muzzaffarnagar
Gur 2500
Rajkot seeds Oil & bullion
Exchange
Castor, Groundnut 2500
IPSTA,Cochin Pepper 2500
Chamber of commerce, hampur Gur, Mustard 2500
Bhatinda Om and Oil exchange Gur 1500
Ahmedabad Commodity Exchange Castor, cotton 3500
Other (mostly inactive) 1500
Total 140000
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COMMODITY EXCHANGE REGISTERED IN INDIA
Commodity Exchange Products traded
Bhatinda Om & Oil Exchange Ltd. Gur
The Bombay Commodity Exchange Ltd. Sunflower Oil, Cotton (Seed and Oil),Groundnut (Nut and Oil), Castor Oil,Catoreseed, Sesamum (Oil and Oilcake),Rice bran, Rice bran Oil and Oil Cake,Crude Palm Oil
The Rajkot Seeds Oil & BullionMerchants
Groundnut Oil
Association Ltd. Castor Seed
The Kanpur Commodity Exchange Ltd. Rapeseed/Mustard Seed Oil and CakeThe Meerut Agro Commodities
Exchange Co. Ltd.Gur
The Spieces and Oilseeds Exchange Ltd.Sangli
Turmeric
Ahmedabad Commodities Exchange ltd. Cotton Seed, Castor Seed
Vijay Beopar Chamber Ltd.,Muzaffarnagar
Gur
India Pepper & Spice Trade Association,Kochi
Pepper
Rajdhani Oils and Oilseeds ExchangeLtd., Delhi
Gur, Rapeseed/Mustard Seed SugarGrade-M
National Board ofTrade, Indore Rapeseed/Mustard Seed/ oilCake/Soyabean/Meal/Oil,Crude PalmOil
The Chamber of Commerce, Hapur Gur. Rapeseed/Mustard Seed
The East India Cotton Association,Mumbai
Cotton
The East India jute & Hessian ExchangeLtd., Kolkata
Hessian, Sacking
First Commodity Exchange of IndiaLtd., Kochi
Copra, Coconut Oil & Copra Cake
The Coffee Futures Exchange of IndiaLtd.,Bangalore
Coffee
The Central India Commercial ExchangeLtd., Gwaliar
Gur
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FUNDAMENTAL ANALYSIS
DEFINITION:
A method of security valuation which involves examining the companys financials and
operations, especially sales, earnings growth potential, assets, debt, management, products,
and competition. Fundamental analysis is taken in to consideration only those variables that
are directly related to the company itself, rather than the overall state of the market or
technical analysis data.
Fundamental analysis is a method used to determine the value of a stock by analyzing the
financial data that is fundamental to the company. That means the fundamental analysis
takes in to consideration only those variables that are directly related to the company itself,
such as its earnings, its dividends, and its sales. Fundamental analysis does not look at the
overall state of the market nor does it include behavioral variables in its methodology. It
focuses exclusively on the companys business in order to determine whether or not the
stock should be bought or sold.
Critics of fundamental analysis often charge that the practice is either irrelevant or that it is
inherently flawed. The first group, made up largely of proponents of the efficient market
hypothesis, say that fundamental analysis is a useless practice since a stocks price will
always already take in to account the companys financial data. In other words, they argue
that it is impossible to learn any thing new about a company by analyzing its fundamentals
that the market as a whole does not already known, since everyone has access to the same
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financial information. The other major argument against fundamental analysis is more
practical than theoretical. These critics charge that fundamental analysis is too unscientific
a process, and that its difficult to get a clear picture of a companys value when there are
so many qualitative factors such as a companys management and its competitive
landscape.
However, such critics are in the minority. Most individual investors and investment
professionals believe that fundamental analysis is useful, either alone or in combination
with other techniques. If you decide that fundamental analysis is the method for you, youll
find that a companys financial statements (its income statement, its balance sheet, and its
cash flow statement) will be indispensable resources for your analysis. And even if youre
not totally sold on the idea of fundamental analysis, its probably a good idea for you to
familiarize yourself with some of the valuation measures it uses since they are often talked
about in other types of stock valuation techniques as well.
FUNDAMENTAL ANALYSIS TOOLS
These are the most popular tools of fundamental analysis. Which focus on earnings per
share, price to earnings ratio, price to sales ratio, price to book ratio, dividend yield.
y EARNINGS PERSHARE:
The over all earnings of a company is not in itself a useful indicator of a stocks worth.
Low earnings coupled with low outstanding shares can be more valuable than high earnings
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with a high number of outstanding shares. Earnings per share is much more useful
information than earnings by itself. Earnings per share (EPS) is calculated by dividing the
net earnings by the number of outstanding shares. For example:ABC company had net
earnings of $1 million and 100,000 outstanding shares for an EPS of 10
(1,000,000/100,00=10). This information is useful for comparing two companies in a
certain industry but should not be the deciding factor when choosing stocks.
y PRICE TO EARNING RATIO:
The price to earning ratio (P/E) shows the relationship between stock price and company
earnings. It is calculated by dividing the share price by the earnings per share. in our
example above of ABC company the EPS is 10 so if it has a price per share of $50 the P/E
is (50/10=5). The P/E tells you how much investors are willing to pay for that particular
companys earnings. P/E's can be read in a variety of ways. A high P/E could mean that the
company is overpriced or it could mean that investors expect the company to continue to
grow and generate profits. A low P/E could mean that investors are wary of the company or
it could indicate a company that most investors have overlooked.
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y PRICE TO SALES RATIO:
When a company has no earnings, there are other tools available to help investors judge its
worth. New companies in particular often have no earnings, but that does not mean they are
bad investments. The Price to Sales ratio (P/S) is a useful tool for judging new companies.
It is calculated by dividing the market cap (stock price times number of outstanding shares)
by total revenues. An alternate method is to divide current share price by sales per share.
P/S indicates the value the market places on sales. The lower the P/S the better the value.
y PRICE TO BOOK RATIO:
Book value is determined by subtracting liabilities from assets. The value of a growing
company will always be more than book value because of the potential for future revenue.
The price to book ratio (P/B) is the value the market places on the book value of the
company. It is calculated by dividing the current price per share by the book value per
share (book value / number of outstanding shares). Companies with a low P/B are good
value and are often sought after by long term investors who see the potential of such
companies.
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y DIVIDENDS YIELD:
Some investors are looking for stocks that can maximize dividend income. Dividend yield
is useful for determining the percentage return a company pays in the form of dividends. It
is calculated by dividing the annual dividend per share by the stock's price per share.
Usually it is the older, well-established companies that pay a higher percentage, and these
companies also usually have a more consistent dividend history than younger companies.
IndustryAnalysis:
Webster defines an Industry as a department or branch of a craft, art, business, or
manufacture. And more specifically:
a) Group of productive or profit-making enterprises or organizations that have a
similar technological structure of production or supply technically substitutable
goods, services, or sources of income.
Industryanalysis is a type of business research that focuses on the status of an industry or
an industrial sector (a broad industry classification, like "manufacturing"). A complete
industrial analysis usually includes a review of an industry's recent performance, its current
status, and the outlook for the future. Many analyses include a combination of text and
statistical data. There are many sources of industry analysis: investment firms, business and
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trade periodicals, trade associations, and government agencies. To conduct a thorough
industry analysis, include a variety of sources.
For an analyst, industry analysis demands into :
y The key sector or sub-division of overall economic activity that influence particular
industries, and
y The relative strength or weakness of particular industry or other groupings under
specific sets of assumptions about economic activity.
Economic Analysis:
Economics studies the allocation of scarce resources among people examining what
goods and services wind up in the hands of which people. Why scarce resources? Absent
scarcity, there is no significant allocation issue. All practical, and many impractical, means
of allocating scarce resources are studied by economists. Markets are an important means
of allocating resources, so economists study markets. Markets include stock markets like
the New York Stock Exchange, commodities markets like the Chicago Mercantile, but also
farmers markets, auction markets like Christies or Sothebys , eBay, or more ephemeral
markets,. In addition, goods and services (which are scarce resources) are allocated by
governments, using taxation as a means of acquiring the items. Governments may be
controlled by a political process, and the study of allocation by the politics, which is known
as political economy, is a significant branch of economics. Goods are allocated by certain
means, like theft, deemed illegal by the government, and such allocation methods
nevertheless fall within the domain of economic analysis. Other allocation methods include
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gifts and charity, lotteries and gambling, and cooperative societies and clubs, all of which
are studied by economists. Some markets involve a physical marketplace. Traders on the
New York Stock Exchange get together in a trading pit.
.
Economic analysis is used in many situations. When British Petroleum sets the price for its
Alaskan crude oil, it uses an estimated demand model, both for gasoline consumers and
also for the refineries to which BP sells. The demand for oil by refineries is governed by a
complex economic model used by the refineries and BP estimates the demand by refineries
by estimating the economic model used by refineries. Economic analysis was used by
experts in the antitrust suit brought by the U.S. Department of Justice both to understand
Microsofts incentive to foreclose rival Netscape and consumer behavior in the face of
alleged foreclosure. Stock market analysts use economic models to forecast the profits of
companies in order to predict the price of their stocks. When the government forecasts the
budget deficit or considers a change in environmental regulations, it uses a variety of
economic models.
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TECHNICAL ANALYSIS:
Definition:
A method of evaluating securities by relying on the assumption that market data, such as
charts of price, volume, and open interest, can help predict future (usually short-term)
market trends. Unlike fundamental analysis, the intrinsic value of the security is not
considered. Technical analysts believe that they can accurately predict the future price of a
stock by looking at its historical prices and other trading variables. Technical analysis
assumes that market psychology influences trading in a way that enables predicting when a
stock will rise or fall. For that reason, many technical analysts are also market timers, who
believe that technical analysis can be applied just as easily to the market as a whole as to an
individual stock.
Technical analysis uses a variety of charts and calculations to spot trends in the market and
individual stocks and to try to predict what will happen next. Technical analysts don't
bother looking at any of the qualitative data about a company (for example, its management
team or the industry that it is in); instead, they believe that they can accurately predict the
future price of a stock by looking at its historical prices and other trading variables.
Technical analysis assumes that market psychology influences trading in a way that lets
them predict when a stock will rise or fall. For that reason, many technical analysts are also
market timers, who believe that technical analysis can be applied just as easily to the
market as a whole as to an individual stock
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. Critics of technical analysis, and there are many, say that the whole endeavor is a
waste of time and effort. They point to academic studies like Burton Malkiel's "A Random
Walk Down Wall Street" as evidence that there is no possible way to predict future prices
using historical prices . Others contend that if any such systems were found to be
successful, those who practiced them would be wealthy beyond their wildest dreams.
Technical analysts use dozens of different quantitative metrics in order to predict stock
prices. In this section, we'll introduce you to some of the most popular ones and explain to
you what they're all about, but first here are a few key terms you should know about:
y Support Level: The level that the technical analyst believes a stock price will not
fall below (also sometimes called a "floor")
y Resistance Level: The opposite of a support level, the level that the technical
analyst believes a stock price will not exceed.
y Breakout: If a stock surpasses the resistance level or falls below the support level, it
is said to be a "breakout."
y Advance-Decline Line: The total number of advancing issues minus the total
number of declining issues, added to a cumulative total.
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MOVING AVERAGES:
Introduction:
Moving averages are one of the most popular and easy to use tools available to the
technical analyst. They smooth a data series and make it easier to spot trends, something
that is especially helpful in volatile markets. They also form the building blocks for many
other technical indicators and overlays.
Perhaps the most commonly used variable in technical analysis, the moving average for a
stock is the average selling price for the stock over a set period of time (the most common
being 20, 30, 50, 100 and 200 days). Moving average data is used to create charts that show
whether or not a stock's price is trending up or down. They can be used to track daily,
weekly, or monthly patterns. Each new day's (or week's or month's) numbers are added to
the average and the oldest numbers are dropped; thus, the average "moves" over time. In
general, the shorter the time frame used, the more volatile the prices will appear, so, for
example, 20 day moving average lines tend to move up and down more than 200 days
moving average lines.
RELATIVE STRENGTH:
Technical analysts use what is called relative strength in order to compare the price
performance of one stock to the entire market. The relative strength of a stock is calculated
by taking the percentage price change of a stock over a set period of time and ranking it on
a scale of 1 to 100 against all other stocks on the market. For example, a stock with a
relative strength of 90 has experienced a greater increase in its price over the last year than
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the price increases experienced by 90% of all other stocks on the market. Some technical
analysts like stocks with high relative strength rankings, believing that stocks which have
recently gone up are more likely to continue going up. Other technical analysts believe that
a very high relative strength can be an indication that the stock is overbought and is ready
to fall. Relative strength is really a "rear view window" metric, measuring only how the
stock has done in the past, not how it will do in the future.
CHARTS:
Charts are the main tool that technical analysts use in order to plot their data and predict
prices. Technical analysts may use several different types of charts in order to conduct their
tests, including line charts, bar charts, and candlestick charts. Most of the time, analysts use
these charts in order to look for patterns in the data. Some of the more commonly used
patterns include:
y Cup and Handle: A pattern on a bar chart that is in the shape of the letter "U" over a
period of between 7 and 65 weeks. Once the stock price reaches the second peak of
the "U", technical analysts believe that the price will fall as investors who bought at
the previous peak start to unload their shares.
y Head and Shoulders: A chart formation in which a price exhibits three successive
rallies, the second one being the highest. The name derives from the fact that on a
chart the first and third rallies look like shoulders and the second looks like a head.
Some technical analysts consider it a sign that the stock will fall further.
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y Double Bottom: A chart formation that looks like a "W". Technical analysts aim to
buy at one of the troughs and ride the stock higher.
VOLUMES:
Not all technical analysts focus exclusively on price. Many of them think that volume is
often times a better indication of where a stock is heading. Volume is simply the number of
shares of a stock that are traded over a particular period of time (e.g. 1 day or 30 days).
Some technical analysts calculate moving averages for volume, the same way others do for
price. Volume is important because it tells how active the stock was during a particular
time, which can in turn affect a stock's price. For example, if a stock falls precipitously but
volume was exceptionally light that day, this is not necessarily an indication that the stock
has fallen out of favor with the market, since the move was caused by a relatively small
number of sellers.
The ability to make commodity price forecasts is only the first step in the price decision
making process. The second, and often more difficult step, is market timing. Since
commodity futures markets are so highly leveraged ( initial margin requirements are
generally less than 10% of a contracts value), minor price moves can have a dramatic
impact on trading performance. Therefore, the precise timing of entry and exit points is an
indispensable aspect of any market commitment. Timing is everything when dealing in the
commodities markets, and timing is almost purely technical in nature. This is where a
practical application of charting principles becomes absolutely essential in the price
forecasting and risk management process.
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TREND LINES
Technical analysis is built on the assumption that prices trend. Trend Lines are an
important tool in technical analysis for both trend identification and confirmation. A trend
line is a straight line that connects two or more price points and then extends into the future
to act as a line of support or resistance. Many of the principles applicable to support and
resistance levels can be applied to trend lines as well.
y UPTREND LINE
An uptrend line has a positive slope and is formed by connecting two or more low points.
The second low must be higher than the first for the line to have a positive slope. Uptrend
lines act as support and indicate that net-demand (demand less supply) is increasing even as
the price rises. A rising price combined with increasing demand is very bullish, and shows
a strong determination on the part of the buyers. As long as prices remain above the trend
line, the uptrend is considered solid and intact. A break below the uptrend line indicates
that net-demand has weakened and a change in trend could be imminent.
y DOWNTREND LINE
A downtrend line has a negative slope and is formed by connecting two or more high
points. The second high must be lower than the first for the line to have a negative slope.
Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is
increasing even as the price declines. A declining price combined with increasing supply is
very bearish, and shows the strong resolve of the sellers. As long as prices remain below
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below support briefly. Sometimes it does not seem logical to consider a support level
broken if the price closes 1/8 below the established support level. For this reason, some
traders and investors establish support zones.
Whatis resistance?
Resistance is the price level at which selling is thought to be strong enough to prevent the
price from rising further. The logic dictates that as the price advances towards resistance,
sellers become more inclined to sell and buyers become less inclined to buy. By the time
the price reaches the resistance level, it is believed that supply will overcome demand and
prevent the price from rising above resistance
Where is resistance established?
Resistance levels are usually above the current price, but it is not uncommon for a security
to trade at or near resistance. In addition, price movements can be volatile and rise above
resistance briefly. Sometimes it does not seem logical to consider a resistance level broken
if the price closes 1/8 above the established resistance level. For this reason, some traders
and investors establish resistance zones.
There are three basic assumptions on which technical analysis is based:
1. The futures market discounts everything.
The technician believes that the price posted on the board of a commodity exchange
at any given time is the intrinsic value of the commodity based upon the
fundamental factors affecting the supply and demand of the product. Therefore, if
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the fundamentals are already reflected in the price, market action (charts- price,
volume, open interest) is all that is needed to be studied to forecast future price
direction. Although not knowing the specifics of the fundamental news, the
technician indirectly studies the fundamentals by studying the charts which reflect
the fundamentals of the marketplace.
2. Prices move in trends
Prices can move in one of three directions, up, down or sideways. Once a trend in
any of these directions is in effect it usually will persist. The market trend is simply
the direction of market prices, a concept which is absolutely essential to the success
of technical analysis. Identifying trends is quite simple; a price chart will usually
indicate the prevailing trend as characterized by a series of waves with obvious
peaks and troughs. It is the direction of these peaks and troughs that constitutes the
market trend.
3. Historyrepeats itself
Technical analysis includes the psychology of the market place. Patterns of human
behavior have been identified and categorized for several hundred years and are
repetitive in nature. The repetitive nature of the marketplace is illustrated by
specific chart patterns which will indicate a continuation of or change in trend.
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List of categories ofthe technical analysis theory:
y Indicators (Oscillators, eg: Relative Strength Index RSI)
y
Numbertheory (Fibonacci numbers, Gann numbers)
y Waves (Elliott wave theory)
y Gaps (High-Low, Open-Closing)
y Trends (Following Moving Average)
y Chart formations (Triangles, Head & Shoulders, Channels)
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CHAPTER-5
COMPANYPROFILE
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Future Capital Holdings was conceptualized as a new age capital managementand investing business that could play a vital role in the development of theconsumption-led economy in India. As a company with an investing mindset, weview India as an attractive long-term investment opportunity across asset classes.
Future Capital Holdings combines the entrepreneurial skills of world-classprofessionals from reputed international and domestic companies with the nationalscale and reach of the Future Group.
Future Group has pioneered and established a nation-wide chain of over 12 million
of retail space in 71 cities and 65 rural locations across the country.
We will respect the fact that our investors have entrusted us with theircapital, our partners with their faith, our customers with their confidence and ouremployees with their aspirations. We will measure our success by the success ofour stakeholders and will work diligently to ensure that we fulfill our fiduciary
responsibility. We firmly believe that the difference between a goodbusiness and a great organisation is the integrity of its people. We will conductourselves ethically and transparently in all our dealings, both internal and external.
We will maintain an environment which fosters creativity and encouragesinnovation. We believe that this will enable us to attract, retain and nurture the best
talent and develop the business and thought leaders of tomorrow. Wewill build an organization which has a positive mindset. By conducting everyinteraction with respect and consideration, we will create a self-reinforcing culture
of success. We believe that it is our responsibility to contribute to theenvironment in which we operate. By investing in our community, we will not onlyimprove our surroundings today, but also provide better opportunities for futuregenerations.
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Kishore Biyani
Chairman
Dhanpal A. Jhaveri
Executive Director
N Shridhar
Chief Financial Officer
Rakesh Makkar
Jt MD Future Capital Financial ServicesLtd.
Shailesh Shirali
MD Wholesale Credit
Rajesh Doshi
Sr. VP Legal, Compliance & CompanySecretary
Business, Future Capital Holdings isthe third leg in the Indian financial services space beyond the traditional bankingand brokerage businesses.
Our vision is to be the premier, most trusted and innovative investingbusiness.
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We launched our retail financial services offering inJune 2007, pursuant to an agreement with PRIL, under which we have theexclusive right to provide financial products and services at present and futuremalls, stores and retail outlets in India which are owned, controlled or managed byPRIL and its subsidiaries. The retail financial services business, housed under a100% subsidiary of FCH; Future Capital Financial Services Ltd ("FCFS") is
operated through 2 verticals; Retail Credit & Distribution. The Retail Creditbusiness is operated under the Future Money brand. The products offered by ourRetail Credit business are Personal loans, Consumption loans, Home equity loansand Credit cards; under the name Future Card, through an agreement with ICICIBank, Life and NonLife Insurance products (as a corporate agent of FutureGenerali), third party mutual fund products and fixed deposit programs.
Our Wholesale Credit business taps a large and relativelyunaddressed market of mezzanine, promoter, project and acquisition financing,and other special situations related financing. Our strong due diligence capabilitiesacross asset classesprivate equity, real estate and special situationsallow usto appropriately analyze risk. This capability coupled with our risk managementand credit systems and our access to entrepreneurs and developers through theFCH-Future Group eco-system of partners and suppliers favorably positions us togrow this business.
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Recent news articles on FCH
'India's domestic consumption story intact": Sameer Sain- Reuters , 18th Feb 2009
BackTo Basics- Business Today , 10th Feb 2009
Future Bright- Business India, 7th Sept 2008
Urban Muscle- Business Standard , 12th Aug 2008
Highest average income recorded in Chandigarh-The Economic Times , 8th Aug 2008
Changing Perceptions- Business India , 16th June 2008
The Gold Rush- India Today, 18th Feb 2008
Talent sets a company apart-Times of India, 6th Nov 2007
Future gets RBI nod for credit card-Times Business, 5th Nov 2007
Reforms gains racing down country roads, finds study-Times Business, 26th July 2007
Finance services firms' salaries head northward- Economics Times, 18th July 2007
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INDUSTRY PROFILE
Commodities Derivatives Exchange: Indian Scenario
In India, commodity markets have been in existence for decades. However, in 1975 the
Government banned forward contracts on commodities. Later in 2003, the Government of
India again allowed forward contracts in commodities. There have been over20 exchanges
existing for commodities all over the country. However, these exchanges are commodity
specific and have a strong regional focus. The Government, in order to make the
commodities market more transparent and efficient, accorded approval for setting up of
national level multi commodity exchanges. Accordingly, three exchanges are there which
deal in a wide variety of commodities and which allow nation-wide trading. They are
1) National Multi Commodity Exchange (NMCE)
2) Multi Commodity Exchange (MCX)
3) National Commodities and Derivatives Exchange (NCDEX)
National Multi Commodity Exchange:
First state of the art demutualised multi-commodity Exchange, National Multi Commodity
Exchange of India Ltd. (NMCE) was promoted by commodity-relevant public institutions,
viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative
Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited
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(GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of
Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL).
While various integral aspects of commodity economy, viz., warehousing, cooperatives,
private and public sector marketing of agricultural commodities, research and training were
adequately addressed in structuring the Exchange, finance was still a vital missing link.
Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even
today, NMCE is the only Exchange in India to have such investment and technical support
from the commodity relevant institutions. These institutions are represented on the Board
of Directors of the Exchange and also on various committees set up by the Exchange to
ensure good corporate governance. Some of them have also lent their personnel to provide
technical support to the Exchange management. The day-to-day operations of the Exchange
are managed by the experienced and qualified professionals with impeccable integrity and
expertise. None of them have any trading interest. The structure of NMCE is impossible to
replicate in India.
NMCE is unique in many other respects. It is a zero-debt company; following widely
accepted prudent accounting and auditing practices. It has robust delivery mechanism
making it the most suitable for the participants in the physical commodity markets. The
exchange does not compromise on its delivery provisions to attract speculative volume.
Public interest rather than commercial interest guide the functioning of the Exchange. It has
also established fair and transparent rule- based procedures and demonstrated total
commitment towards eliminating any conflicts of interest.
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NMCE commenced futures trading in 24 commodities on 26 November2002 on a national
scale and the basket of commodities has grown substantially since then to include cash
crops, food grains, plantations, spices, oil seeds, metals & bullion among others. Research
Desk of NMCE is constantly in the process of identifying the hedging needs of the
commodity economy and the basket of products is likely to grow even further. NMCE has
also made immense contribution in raising awareness about and catalyzing implementation
of policy reforms in the commodity sector. NMCE was the first Exchange to take up the
issue of differential treatment of speculative loss. It was also the first Exchange to enroll
participation of high net-worth corporate securities brokers in commodity derivatives
market. It was the Exchange, which showed a way to introduce warehouse receipt system
within existing legal and regulatory framework.
NMCE, India is committed to provide world class services of on-line screen based Futures
Trading of permitted commodities and efficient Clearing and guaranteed settlement, while
complying with Statutory / Regulatory requirements. We shall strive to ensure continual
improvement of customer services and remain quality leader amongst all commodity
exchanges. It was the first Exchange to complete the contractual groundwork for
dematerialization of the warehouse receipts. Innovation is the way of life at NMCE. It is
the only Commodity Exchange in the world to have received ISO 9001:2000 certification
from British Standard Institutions (BSI).
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NMCE Mission:
y Continual Improvement in Customer Satisfaction.
y Improving efficiency of marketing through on-line trading in Dematerialization
form.
y Minimization of settlement risks.
y Improving efficiency of operations by providing best infrastructure and latest
technology.
y Rationalizing the transaction fees to optimum level.
y Implementing best quality standards of warehousing, grading and testing in tune
with trade practices.
y Improving facilities for structured finance.
y Improving quality of services rendered by suppliers.
y Promoting awareness about on-line features trading services of NMCE across the
length and breadth of the country.
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MCX is an independent and de-mutulised multi commodity exchange. It was inaugurated
on November 10, 2003 by Mr. Mukesh Ambani, Chairman and Managing Director,
Reliance Industries Ltd.; and has permanent recognition from the Government of India for
facilitating online trading, clearing and settlement operations for commodities futures
market across the country. Today, MCX features amongst the world's top three bullion
exchanges and top four energy exchanges.
MCX offers a wide spectrum of opportunities to a large cross section of participants
including producers/ processors, traders, corporate, regional trading centre, importers,
exporters, co-operatives and industry associations amongst others. Headquartered in the
financial capital of India, Mumbai, MCX is led by an expert management team with deep
domain knowledge of the commodities futures market.
Presently, the average daily turnover of MCX is around USD1.55 bn (Rs.7, 000 crore -
April 2006), with a record peak turnover of USD3.98 bn (Rs.17, 987 crore) on April 20,
2006. In the first calendar quarter of2006, MCX holds more than 55% market share of the
total trading volume of all the domestic commodity exchanges. The exchange has also
affected large deliveries in domestic commodities, signifying the efficiency of price
discovery.
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Being a nation-wide commodity exchange having state-of-the-art infrastructure, offering
multiple commodities for trading with wide reach and penetration, MCX is well placed to
tap the vast potential poised by the commodities market.
Key shareholders
Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for
Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.
(NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank,
Union Bank of India, Canara Bank, Bank of India, Bank of Baroda , HDFC Bank and SBI
Life Insurance Co. Ltd.
Vision ofMCX:
MCX will offer unparalled efficiencies, unlimited growth and infinite opportunities to
all market participants. It will be acknowledged as the Exchange of Choice, based on its
strong service availability backed by superior technology.
MCX is committed towards revolutionizing the Indian commodity markets. It aims to
empower the market participants through innovative product offerings and business rules;
so that the benefits of futures markets can be fully realized. MCX will focus its efforts
towards meeting the requirements of all the stakeholders in the commodity ecosystem
without any bias. It shall focus its efforts towards establishing globally acceptable industry
norms.
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Winning Edge ofMCX:
Neutral Image:
MCX's most important strength is that it is an independent and de-mutualized exchange
since inception.
Value Proposition:
Headquartered in the financial capital of India, Mumbai, MCX is led by an expert
management team with deep domain knowledge of the commodities futures market. It also
has strong partnerships with banks, financial institutions, warehousing companies and other
stakeholders of the marketplace.
Insurance ofSettlement Guarantee Fund:
MCX is the only domestic exchange which has insured its Settlement Guarantee Fund, to
the tune of Rs.100 crores by The New India Assurance Co.Ltd.'S
Strategic Equity Partnerships:
MCXs wide based strategic equity partners include - Financial Technologies (I) Ltd., State
Bank of India Ltd. and its associates, National Bank for Agriculture & Rural Development
(NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an
affiliate of Fidelity International, Corporation Bank Ltd., Union Bank of India Ltd., Canara
Bank Ltd., Bank of India Ltd., Bank of Baroda Ltd., HDFC Bank Ltd., SBI Life Insurance
Co. Ltd.
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Trade Support:
MCX has already tied up exclusively with some of the largest players in the commodities
eco-system namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent
Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United
Planters Association of India and India Pepper & Spice Trade Association. MCX has also
established the National Gold Delivery market in partnership with World Gold Council.
International Alliances:
MCX has various strategic Memorandum of Understandings/ Licensing Agreements with
global exchanges like The Tokyo Commodity Exchange (TOCOM); The Baltic Exchange,
London; Chicago Climate Exchange (CCX); New York Mercantile Exchange (NYMEX),
London Metal Exchange (LME); Dubai Multi Commodities Centre (DMCC); New York
Board ofTrade (NYBOT) and Bursa Malaysia Derivatives, Berhad (BMD)
FTIL: Technology Partner:
Financial Technologies India Ltds (FTIL) proven mettle of end-to-end exchange trading
technologies addressing trading/ surveillance/ clearing and settlement operations help
enhance the MCX Trade Life Cycle operations (Pre-Trade, Trade and Post-Trade). In
addition to its technological capabilities, FTIL also brings to MCX its associations with
technology giants such as Microsoft/ Intel and HP.
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National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally
managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI
Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural
Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab
National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of
India Limited), Indian Farmers Fertiliser Cooperative Limited (IFFCO) ,Canara Bank and
Goldman Sachs by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange.
NCDEX is the only commodity exchange in the country promoted by national level
institutions. This unique parentage enables it to offer a bouquet of benefits, which are
currently in short supply in the commodity markets. The institutional promoters of NCDEX
are prominent players in their respective fields and bring with them institutional building
experience, trust, nationwide reach, technology and risk management skills.NCDEX is a
public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It
obtained its Certificate for Commencement of Business on May 9, 2003. It has commenced
its operations on December 15, 2003.
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NCDEX is a nation-level, technology driven de-mutualized on-line commodity exchange
with an independent Board of Directors and professionals not having any vested interest in
commodity markets. It is committed to provide a world-class commodity exchange
platform for market participants to trade in a wide spectrum of commodity derivatives
driven by best global practices, professionalism and transparency. NCDEX is regulated by
Forward Market Commission in respect of futures trading in commodities. Besides,
NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act,
Contracts Act, Forward Commission (Regulation) Act and various other legislations, which
impinge on its working.
NCDEX is located in Mumbai and offers facilities to its members in more than 550 centres
throughout India. The reach will gradually be expanded to more centres. NCDEX currently
facilitates trading of 54 commodities - Cashew, Castor Seed, Chana, Chilli LCA334,
Coffee - Arabica, Coffee - Robusta, Cotton Seed Oilcake, Crude Palm Oil, Groundnut (in
shell), Groundnut Expeller Oil, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags,
Indian 28 mm Cotton , Indian 31 mm Cotton , Lemon Tur, Masoor Grain Bold, Medium
Staple Cotton, Mentha Oil , Mulberry Green Cocoons ,Rapeseed - Mustard Seed ,Pepper
,Potato ,Raw Jute, Indian ParboiledRice(IR-36/IR-64),IndianRawRice(ParmalPR-
106),RBD Palmolein
RMSeed Oil Cake, Refined Soy Oil , Rubber, Sesame Seeds, Soy Bean, Sponge Iron,
Expeller Mustard Oil ,Mulberry Raw Silk,V-797 Kapas, Sugar, Turmeric, Urad,Wheat,
Yellow Peas, Yellow Red Maize, Yellow Soybean Meal,Electrolytic Copper Cathode,
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Aluminium Ingot, Nickel Cathode, Zinc Metal Ingot, Mild Steel Ingots, Gold KG, Silver,
Brent Crude Oil, Furnace Oil. At subsequent phases trading in more commodities would
be facilitated.
Key shareholders:
Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for
Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.
(NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank,
Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and Life
Insurance Corporation of India.
Commodities Derivatives Exchanges-Global Scenario
Globally, commodities derivative exchanges have existed for a long period of time. The
Chicago Board of Trade is one of the oldest derivatives exchange in the world. Now
commodities exchanges exist all over the world and wide variety of commodities are traded
all over the world in these exchanges.
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The major Commodities Exchanges ofthe world are as follows:
Chicago Board of Trade [CBOT] USA
New YorkMercantile Exchange [NYME] USA
London Metal Exchange [LME] UK
Tokyo Commodity Exchange [TOCOM] JAPAN
South Africa Futures Exchange [SAFEX] SOUTH AFRICA
Shanghai Futures Exchange [SFE] CHINA
Honkong Futures Exchange [HKFE] HONKONG
Chicago Board Of Trade [CBOT]
The Chicago Board ofTrade [CBOT], established in 1848, is a leading futures exchanges
in the world. More than 3600, CBOT members trade 50 different futures and options
products at the exchange through open auction as well as electronically. Volumes at the
exchange have crossed in 600 million contracts. Earlier CBOT traded only in agricultural
commodities such as corn, wheat, oats and soybeans. Futures contracts at the exchange
evolved over the years to include non-storable agricultural commodities and non-
agricultural products such as gold and silver. The CBOTs first financial futures contract
was launched in October 1975, was based on the Government National Mortgage
Association mortgage backed certificates. Since that introduction, futures trading has been
initiated in many financial instruments, including US Treasury Bonds, and Notes, stock
indexes and swaps etc; Another innovation in the markets was the introductions of Options
on futures in 1982.
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traditional strengths and remains close to its core users by ensuring its contracts continue to
meet the expectations of industry. As a result, it is highly successful with turnover in excess
of US$ 3,000 billion per annum. It also contributes to UKs invisible earnings to the sum of
more than 250 million pounds in overseas earnings each year.
The origins of the London Metal Exchange can be traced as far back as opening of the
Royal Exchange in 1571. This is where metal traders first began to meet on regular basis.
However, it was in 1877 that the London Metal Market and Exchange Company was
formed as a direct result of Britains Industrial revolution of the 19 century. This led to
massive increase in the UKs consumption of metal, which required the import of
enormous tonnages from abroad. Merchant ventures were investing large sums of money
in this activity and were exposed to great risk, not only because the voyages were
hazardous but also because the cargoes could lose value if there was fall in price during the
time it took for the metal to reach Britain.
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CHAPTER-6
DATA ANALYSIS
AND
INTERPRETATION
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DATAANALYSISAND INTERPRETATION OF ENERGY COMMODITIES
INTRODUCTION TO CRUDE OIL
CRUDE OIL
A mineral oil consisting of a mixture of hydrocarbons of natural origin, yellow to black in
color, of variable specific gravity and viscosity, often referred to simply as crude.
OR
A fossil fuel formed from plant and animal remains many millions of years ago. It
comprises organic compounds built up from hydrogen and carbon atoms and is ,
accordingly, often referred to as hydrocarbons. Crude oil is occasionally found in springs or
pools but is usually drilled from wells beneath the earths surface.
VARIETIES OF CRUDE OIL
The petroleum industry often characterizes crude oils according to their geographical
source, e.g., Alaska north slope crude. Oils from different geographical areas have unique
properties: they can vary in consistency from a light volatile fluid to a semi-solid.
The classification scheme provided below is more useful in a response scenario.
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y Class A: Light, Volatile Oils-These oils are highly fluid, often clear, spread rapidly
on solid or water surfaces, have a strong odor, a high evaporation rate, and are
usually flammable. They penetrate porous surfaces such as dirt and sand and may
be persistent in such a matrix. They do not tend to adhere to surfaces; flushing with
water generally removes them. Class A oils may be highly toxic to humans, fish and
other biota. Most refined products and many of the highest quality light crudes can
be included in this class.
y Class B: Non-Sticky Oils-These oils have a waxy or oily feel. Class B oils are less
toxic and adhere more firmly to surfaces than class A oils, although they can be
removed from surfaces by vigorous flushing. As temperatures rise, their tendency to
penetrate porous substrates increases and they can be persistent. Evaporation of
volatiles may lead to a class C or D residue. Medium to heavy paraffin-based oils
fall into this class.
y Class C: Heavy, Sticky Oils-Class C oils are characteristically viscous, sticky or
tarry, and brown or black. Flushing with water will not readily remove this material
from surfaces, but the oil does not readily penetrate porous surfaces. The density of
class c oils may be near that of water and they often sink. Weathering or
evaporation of volatiles may produce solid or tarry class d oil. Toxicity is low, but
wildlife can be smothered or drowned when contaminated. This class includes
residual fuel oils and medium to heavy crudes.
y Class D: Nonfluid Oils-class D oils are relatively non-toxic, do not penetrate porous
substrates, and are usually black r dark brown in color. When heated, class D oils
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may melt and coat surfaces making cleanup very difficult. Residual oils, heavy
crude oils, some high paraffin oils and some weathered oils fall into this class.
These classifications are dynamic for spilled oils; weather conditions and water
temperature greatly influence the behavior of oil and refined petroleum products in the
environment. For example, as volatiles evaporate from a class B oil, it may become a class
C oil. If a significant temperature drop occurs (e.g., at night), a class c oil may solidify and
resemble a class D oil. Upon warming, the class D oil may revert back to a class C oil.
Categories of crude oil
y West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is
39.6 degrees (making it a light crude oil), and it contains only about 0.24 percent
of sulfur (making a sweet crude oil). WTI is generally priced at about a $2-4 per-
barrel premium to OPEC basket price and about $1-2 per barrel premium to Brent,
although on a daily basis the pricing relationships between these can very greatly.
y Brent crude oil stands as a benchmark for Europe.
y India is very much reliant on oil from the Middle East (high sulphur). The OPEC
has identified china& India as their main buyers of oil in Asia for several years to
come.
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Indian in world crude oil industry
Petroleum and natural gas. The recent exploration and production activities in the country
have led to a dramatic increase in the output of oil. The country currently produces 35
million tones of crude oil, two-thirds of which is from offshore areas ad imports another27
million tones. Refinery production in terms of crude throughput of the existing refineries is
about 54 million tones.
Natural gas production has also increases substantially in recent years, with the country
producing over22,000 million cubic meters. Natural gas is rapidly becoming an important
source of energy and feed stock for major industries. By the end of the eight five year plan,
production was likely to reach 30 billion cubic meters.
Factors influencing crude oil markets
y Shortage of oil supplies
y Taxation-when oil taxes are raised, end consumers often mistakenly blame the oil
producers, but it is really their own governments that are responsible.
y Balance of demand and supply in the short term
y Rate of investment in the longer term
y Accidents
y Bad weather
y Increasing demand
y Halting transport of oil from producers
y Labour disputes
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Note: if traders I the oil market believe there will be a shortage of oil supplies, they may
raise prices before a shortage occurs.
Crude oil reserves
World crude oil reserves are estimated at more than one trillion barrels, of which the 11
OPEC member countries hold more than 75 percent. OPEC members currently produce
around 27 million to 28 million barrels per day of oil, or some 40 percent of the world total
output, which stands at bout 75 million barrels per day.
Is the world running out of oil?
Oil is a limited resource, so it may eventually run out, although not for many years to come.
OPECs oil reserves are sufficient to last another80 years at the current rate f production,
while non-OPEC oil producers reserves might last less than 20 years. The worldwide
demand for oil is rising and OPEC is expected to be an increasingly important source of
that oil.
If we manage our resources well, use the oil efficiently and develop new fields, then our oil
reserves should last for many more generation to come
Uses of crude oil
y Gasoline
y Petrol
y Liquefied Petroleum gas(LPG)
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y naphtha
y kerosene
y gasoil
y fuel oil
y lubricants
y asphalt(used in paving roads)
y ethane
y ethylene
y propylene
y butadiene
y benzene
y ammonia
y methanol
y plastics
y synthetic fibres
y synthetic rubbers
y detergents
y Chemical fertilizers.
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Exchanges dealing in crude futures apart formMCX
y The New York Mercantile Exchange(NYMEX)
y The International Petroleum Exchange of London(IPE)
y The Tokyo Commodity Exchange (TOCOM)
Crude oil units (average gravity)
y 1 US barrel =42 US gallons
y 1US barrel= 158.98 litres
y 1 tonne= 7.33 barrels
y 1 short ton=6.65 barrels
Note: barrels per tonne vary from origin to origin.
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4.1 FUNDAMENTAL ANALYSIS OF CRUDE OIL
INDUSTRY ANALYSIS OF CRUDE OIL
Crude oil prices behave much as any other commodity with wide price swings in times of
shortage or oversupply. The crude oil price cycle may extend over several years responding
to changes in demand as well as OPEC and non-OPEC supply.
The U.S. petroleum industry's price has been heavily regulated through production or price
controls throughout much of the twentieth century. In the post World War II era U.S. oil
prices at the wellhead have averaged $23.57 per barrel adjusted for inflation to 2006
dollars. In the absence of price controls the U.S. price would have tracked the world price
averaging $25.56. Over the same post war period the median for the domestic and the
adjusted world price of crude oil was $18.43 in 2006 prices. That means that only fifty
percent of the time from 1947 to 2008 has oil prices exceeded.
Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude,
oil prices only exceeded $23.00 per barrel in response to war or conflict in the Middle East.
With limited spare production capacity OPEC has abandoned its price band and for close to
three years was powerless to stem a surge in oil prices which was reminiscent of the late
1970s.
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Crude oil prices 1969-2009
Middle EastSupply Interruptions
Yom Kippur War - Arab Oil Embargo
In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price
of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel
by Syria and Egypt on October5, 1973. The United States and many countries in the
western world showed strong support for Israel. As a result of this support several Arab
exporting nations imposed an embargo on the countries supporting Israel. Arab nations
curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up
by increased production in other countries. The net loss of4 MMBPD extended through
March of 1974 and represented 7 percent of the free world production.
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U.S. and World Events and Oil Prices 1973-1981
If there was any doubt that the ability to control crude oil prices had passed from the United
States to OPEC it was removed during the Arab Oil Embargo. The extreme sensitivity of
prices to supply shortages became all too apparent when prices increased 400 percent in six
short months.
From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per
barrel to $13.55 per barrel. When adjusted for inflation the price over that period of time
exhibited a moderate decline.
OPECS Failure to Control Oil Prices
OPEC has seldom been effective at controlling prices. While often referred to as one OPEC
does not satisfy the definition of a cartel. One of the primary requirements is a mechanism
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to enforce member quotas. During the 1979-1980 period of rapidly increasing prices,
Saudi Arabia's oil minister Ahmed Yamani repeatedly warned other members of OPEC that
high prices would lead to a reduction in demand. His warnings fell on deaf ears.
Surging prices caused several reactions among consumers: better insulation in new homes,
increased insulation in many older homes, more energy efficiency in industrial processes,
and automobiles with higher mileage. These factors along with a global recession caused a
reduction in demand, which led to falling crude prices. Unfortunately for OPEC only the
global recession was temporary. Nobody rushed to remove insulation from their homes or
to replace energy efficient plants and equipment -- much of the reaction to the oil
Price increase of the end of the decade was permanent and would not respond to lower
prices with increased demand for oil.
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The higher prices also resulted in increased exploration and production outside of OPEC.
From 1981 to 2007 non-OPEC production increased 10 million barrels per day. OPEC was
faced with lower demand and higher supply from outside the organization
A December 1986 OPEC price accord set to tar