8/2/2019 project 2010-2012
1/61
Commodity Futures as an Investment Avenue
Dissertation submitted in partial fulfillment of the
requirements of the
Two year full-time Post Graduate Diploma in
Management Program
Submitted by
Priyam Tripathi
FT-FS-10-836
Institute for Integrated Learning in Management
Graduate School of Management
16, Knowledge Park-II
Greater Noida 201 306
March,2012
1
8/2/2019 project 2010-2012
2/61
FINAL DISSERTATION DECLARATION FORM
I hereby declare that the Project work entitled Commodity Futures as an
Investment Submitted by me for the partial fulfillment of the Post GraduateDiploma in Management Program to Institute for Integrated Learning in
Management, Greater Noida is my own original work and has not been
submitted earlier either to IILM GSM or to any other Institution for the fulfillment
of the requirement for any course of study. I also declare that no chapter of this
manuscript in whole or in part is lifted and incorporated in this report from any
earlier / other work done by me or others.
Name : Priyam Tripathi
Place : Delhi
2
8/2/2019 project 2010-2012
3/61
Date : 26th March 2012 Signature of Student
3
8/2/2019 project 2010-2012
4/61
ACKNOWLEDGEMENT
I would like to convey my heartiest gratitude to several people, for their support and
guidance, which helped me to complete this project. I wish to take this opportunity to
thankProf. S.P KETKAR(Faculty) for permitting me to carry on this project. Last but
not the least, my endless appreciation goes to my family and faculties who has stood by
my side and given me moral support whenever I was low and boosted my will power.
Thank you!
4
8/2/2019 project 2010-2012
5/61
Table Of Contents
Declaration Form Pg. 2
Title Pg. 3
Acknowledgement Pg. 4
Introduction Pg. 6
Literature Review Pg. 11
Objective of the study Pg. 12
5
8/2/2019 project 2010-2012
6/61
Research Design Pg. 13
Methodology Pg. 16
Sampling Pg. 17
Instruments Pg. 18
Factor Analysis Pg. 19
Cross Tabulation Pg. 20
Industry Profile Pg. 21
Rules governing Commodity derivatives Pg. 25
Analysis & Interpretation Pg. 26
Findings, Suggestions & Conclusion Pg. 45
Bibliography Pg. 51
Annexure Questionnaire Pg. 52
6
8/2/2019 project 2010-2012
7/61
Introduction
Commodities have always been a part of our day to day life as one of the finest
investment avenues available. But we have been unaware of them. The wheat in our
bread, the Cotton in our clothes, our jewels, the oil that runs our Vechile, etc,are all
traded across the world in major exchanges.
India has a long history of trade in commodity derivatives; this sector remained
underdeveloped due to the control over and intervention in commodities prices by the
government for many years. The production, supply and distribution of many
agricultural commodities are still governed by the state and forwards and futures trading
7
8/2/2019 project 2010-2012
8/61
are selectively introduced with stringent controls. Free trade in many commodity items is
restricted under the Essential Commodities Act, 1955 and the Agriculture Productive
Marketing Committees Acts of the various state governments.
The Mumbai Cotton Trade Association set up the first commodity exchange in India and
formally organized futures trading in cotton in 1875. Subsequently, many exchanges
came up in different parts of the country for futures trading in various commodities. The
Gujarati Vyapari Mandali came into existence in 1900, which undertook futures trading
in oilseeds for the first time in the country. The Calcutta Hessian exchange ltd and the
East India Jute Association Ltd were set up in 1919 and 1927 respectively for futures
trade in raw jute. A future trading in cotton was organized in Mumbai under the auspices
of East India cotton Association in 1921. Simultaneously, several exchanges were set upin major agricultural centers in North India before the World War broke out and they
were mostly engaged in wheat futures until it was prohibited in 1921.
The existing exchanges Hapur, Muzaffarnagar, Meerut, and Bhatinda etc were
established during this period. The Government of India banned trading in commodity
futures in the year 1967 in essential commodities. As the result of this, all the commodity
futures in the year 1967, in order to have an effective control over the Khusro Committee
in 1980, the Government, reintroduced futures trading in some selected commodities. As
the result of this, all the commodity exchanges went out of business and many trades
started resorting to unofficial and informal trading in futures On the recommendation of
Khusro committee in 1980, the Government reintroduced futures trading in some
selected commodities including cotton, jute potatoes etc. As the part of economic
reforms, the government of India appointed a expert committee on forward markets
under the chairmanship of K N Kabra in the year 1993.
The committee submitted its report in 1944 and recommended for the reintroduction of
futures, with an wider coverage of and scope for more agricultural commodities. In order
to give a thrust to the agricultural sector, the National Agricultural Policy 2000
envisaged external and domestic market reforms and the dismantling of all controls and
regulations on the agricultural commodity market. It has also proposed enlargement of
the coverage of futures market to reduce wide fluctuations in commodity prices and for
hedging the risk arising from price fluctuations.
8
8/2/2019 project 2010-2012
9/61
In the budget speech delivered on 28 February 2002, the then Finance Minister
announced an expansion of futures and forward trading to cover all agricultural
commodities. This was followed by the removal of the ban on futures trading on 27 (out
of 81 items) in oilseeds, oils and their cakes in August 2002. Subsequently, in February
2003, the Government removed the prohibition on the remaining 54 commodities also
under the Forward trading in general and the agricultural sector in particular, The
Securities Contracts (Regulation) Act, 1956, was also amended in August 2003 to
provide for commodity derivatives Exchange (NCDEX ) and Multi Commodity
Exchange (MCX), Mumbai.
National status was given to those exchanges so that they would be automatically
permitted to conduct futures trading in all commodities subject to the clearance of bylaws and contract specifications by the FMC, While the NMCE, Ahmedabad
commenced futures trading in November 2002, MCX and NCDEX, Mumbai
commenced operations in October and December 2003 respectively.
Over the ages, commodities had been the basis for trade and industry. They have spurred
commerce, encouraged exploration and altered the histories of nation. Today they are
played a very important role in the world economy with billion of dollars of these
commodities traded each day of exchanges across the world, so much so that today the
commodity market are roughly 4-5 times the size of the equity market, where ever they
are actively traded.
Futures trading play a key role in the marketing of many important agricultural
commodities and their products. And yet this institution is still perhaps the least
understood and often the most condemned part of the entire marketing system. In our
own country as well as in those like the U.S.A. and the U.K., where active Futures
markets exist, a theoretical debate has been going on for quite some time as to their role
and functions. Much of the discussion has naturally centered on the Effects of futures
trading on prices. Some affirm that it helps to stabilize prices while others argue that
because of the existence of speculation which is inherent in it; its price effects are often
destructive. Little empirical evidence, however, has yet been produced in support of
either view. The present study is an modest attempt in that direction.
Trade in commodity futures contracts via the organized exchanges currently seen in the
United States goes back to the 1860s. The basic concept is much older. There are records
9
8/2/2019 project 2010-2012
10/61
of trade in contractual obligations, similar to modern day futures contracts, in China and
Japan in earlier centuries.
The current widespread and growing interest in commodity futures emerged during the
1970s. Extreme price variability in the grains, oilseeds, fibers, and livestock
commodities brought with it an sense of urgency and a need for mechanisms to manage
age exposure to price risk. Instability in the economy late in the decade and into the early
1980s brought double-digit inflation, the prime interest rate that exceeded 20 percent,
and widespread uncertainty. Farm policy moved away from approaches that pegged
specific prices for key agricultural commodities and toward a posture that would allow
U.S. prices to trade in futures contracts for such diverse items as the agricultural
commodities, treasury bills, lumber, foreign currencies, copper, and heating oil.Options on futures contracts can remove to related and major barrier to the use of
commodity futures in the forward-pricing of agricultural commodities. The first is the
producers constant fear that forward prices of future sales have been set too low or that
forward prices (i.e., costs) of futures purchases have been set too high.
Producers often equate bad outcomes, in terms of opportunity costs, with bad decisions.
Even if the forward price established is profitable, there is a tendency for producers to
view the hedge set early at relatively low prices (or at relatively high costs) to be a bad
decision. If the futures side of the hedge loses money, the Tendency is to view the hedge
as a mistake and to talk about losing money with the hedge.
Second and related barrier to direct use of the futures markets is the need to manage a
margin account and answer margin calls as the market rallies against a short position in
the futures. Neither producers nor their lenders have always understood the need for a
special and additional credit line to answer margin calls. There are countless examples of
producers being forced to offset short hedges due to the inability or lack of a willing
creditor to provide the needed margin funds. Often, the market turns lower after the
upward price move that forced the producer to offset the short hedges. A loss is incurred
in the futures account and than the producer is without price protection as the market
turns and trends lower.
In the budget speech delivered on 28 February 2002, the then Finance minister
announced an expansion of futures and forward trading to cover all agricultural
commodities. This was followed by the removal of the ban on futures trading on 27 (out
10
8/2/2019 project 2010-2012
11/61
of 81 items) in oilseeds, oils and their cakes in August 2002. Subsequently, in February
2003, the Government removed the prohibition on the remaining 54 commodities also an
under the Forward Contract (Regulation) Act, 1952, thus removing the statutory hurdles
in futures trading in general and the agricultural sector in particular. The Securities
Contracts (Regulation) Act, 1956 was also amended in August 2003 to provide for
commodity derivatives.
Soon thereafter, the Forward Markets Commission granted permission to three national
multi-commodity exchanges via National Multi-Commodity Exchange of India Ltd.
(NMCE), Ahmedabad, National Commodity & Derivatives Exchange (NCDEX) and
Multi-commodity Exchanges (MCX), Mumbai.
National status was given to those exchanges so that they would be automaticallypermitted to conduct futures trading in all commodities subject to the clearance of
bylaws and contract specification by the FMC. While the NMCE, Ahmedabad
commenced futures trading in November 2002, MCX and NCDEX, Mumbai
commenced operation in October and December 2003 respectively.
Literature Review
11
8/2/2019 project 2010-2012
12/61
Futures trading are a device for protection against the price fluctuations which normally
arise in the course of marketing of commodities. Stockiest, processors and manufacturers
utilize the futures contract to transfer the price risk faced by them. This is use of the
futures market is commonly known as hedging.
A futures contract is a highly standardize contract, which is invariably entered into for
the basis variety, but against which other varieties within a stipulated range can also
delivered with appropriate premier or discounts for the differences in their qualities from
the basis during a period which, in futures market parlance, called the delivery month.
Wherever a futures market is organized, two markets operate side by side, viz., the spot
and the futures.For purposes of hedging, those who have bought stocks and are, therefore, long in the
ready market sell in the futures market while those who have sold the actual commodity
and are shorts in the ready market are buyers in the futures market.
Benefits of literature review
As the study is being formulated on general public, the elements that affect this segment
and what are the criteria that this segment follows to safeguard their commodity future.
Review of Literature help in understanding preferences and the outlook of general public
towards investment. At the same time the theory also helped in understanding the
concept of portfolio creation.
The review of literature was beneficial for the successful completion of the project work
and to carry out the survey in the right direction. The literature review updates the
knowledge of the researcher on portfolio creation techniques and the need of the
individual. It benefited in the learning of the profile of the respondents and their
preferences.
12
8/2/2019 project 2010-2012
13/61
Objectives of the study
1. To find out the various risk factors in using commodity future.
2. To study the influences of futures trading, on price and price variation
3. To evaluate the effectiveness of the various measures of commodity futures as
investment avenues in India.
13
8/2/2019 project 2010-2012
14/61
14
8/2/2019 project 2010-2012
15/61
Introduction
The commodities that have always been a Part of our day to day existence are also one of
the finest Investment avenues available. The wheat in our bread, the Cotton in our
cloths, our g jewels, the oil that runs our cars, etc; are all trades across the world in major
exchanges.
Over the ages, commodities have been the basis for trade and industry. They have
spurred commerce, encouraged exploration and altered the histories of nation. Today
they play a very important role in the world economy with billion of dollars of these
commodities traded each day of exchanges across the world, so much so that today the
commodity market are roughly 4-5 times the size of the equity market, where ever they
are actively traded.
Statement of the problems
Primary commodity prices and their markets are known to behave differently from those
of the manufactured goods or services. Theoretical analysis suggests that commodity
prices will fall relative to others because of the inelastic demand.
Thus, the real income of the commodity producers falls because inelastic demand
prevents them from offsetting price movements with volume changes. The reason for
extra volatility in commodity prices in the presence of natural shocks that are not
predictable and majorly relate to the previous years production or consumption in price,
followed by a slow or rapid reduction depending on the nature of the commodity.
Commodity price cycles mainly have flat bottoms with occasional sharp peaks.
15
8/2/2019 project 2010-2012
16/61
The following are four important commodity price problems:
a) Short-term fluctuations: These are some common among the agriculture
products, either within a year due to seasonal variations or from year to year
because of abnormal weather variations and conditions.
b) Medium-term changes: As seen often in oil or other mineral markets, respondingto multi-year business cycles in the world economy.
c) Permanent changes: These are affecting the one or a few countries owing to
technological changes or the discovery of a new technology which alters
competitiveness.
d) Long-term declining commodity prices: Normally, the behavior of commodity
prices short-term in nature and show a sudden rise or fall and this asymmetric
behavior tends to impose costs on any scheme meant for balancing price
fluctuations. All this exposes producers to the dual problem of lower returns and
higher risks.
Need of the study
There have been a number of studies made in the field of investment and creation of
portfolios. All the studies made are in reference with income levels in general. Income
levels even though same but the field of work and the life style of a particular segment
differ from others, which in turn affects the saving and investment priorities.
Scope of the study
16
8/2/2019 project 2010-2012
17/61
This study focuses on futures alone among derivative. Among futures, only commodity
future has been assessed. The main focus on potential investors and those who invest
regularly commodity futures there return, risk and expectation towards commodity
futures of this study is to asses to examine the various risk factors in using commodityfutures by inflation and price fluctuation, and to evaluate the future trading on price and
price variation
Hypothesis statement:
Testing: For hypothesis testing Chi square test is used. The total no of respondents who
are involved in the survey are 60 out of which 45 respondents are regular investors in
commodity futures remaining 15 were potential investors
Hypothesis to be tested:
Ho-Commodity futures are not excellent vehicle for investment
Hi-Commodity future are excellent vehicle for investment
Methodology
According to Clifford woody research comprises of defining, redefining problem,
formulating hypothesis or suggested solution, collecting, organizing and evaluating data,
making deductions and conclusions to determine whether they fit the formulating
hypothesis.
17
8/2/2019 project 2010-2012
18/61
It is a way to systematic solution of the research problem. The researcher needs to
understand the assumption underlying various techniques and procedures that will be
applicable to certain problem. This means that it is necessary for the researcher to design
its methodology.
There are various factors such as the personal factors as well as the market factors that
motivate a person to save and invest. Thus, the questionnaire will be directed towards the
respondents to give the feed back about their savings interest and the various investment
opportunities they are aware about and it also give us respondents to rethink about their
investment criteria and upgrade it to their maximize returns.
Sampling
All items under study in any field of survey are known as a universe or population. A
complete enumeration of all items in the population is census enquiry, which is not
practically possible. Thus sample design is done which basically refers to the definition
plan defined by data collection for obtaining a sample from a given population.
Sampling Technique
This study is purposive in nature as the research is focusing on the various matters that
are related to general investment avenue .Research is not trying to reach a conclusion by
making any assumption and findings are based on the results of the respondents that
enrich our database with a focus on the creation of certain portfolios in general
investment avenue
Convenient Sampling approach is adopted here. This is due to the fact that the
respondents were available only at the colleges and only at the duty time, to get the clear
idea of their approach the nearest colleges were selected and the study was made.
Sampling unit
The sample size consists of professionals. Thus the population selected was of
Professionals consisting of both males and females of different age groups, holding
18
8/2/2019 project 2010-2012
19/61
different qualifications.
Sampling size
The sample size consists of 60 respondents of various financial institutions. The sample
size is drawn using convenience sampling method.
Sample design
Sample design refers to a definite plan followed for the collection of sample from a
given population. The process followed was, firstly a questionnaire was prepared with
the objective in mind. The respondent from various financial institutions were
determined. The second step includes convenience sampling whereby the selected
population was considered and the questionnaire was administered.
Instruments
An open-ended questionnaire has been administered, backed by a personal interview to
draw detailed explanations on the investment pattern. The instrument used to collect the
data from primary source is structured questionnaires which consist of number of
questions printed in a systematic form. Information was collected from regular investors
and potential investors.
Tools for data collection
In dealing with real life problems it is often found that the data at hand are inadequate,
and hence, it becomes necessary to collect sufficient data that are appropriate. The data
can be of two types- Primary data as well as Secondary data.
In this study the Primary data is collected by means of personnel interview with the help
of questionnaires which is designed in such a manner that the faculties of all streams can
use it easily.
19
8/2/2019 project 2010-2012
20/61
The secondary data are those data which already exist. This data is also an important
input for the study, and in this case the secondary data is collected from various records,
magazines, text books, internet, discussion with various in house faculties etc.
Plan of the analysis
The data collected through questionnaire and the secondary data available was
researched in detail; it was further classified and tabulated for the purpose of analysis to
generalize percentages.
Based upon the information and objectives of the study, conclusions were drawn,
suggestions and recommendations are made which can be used in providing appropriate
training and development programs. Graphs and Charts have been used wherever
necessary.
The tabulated data is being graphically represented for the better analysis.
Software use for data analysis
MS Excel & SPSS
Factor analysis
Factor analysis is a general term for several specific computational techniques. All have
the objective of reducing to a manageable number many variables that belong together
and have overlapping measurement characteristics.
20
8/2/2019 project 2010-2012
21/61
The predictor- criterion relationship that was found in the dependence situation is
replaced by a matrix of inter correlations among several variables, none of which is
viewed as being dependent on another. For example, one may have data on 100
employees with scores on six attitude scale items.
Method
Factor analysis begins with the construction of a new set of variables based on the
relationships in the correlation matrix. While this can be done in a number of ways, the
most frequently used approach is principal components analysis. This method transforms
a set of variables into a new set of composite variables or principal components that are
not correlated with each other.
These linear combinations of variables, called factors, account for the variance in the
data as a whole. The best combination makes up the first principal component and is the
first factor. The second principal component is defined as the best linear combination of
variables
For explaining the variables not accounted for by the first factor. In turn, there may be a
third, fourth, and component, each being the best linear combination of variables not
accounted for by the previous factors.
Cross tabulation
Cross tabulation is a technique for comparing two classification variables, such as
gender and selection by ones company for an overseas assignment. The technique uses
21
8/2/2019 project 2010-2012
22/61
tables having rows and columns that correspond to the levels or values of each variables
categories.
An example of a computer-generated cross-tabulation. This table has two rows for
gender and two columns for assignment selection. The combination of the variables with
their values produces four cells. Each cell contains a count of the cases of the joint
classification and also the row, column, and total percentages. The number of row cells
and column cells is often used to designate the size of the table, as in this 2*2 table.
The cells are individually identified by their row and column numbers, as illustrated.
Row and column totals, called marginal, appear at the bottom and right margins of thetable. They show the counts and percentages of the separate rows and columns.
When tables are constructed for statistical testing, we call them contingency tables, and
the test determines if the classification variables are independent. Of course, tables may
be larger than 2*2.
22
8/2/2019 project 2010-2012
23/61
For a market to succeed, it must have all three kinds of participants-hedgers, speculators
and arbitragers. The confluence of these participants ensures liquidity and efficient price
discovery on the market. Commodity markets give opportunity for all three kinds of
participants. In this chapter we look at the use of commodity derivatives for hedging,
speculation and arbitrage.
HEDGING
Many participants in the commodity futures market are hedgers. They usually use the
futures market to reduce a particular risk that they face. This risk might relate to the price
of wheat or oil or any other commodity that the person deals in. The classic hedging
example is that of wheat farmer who wants to hedge the risk of fluctuations in the priceof wheat around the time that his crop is ready for harvesting. By selling his crop
forward, he obtains a hedge by locking in to a predetermined price.
Hedging does not necessarily improve the financial outcome; indeed, it could make the
outcome worse. What it does however is, that it makes the outcome more certain.
Hedgers could be government institutions, private corporations like financial institutions,
trading companies and even other participants in the value chain, for instance farmers,
extractors, ginners, processors etc., who are influenced by the commodity prices.
23
8/2/2019 project 2010-2012
24/61
SHORT HEDGE
A short hedge is the hedge that requires a short position in futures contracts. As we said,
a short hedge is appropriate when the hedger already owns the asset, or is likely to own
the asset and expects to sell it at sometime in the future. For example, a short hedge
could be used by a cotton farmer who expects the cotton crop to be ready for sale in the
next two months.
A short hedge can also be used when the assets are not owned at the moment but is likely
to be owned the future. For example, an exporter who knows that he or she will receive a
dollar payment three months later. He makes a gain if the dollar increases in a valuerelative to the rupee and makes a loss if the dollar decreases in value relative to the
rupee. A short futures position will give him the hedge he desires.
LONG HEDGE
Hedges that involve taking a long position in futures contract are known as long hedges.
A long hedge is appropriate when a company knows it will have to purchase a certain
asset in the future and wants to lock in a price now.
SPECULATION
An entity having an opinion on the price movements of a given commodity can speculate
using the commodity market. While the basics of speculation apply to any market,
speculation in commodities is not as simple as speculating on stocks in the financial
market.
For a speculator who thinks the shares of a given company will rise, it is easy to buy the
shares and hold them for whatever duration he wants to. However, commodities are
bulky products and come with all the costs and procedures of handling these products.
24
8/2/2019 project 2010-2012
25/61
The commodities futures markets provide speculators with an easy mechanism to
speculate on the price of underlying commodities.
To trade commodity futures on the NCDEX, the customer must open a futures trading
account with a commodity derivatives broker. Buying futures simply involves putting in
the margin money. This enables futures traders to take a position in the underlying
commodity without having to actually hold that commodity. With the purchase of futures
contract on a commodity, the holder essentially makes a legally binding promise or
obligation to buy the underlying security at some point in the future.
Speculation: Bearish commodity, sell futures
Commodity futures can also be used by a speculator who believes that there is likely to
be excess supply of a particular commodity in the near future and hence the prices are
likely to see a fall. How can he trade based on this opinion? In the absence of a deferral
product, there wasnt much he could do to profit from his opinion. Today all he needs to
do is sell commodity futures.
ARBITRAGE
A central idea in modern economics is the law of one price. This states that in a
competitive market, if two assets are equivalent from the point of view of risk and return,
they should sell at the same price. If the price of a same asset is different in two markets,
there will be operators who will buy in the market where the asset sells cheap and sell inthe market where it is costly.
This activity termed as arbitrage, involves the simultaneous purchase and sale of the
same or essentially similar security in two different markets for advantageously different
prices. The buying cheap and selling expensive continues till prices in the two markets
reach equilibrium. Hence, arbitrage helps to equalize prices and restore market
efficiency.
Indian commodity exchange and progress
25
8/2/2019 project 2010-2012
26/61
The Bombay Cotton Trade Association set up the first commodity exchange in India and
formally organized futures trading in cotton in 1875. Subsequently, many exchanges
came up in different parts of the country for futures trading in various commodities. The
Gujarati Vyapari Mandali came into existence in 1900, which undertook futures trading
in oilseeds for the first time in the country.
The Calcutta Hessian exchange ltd and the East India Jute Association Ltd were set up in
1919 and 1927 respectively for futures trade in raw jute. Futures trading in cotton were
organized in Mumbai under the auspices of East India cotton Association in 1921.
Simultaneously, several exchanges were set up in major agricultural centers in North
India before the World War broke out and they were mostly engaged in wheat futures
until it was prohibited in 1921.The existing exchanges Hapur, Muzaffarnagar, Meerut, Bhatinda etc were established
during this period. The Government of India banned trading in commodity futures in the
year 1966 in essential commodities. As a result of this, all the commodity futures in the
year 1966, in order to have an effective control over the Khusro Committee in 1980, the
Government, reintroduced futures trading in some selected commodities. As the result of
this, all the commodity exchanges went out of business and many trades started resorting
to unofficial and informal trading in futures.
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC). Under the Forward Contracts (Regulation) Act, 1952, forward
trading in commodities notified under section 15 of the Act can be conducted only on the
exchanges, which are granted recognition by the central government.
All the exchanges, which deal with forward contracts, are required to obtain certificate of
registration from the FMC. Besides, they are subjected to various laws of the land like
26
8/2/2019 project 2010-2012
27/61
the companies Act, Stamp Act, Contracts Act, Forward commission Act and various
other legislations, which impinge on their working.
Forward Markets Commission provides regulatory oversight in order to ensure financial
integrity, market integrity and to protect and promote interest of customers/ non-
members. It prescribes the following regulatory measures:
1. Limit on net open position as on the close of the trading hours. Some times limit
is also imposed on intra- day net open position. The limit is imposed operator-
wise, and in some cases, also member-wise.
2. Circuit-filters or limit on price fluctuations to allow cooling of market in theevent of abrupt upswing or downswing in prices.
3. Special margin deposit to be collected on outstanding purchases or sales when
price moves up or down sharply above or below the previous day closing price.
By making further purchases/sales relatively costly, the price rise or fall is
sobered down. This measure is imposed only on the request of the exchange.
4. Circuit breakers or minimum/maximum prices these are prescribed to prevent
futures prices from falling below as rising above not warranted by prospective
supply and demand factors.
5. Skipping trading in certain derivatives of the contract, closing the market for a
specified period and even closing out the contract.
27
8/2/2019 project 2010-2012
28/61
DATA ANALYSIS AND EVALUATION OF PEDIATRECIANS
1. Cross tabulation between income group and age group.
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
28
8/2/2019 project 2010-2012
29/61
income * age 60 92.3% 5 7.7% 65 100.0%
Table No 1
Income * age Cross tabulation
age Total
.25 25 to 40 40 to 50 50 above
Income
>200000 Count8 7 0 0 15
% within income 53.3% 46.7% .0% .0% 100.0%
% within age 100.0% 43.8% .0% .0% 25.0%
200000 to300000
Count0 9 3 0 12
% within income .0% 75.0% 25.0% .0% 100.0%
% within age.0% 56.3% 25.0% .0% 20.0%300000 to
375000Count
0 0 9 6 15
% within income .0% .0% 60.0% 40.0% 100.0%
% within age .0% .0% 75.0% 25.0% 25.0%
375000 & ab Count 0 0 0 18 18
% within income .0% .0% .0% 100.0% 100.0%
% within age .0% .0% .0% 75.0% 30.0%
Total Count 8 16 12 24 60
% within income 13.3% 26.7% 20.0% 40.0% 100.0%
% within age 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Primary Data
INFERENCE:
According to the survey most of the investors are falling under there
income more than375000 and age group 50 & above are regular investors among
other age and income group because it could be they are more aware about trading
system and their annual income also high.
Figure No .1
29
8/2/2019 project 2010-2012
30/61
2. Cross tabulation between income and occupation.
375000 & ab300000 to 375000200000 to 300000>200000
income
20
15
10
5
0
Count
50 above40 to 5025 to 40.25age
30
8/2/2019 project 2010-2012
31/61
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
income *occupation
60 92.3% 5 7.7% 65 100.0%
Table No .2
Income * occupation Cross tabulation
occupation Total
Pvt.Emp govt emp businessman professional
income >200000 Count 0 0 15 0 15
% within income .0% .0% 100.0% .0% 100.0%
% withinoccupation
.0% .0% 75.0% .0% 25.0%
200000 to300000
Count0 0 5 7 12
% within income .0% .0% 41.7% 58.3% 100.0%
% withinoccupation .0% .0% 25.0% 70.0% 20.0%
300000 to375000
Count
12 0 0 3 15
% within income80.0% .0% .0% 20.0% 100.0%
% withinoccupation 57.1% .0% .0% 30.0% 25.0%
375000 &above
Count9 9 0 0 18
% within income
50.0% 50.0% .0% .0% 100.0%
% withinoccupation
42.9% 100.0% .0% .0% 30.0%
Total Count21 9 20 10 60
% within income35.0% 15.0% 33.3% 16.7% 100.0%
% withinoccupation 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Primary Data
INFERENCE:
31
8/2/2019 project 2010-2012
32/61
According to the survey income and occupation among that income
falling above 375000 per alum and occupation pvt .employees are regularly
investors because there income may be high when compare to other income
group.
Figure No 2
375000 & ab300000 to 375000200000 to 300000>200000
Income
14
12
10
8
6
4
2
0
Count
proffessionalBusinessmangovt emppvt empOccupation
32
8/2/2019 project 2010-2012
33/61
3. Do you trade in commodity futures?
Statistics
trader1
N Valid 60
Missing 5
Minimum 1.00
Maximum 2.00
Table No 3
Traders in Commodity futures
Respondent Frequency Percent Valid PercentCumulativePercent
Valid regular trader 49 75.4 81.7 81.7
potential customer 11 16.9 18.3 100.0
Total 60 92.3 100.0
Missing System 5 7.7
Total 65 100.0
Source: Primary Data
INFERENCE:
According to the survey commodity traders are high. That is regular
traders more significant among two variables. So it got 49% out of 60 %.
33
8/2/2019 project 2010-2012
34/61
Figure No .3
potential customerregular trader
trader1
100
80
60
40
20
0
Percent
trader1
34
8/2/2019 project 2010-2012
35/61
4. If they trade regularly, why
Table No .4
Attributes of satisfaction
Options No of Respondent Percentage
Trade on an organizedexchange
12
24.48%
Standardized contract terms 17 34.69%
follows of daily settlement
12 24.48%
location of settlement 8 13.33%
Total 49 100%
35
8/2/2019 project 2010-2012
36/61
Source: Primary Data
INFERENCE:
According to above definition it is clear that regular investors in
commodity futures are satisfied about its facilities and futures contract. Among all
these attributes
Standardized contract signifies more 34.69% when compare to other variable.
Figure No 4
36
8/2/2019 project 2010-2012
37/61
regular investors in commodity futures
Regular trader
Trade on an organised
axchange
Standardized contract terms
follows of daily settlement
location of settlement
5. Do you think futures trading influence the price and price variation?
Influences
N Valid 60
Missing 5
Std. Deviation .49717
37
8/2/2019 project 2010-2012
38/61
Table No 4.1
Future trading influences price and price variation
Sources Primary Data
INFERENCE:
According to the survey most of the investors believe that price and
price variation dose not influence the price variation.
Survey indicated that the major influencing factor that is 35% says that
price dose not influence the commodity futures.
Frequency Percent Valid PercentCumulative
Percent
Valid influences theprice variation 25 38.5 41.7 41.7
not influence theprice variation 35 53.8 58.3 100.0
Total 60 92.3 100.0
Missing System 5 7.7
Total 65 100.0
38
8/2/2019 project 2010-2012
39/61
Figure No 5
Missing
not influence theprice veriation
influences the priceveriation
influences
39
8/2/2019 project 2010-2012
40/61
6. If price and price variation influences the fluctuation, how
Summery
N Valid 25
Missing 40
Minimum 1.00
Maximum 4.00
Table No .6
Attributes of influences in price and price variation
Frequency Percent Valid PercentCumulative
Percent
Valid seasonal price variation 10 15.4 40.0 40.0
inter and intra seasonalfluctuation in price 5 7.7 20.0 60.0
short term oscillation inprices 5 7.7 20.0 80.0
average received byproducers and paid byconsumers
5 7.7 20.0 100.0
Total 25 38.5 100.0
Missing System 40 61.5
Total 65 100.0
INFERENCE:
According to the survey most of the investors believe that price and
price variation influences the fluctuation of the market.
Survey indicated that the major influencing factors, seasonal price
variation that influence in short term volatility in the market so table shows that
15.4 % among other variables got for seasonal price variation.
40
8/2/2019 project 2010-2012
41/61
Figure No 6
4.002.000.00
Influence
10
8
6
4
2
0
Frequ
ency
Mean =2.20Std. Dev. =1.19024
N =25
41
8/2/2019 project 2010-2012
42/61
7 .if price and price variation dose not influence commodity futures by various
commodity trading.
Table No .7
Methods of risk avoiding
Source: Primary Data
Options No of Respondent Percentage
By hedging 12 30
By speculation 15
40
By arbitrage8 30
TOTAL35 100
42
8/2/2019 project 2010-2012
43/61
Price and variation
Table No .8
Respondent
Observed
No
.
Expected
No.(O E) (O- E )2 ( O-E )2\E
By hedging
30 30 0 0 0
By
speculation40 30 10 100 3.333
By arbitrage
30
30 - 10 100 3.333
Total
43
8/2/2019 project 2010-2012
44/61
90 90 0 6.666
Source: Primary Data
2 = [(O-E) 2/E] =6.666d. f. = 3-1= 2 Tabulated value = 5.991
Since calculated value of2 = 6.666 is greaterthan thetabulated value 5.991, it is significance. Hence we conclude that the future
trading dose not influence the price and price variation.
8. Are you satisfied about future trading in commodity exchange?
Ranks about satisfaction levels
Table No: 9
Options No of Respondent Percentage
R110 16.66
R215
25
R310 16.66
R410 16.66
R5 10 16.66
R6 5 8.33
TOTAL 60 100
44
8/2/2019 project 2010-2012
45/61
Source: Primary Data
INFERENCE:
According to the survey most of the investors are satisfied above mentioned
options i.e. R1, R2, R3, R4, R5, R6.
Survey indicated that the major influencing factors for commodity futures are
fair price discovery and transparent trading. So it helps investors to track the
current fluctuation in price and proper price discovery.
Figure No .9
45
8/2/2019 project 2010-2012
46/61
satisfied future trding
10
15
10
10
55
future trading
Transparent trading
Fair price discovery
automated trading
system
unique identification
number
to prouide nationwide
reach
to bring trust
Attributes
R1-Transparent trading
R2- Fair price discovery
R3- Automated trading system
R3- Unique identification number
R4- To provide nationwide reach and consistent offering
R5- To bring together the entities that the market can trust
9. Current regulatory mechanism of commodity futures in India
Table No: 10
46
8/2/2019 project 2010-2012
47/61
Source: Primary Data
Options No of Respondent Percentage
R1 10 16.66%
R2 1830%
R3 8 13.33%
R4 12 20%
R5 12 20%
Total 60 100%
47
8/2/2019 project 2010-2012
48/61
Attributes
R1- Limit on net open position as on the close of the trading hours.
R2- Limit on price fluctuation to allow cooling of market in the event of
abrupt upswing or downswing prices.
R3- Special margin deposit to be collected on outstanding purchase or
sales when price fluctuate.
R4- Minimum\maximum prices-these are prescribed to prevent futures
prices from falling below as rising above not warranted prospective supply
or demand.
R5- Skipping trading in certain derivatives of the contract, closing the
market for a special period and even closing out the contract.
Inference:
According to the survey most of the investors are satisfied current regulatory
measures that is above mentioned options i.e. R1, R2, R3, R4, and R5.
Survey indicated that the major influencing factors for commodity futures areMinimum\maximum prices-these are prescribed to prevent futures prices from
falling below as rising above not warranted prospective supply or demand.
Skipping trading in certain derivatives of the contract, closing the market for a
special period and even closing out the contract.
So it helps investors to track the current regulatory measure in price and proper
price discovery.
Figure No.10
48
8/2/2019 project 2010-2012
49/61
0
2
4
6
8
10
12
14
16
18
Repondents
Reguletry
mechanism
R2 R4
attributes
Reguletery mechanism
Series1
49
8/2/2019 project 2010-2012
50/61
Findings and Inferences
The following prerequisites are certain to give a big boost to commodity futures
trading in India:
A.)A negotiable document, may be in demat form, is to be created for the
underlying asset of the futures being traded so that the title of the goods can be
transferred from one individual to another without undertaking the physical
delivery of stocks.
50
8/2/2019 project 2010-2012
51/61
b.) An agency is to be set up to help the seller and buyer by grading the stocks
being offered by them for sale and certify their quality so that the buyer can be
sure of buying them.
C.)There must be a Clearing House that takes care of the commodity that is being
traded in the derivatives exchanges and ensures that quality is maintained till the
stock under the traded contact is delivered to the ultimate buyer, at a reasonable
cost.
D.)Commodities trading must be settled in determined form so that traders from
across the country can trade futures being certain of the underlying commodity in
terms of its quality, grade, quantity and its maintenance during the intervening
period.
E.)Banks can come forward to sanction agriculture produce loans to farmers
against the pledge of warehouse receipts and futures contracts of national
derivatives exchanges.
They should also explore the possibility of offering hedge prospects to farmers on
a pooled basis, with banks as intermediaries between exchanges and farmers and
thus pave the way for active futures trading in agriculture commodities so that
farmers can enjoy the benefit of dependable price discovery well in advance to
their planting and sowing season.
G.) The market must be efficient with widespread awareness amongst various
market players. The liquidity would increase further with a well-diversified basket
of commodities.
51
8/2/2019 project 2010-2012
52/61
I.)The union Finance Minister, in his Budget-2005 speech, pleaded for a single
regulatory regime. It will find very difficult to tackle complexities in the socio
economic dimensions of the fledging commodity future.
J.)Healthy competition is always beneficial to catalyze the growth in any market.
In this case too, the government has to take necessary steps for the
implementation of online commodity trading on the regional exchanges also.
K.)The market should be made broader based by allowing banks and FIIs to
participate in commodity futures. Options should be allowed to be traded as that
will give one more efficient tool to the participants to apply various hedging
strategies for averting their price risks.
CONCLUSION
52
8/2/2019 project 2010-2012
53/61
The agriculture industry requires increasing formation, improved availability of
agriculture inputs, infrastructure facility agricultural business, etc A conductive
environment also helps in bringing cost effectiveness by influencing the existence
of commodity exchange will strengthen the market based trading system, which
could also be used for by the Government. Definitely, commodity exchange will
create an environment where farmers will have many options of selling their
commodities like spot market, future market and future market referred OTC
forward market. Due to future market being executable at national level in
electronic format, integration of banks and institutional traders in commodities
market would create several institutional traders in farmers. Thus MCX is likely
to play a pivotal role in the process enable Second Green Revolution.
With all its attendant benefits, we are confident that the commodity exchange will
initiate the Second Green Revolution by making it the development mantra of
the country in the 21st century. Therefore, the challenge right now for us is to take
the fruits of the commodity futures make a difference by establishing a
sustainable model for the development of kissanof the nation.
Developing countries have large exposure to commodity price risk and can be
eliminated by speculation hedging and arbitrage and seasonal price fluctuation.
Exports are often concentrated in a few primary commodities with positively
correlated price movements. The dependence on a few commodities and uncertain
commodity prices expose such countries to uncertain revenues and expenditures.
This has varied consequences such as affect the government revenue, have an
adverse impact on commodity financing in terms of increased cost of debt or no
or low debt due to poor credit worthiness etc.
The beta calculation reflects a measure of historical alignment of the price of a
stock with that of the market. Hence many regard it as a measurement of past
relationship that cannot be naively used as an estimate of future risk. Why?
Two reasons are commonly given;
To overcome this limitation, some adjustment may be required. A procedure that
is sometimes recommended is to take a weight average of the historical beta, on
53
8/2/2019 project 2010-2012
54/61
the one hand, and 1.0 (the value of market beta) on the other. The weighting
scheme should take into account the degree of historical estimation error and the
dispersion of individual firms around the average. If the historical estimation error
is large, the weight assigned to the historical beta should be small.
The future is certainly bright for the Indian commodities market. Once the much
awaited institutional participation enters the market, it will create speculation,
arbitration and hedging for all kinds of players in the market
SUGGESTION
Delay the transfer of commodities in the name of transferee
Effect take part either directly or indirectly transactions, which are likely
to have effect of artificially, raising or depressing spot or derivatives
contract.
Miss calculation creates a false or misleading appearance of trading,
resulting in reflection of prices which are not genuine.
Buy, sell commodities contracts on his own behalf or on behalf of a person
associated with him pending the execution of the order of his constituent
Indulge in falsification of his books accounts and records for the purpose
of manipulation
54
8/2/2019 project 2010-2012
55/61
55
8/2/2019 project 2010-2012
56/61
BIBLIOGRAPHY
Books Referred:
P. j. Kaufman commodity trading system and methods, john Wiley & sons,
New York, 1978.The author include a chapter on behavioral techniques.
He discusses contrarians strategies and demonstrates the use of the Elliott
wave theory and measurement of moves and correction in future markets.
Future and options in risk management by Terry j.Watsham.
Derivative markets in India edited by susan Thomas.
Websites Visited:
www.mcx.com
www.sbi.com
www.google.com
www.ncdex.Com
www.capitaline.com
56
http://www.mcx.com/http://www.sbi.com/http://www.google.com/http://www.ncdex.com/http://www.capitaline.com/http://www.mcx.com/http://www.sbi.com/http://www.google.com/http://www.ncdex.com/http://www.capitaline.com/8/2/2019 project 2010-2012
57/61
57
8/2/2019 project 2010-2012
58/61
PART- A
Personal Information
SEX MALE FEMALE
AGE GROUP : BELOW 25 YEARS 40 TO 50
25 TO 40 50AND ABOUE
QULIFICATION : BELOW PUC DEGREE
POST GRAOTHERS..
OCCUPATION PVT .EMPLOYEE BUSINESSMAN
GOVT.EMPLOYEE
PROFESSIONAL
ANNUAL INCOME BELOW 25000
RS50000TO75000
RS 25000TO50000 RS
75000&ABOVE
58
8/2/2019 project 2010-2012
59/61
Part B
1. Do you trade in commodity futures?
Yes No
2. If yes, why?
i. Trade on an organized exchange
ii. Standardized contract terms
iii. Follows of daily settlement
iv. Location of settlement
3. Do you think futures trading influence the price and price variation?
Yes No
4. If yes, why?
i. Seasonal price variation
ii. Inter and intra-seasonal fluctuation in price
iii. Short term oscillation in prices
iv. Average prices received by producers and paid by consumer
59
8/2/2019 project 2010-2012
60/61
5. If no, why?
a. By hedging
b. By speculation
c. By arbitrage
6. Are you satisfied about future trading in commodity exchange?
Yes No
7. If yes, please rank from 1 to 6
a. Transparent trading
b. Fair price discovery
c. Automated trading system
d. Unique identification number
e. To provide nationwide reach and consistent offering
f. To bring together the entities that the market can trust
8. If no, comment
i. ----------------------------------------------------------------------
ii. --------------------------------------------------------------------
9. How do you rank current regulatory mechanism of commodity futures inIndia
a) Limit on net open position as on the close of the trading hours.
b) Limit on price fluctuation to allow cooling of market in the event of
abrupt upswing or downswing prices.
60
8/2/2019 project 2010-2012
61/61
c) Special margin deposit to be collected on outstanding purchase or sales
when price fluctuate.
d) Minimum\maximum prices-these are prescribed to prevent futures
prices from falling below as rising above not warranted prospectivesupply or demand.
e) Skipping trading in certain derivatives of the contract, closing the
market for a special period and even closing out the contract.
THAK YOU FOR YOUR KIND CO-OPRATION.