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Commodity Market MSOP Batch - 9

27th Feb to 14th Mar 2014

The Project provides a short summary on various facts related to the “Emerging scenario of Commodity Futures” in respect to the present and practical capital market world.

Prepared by:

Rohit Natani

220558771 / 08 / 2007

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ACKNOWLEDGEMENT

At this point of time I would like to express my gratitude to all those who gave me their support to complete this project

I am grateful to my Sir Dr. Girish Goyal and Mr. Shyam Agarwal for giving me permission to commence this project in the first instance and to do the necessary study and research. I want to thank both and other faculty members for all their professional advice, value added time, effort, and expertise help, support, interest and valuable hints that encouraged me to go ahead with my project.

I am deeply indebted to my colleagues for their meticulous planning, layout, presentation and above all for their consideration and time.

My heartfelt appreciation also goes to my friends for their stimulating suggestions and encouragement which helped me at each level of my research and in writing of this project.

Especially, I would like to give my special thanks to my parents, family members and god whose patient love enabled me to complete this work.

I have tried my best to enclose practical approach of commodity market in this project instead of getting deep into theoretical part.

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CONTENTS

Sr. No. Topic Page No.

1. Introduction 4-7

2. Definitions 8-11

3. Working of commodity market 12

4. Process of trading 13-14

5. Demo and timings of trading 15

6. Details about commodity market 16-20

7. Myths of commodity market 21-24

8. What can commodity market offers? 24-25

9. Do`s and Don`ts for dealing in commodity futures 26-27

10. Rights of clients in commodity market 27

11. Beware of the following 28

12. Case Studies 28-30

13. Conclusion 30-31

14. Bibliography 32-37

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Commodity Market - Introduction

Ever since the drawn of civilization, commodity trading has become an integral

part of mankind. The first and foremost reason is that commodity represents the

fundamental elements of lifestyle of human beings. In the early days, people used to

exchange goods for goods, which was called as ‘Barter System’. With the advancement

of civilization, trading system has gone through various changes and has now entered

into an era of Future trading besides existence physical trading across the world.

The history of Commodity Future trading can be traced back to 1688 with the

introduction of Future trading in rice in Japan. This was followed by an increased

participation in commodity derivatives, especially in Futures, in the industrialized

countries like America and Britain. All the countries opened the avenue for introduction

of Future trading in commodities in 19th century. Major commodity Future trading

platforms opened in the world are Chicago Board of Trade (NYBOT) and New York

Mercantile Exchange (NYMEX).

A Commodity derivative is a contract which derives its value from an underlying

commodity. The main purpose of Future market is to provide a mechanism for

successfully managing the price risk associated with commodities. Future markets

provide a platform for buyers and sellers to trade in a huge number of diverse

commodities such as agricultural products, metals and energy. These markets are not

only meant for hedgers, speculators and arbitrages, but also for retail investors who

want to trade in booming commodity market.

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A Commodities exchange is an exchange where various commodities and

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

agricultural products and other raw materials (like, Jeera, sugar, Chilli, Chana, Energy

Sector Crude oil, Metals-Copper, Zinc, Lead, Bullions-Gold, Silver, etc.) and contracts

based on them. These contracts can include spot prices, forwards, futures and options

on futures. Other sophisticated products may include interest rates environmental

instruments, swaps, or ocean freight contracts.

Commodities exchanges usually trade futures contracts on commodities.

Speculators and investors also buy and sell the futures contracts in attempt to make a

profit and provide liquidity to the system. However, due to the leverage provided by the

exchange to traders those participating in commodity futures trading face substantial

amounts of speculative risk.

A futures contract is a standardized contract between two parties to exchange a

specified asset of standardized quantity and quality for a price agreed today (the

futures price or the strike price) but with delivery occurring at a specified future date,

the delivery date.

The contracts are traded on a futures exchange. The party agreeing to buy the

underlying asset in the future, the "buyer" of the contract, is said to be "long", and the

party agreeing to sell the asset in the future, the "seller" of the contract, is said to be

"short". The terminology reflects the expectations of the parties -- the buyer hopes the

asset price is going to increase, while the seller hopes for a decrease. Note that the

contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience

reflecting the position each party is taking (long or short).

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Indian scenario

The commodity derivatives markets in India are as old as those of the US. The

origin of commodity derivatives markets in India can be traced back to 1875, when

Bombay Cotton Trade Association Ltd., was set up to start trading in cotton Futures.

Subsequent to this, many other associations have started Future trading in commodities

at different places.

For example, the Futures trading in oilseeds started in 1900 at Bombay, raw jute

and jute products in 1912 in Calcutta, wheat in Hapur in 1913, bullion in Bombay in

1920. However, in 1939, the Option trading in cotton was banned by the government of

Bombay to restrict the speculative activity in the cotton market. in subsequent years,

forward trading in various commodities like oilseeds, food grains, vegetable oil, sugar

cloth were also prohibited.

India’s commodity exchanges have come a long way since their opening up in the

early twenty first century. In India, three national level exchanges namely

1. Multi Commodity Exchange of India (MCX)

2. National Commodity and Derivatives Exchange (NCDEX) and

3. National Multi Commodity Exchanges (NMCX)

These are operating to cater to the needs of Indian investors. Apart from these national

level exchanges, nearly 20 regional exchanges are in operation, to deal with specified

commodities in that region.

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Present Scenario

- Ban completely lifted in 2003 - Emergence of national level de-mutualised online multi-commodity exchanges - 3 National and 20 regional exchanges - Trade in 60 commodities compared with just 8 in 2000 - Growth exceeds 7-8 times in FY09 over FY10

Structure of Indian Commodity Market

Forward Markets Commission (FMC) is the regulator of the Commodity Futures Market.

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Definations

Arbitrage The simultaneous purchase and sale of similar Commodities in different markets to take advantage of a price discrepancy.

Backwardation A futures market in which the relationship between two delivery months of the same commodity is abnormal. The opposite of Contango. Basis The difference between the current cash price of a commodity and the futures price of the same commodity.

Bear Market A market in which prices are declining. A market participant who believes prices will move lower is called a “bear.” A news item is considered bearish if it is expected to result in lower prices.

Bid An expression of willingness to buy a commodity at a given price. The opposite of Offer.

Broker A company or individual that executes futures and options orders on behalf of financial and commercial institutions or the general public.

Bull Market A market in which prices are rising. A market participant who believes prices will move higher is called a “bull.” A news item is considered bullish if it is expected to result in higher prices.

Clear The process by which a clearing house maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing members.

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Clearinghouse An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, collecting and maintaining margin monies, regulating delivery and reporting trade data. The clearinghouse becomes the buyer to each seller (and the seller to each buyer) and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.

Clearing Member A member of an exchange clearinghouse responsible for the financial commitments of its customers. All trades of a non-clearing member must be registered and eventually settled through a clearing member.

Closing Price At the end of each day’s trading, the system calculates the weighted average price of all trades of that contract done during the last 30 minutes of a trading session.

Commission A fee charged by a broker to a customer for executing a transaction.

Contango A futures market in which prices in succeeding delivery months are progressively higher. The opposite of Backwardation.

Delivery The transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of cash commodity. Some futures contracts, such as stock index contracts, are cash settled.

Expiration Date Generally the last date on which an option may be exercised. It is not uncommon for an option to expire on a specified date during the month prior to the delivery month for the underlying futures contracts.

FMC Forward market commission.

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Futures Contract It is an agreement between two parties to buy or sell a specified quantity and quality of an asset at a certain time in the future at a price agreed upon at the time of entering into the contract on the futures exchange.

Forward contract It is an agreement between two parties to buy or sell an asset at a future date for price agreed upon while signing the agreement. Forward contract is not traded in the exchange.

Long One who has bought futures contracts.

Margin An amount of money deposited by both buyers and sellers of futures contracts and by sellers of options contracts to ensure performance of the terms of the contract (the making or taking delivery of the commodity or the cancellation of the position by a subsequent offsetting trade). Margin in commodities is not a down payment, as in securities.

Maintenance Margin A set minimum margin (per outstanding futures contract) that a customer must maintain in his margin account to retain the futures position.

Mark-to-Market To debit or credit a margin account on a daily basis based on the close of that day’s trading session. In this way, buyers and sellers are protected against the possibility of contract default.

Market Order An order to buy or sell a futures or options contract at whatever price is obtainable when the order reaches the trading floor.

NBOT National Board of Trade

Open Interest The total number of futures contracts of a given commodity that have not yet been offset by an opposite futures transaction nor fulfilled by delivery of the commodity.

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Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

Overbought A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors.

Oversold A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors.

Price Discovery The process of determining the price of a commodity by trading conducted in open outcry at an exchange.

Settlement Price The last price paid for a futures contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries.

Short One who has sold futures contracts

Speculator A market participant who tries to profit from buying and selling by anticipating future price movements.

Spot Usually refers to a cash market price for a physical commodity that is available for immediate delivery. Volume The number of purchases and sales of futures contracts made during a specified period of time, often the total transactions for one trading day.

Warehouse Receipt A document guaranteeing the existence and availability of a given quantity and quality of a commodity in storage; commonly used as the instrument of transfer of ownership in both cash and futures transactions.

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Working of Commodity Market

Relationship between Clients and Government

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Process of Trading

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1. Offline Trading

2. Online trading

Types of Trading

Take a position in the commodity

Liquidate the position by squaring up

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Demo of Trading

Timings

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Details about commodity market

Regulating Body - The commodity futures traded in commodity exchanges are regulated

by the Government under the Forward Contracts Regulations Act, 1952 and the Rules

framed there under. The regulator for the commodities trading is the Forward Markets

Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs

Food and Public Distribution.

Forward Markets Commission (FMC):- It is statutory institution set up in 1953 under

Forward Contracts (Regulation) Act, 1952. Commission consists of minimum two and

maximum four members appointed by Central Govt. Out of these members there is one

nominated chairman. All the exchanges have been set up under overall control of

Forward Market Commission (FMC) of Government of India.

Two types of Commodity Market prevails in India

1. MCX

The Multi Commodity Exchange of India Limited (MCX), India’s first listed exchange, is a

state-of-the-art, commodity futures exchange that facilitates online trading, and

clearing and settlement of commodity futures transactions, thereby providing a

platform for risk management. The Exchange, which started operations in November

2003, operates within the regulatory framework of the Forward Contracts (Regulation)

Act, 1952.

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MCX has been certified to three ISO standards including ISO 9001:2008 quality

management standard, ISO 27001:2005 information security management standard and

ISO 14001:2004 environment management standard.

2.NCDEX

National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally

managed on-line multi commodity exchange. The shareholders of NCDEX comprises of

large national level institutions, large public sector bank and companies.

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

commenced its operations on December 15, 2003.

As on March 30, 2013, the Exchange offered 31 contracts for trading of which: 23

agricultural commodities, 3 precious metals, 2 energy, 1 polymer and 2 other metals.

The top 5 commodities, in terms of volume traded at the Exchange, were Soya oil,

Soyabean, RM seed, Chana and Castor Seed.

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COMMODITIES TRADED World-over one will find that a market exits for almost all the commodities known to us. These commodities can be broadly classified into the following:

METAL Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc

BULLION Gold, Gold HNI, Gold M, I-gold, Silver, Silver HNI, Silver M

FIBER Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn, Kapas

ENERGY Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour Crude Oil

SPICES Cardamom, Jeera, Pepper, Red Chilli, Turmeric PLANTATIONS Areca nut, Cashew Kernel, Coffee (Robusta), Rubber PULSES Chana, Masur, Yellow Peas PETROCHEMICALS HDPE, Polypropylene(PP), PVC

OIL & OIL SEEDS

Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed, Soy meal, Soy Bean, Soy Seeds

CEREALS Maize

OTHERS Guar gum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M-30, Sugar S-30

INDIAN EXCHANGES The following are the list of exchange and commodities in which futures contracts are traded in India are as follows S.NO EXCHANGE COMMODITY

1 India pepper & Spice Trade Association , Kochi(IPSTA)

Pepper (both domestic and international contracts)

2 Vijay Beopar chamber Ltd., Muzaffarnagar Gur

3 Rajdhani oil & oilseed exchange ltd, Delhi

Gur, Mustard seed its oil & oilcake

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4 Bhatinda Om & oil exchange ltd ,Bhantada Gur

5 The chamber of commerce ,Hapur Gur , potatoes and Mustard seed

6 The Meerut Agro Commodity Exchange ltd., Meerut Gur

7 The Bombay Commodity Exchange Ltd., Bombay Oilseed complex

8 Rajkot seeds, oil & Bullion Merchants Association , Rajkot

Castrol seed, Ground nut, its oil & cake, cottonseed its oil &cake, cotton & RBD Palmolein

9 The Ahmedabad Commodity Exchange, Ahmedabad

Castrol seed, cottonseed , its oil and oilcake

10 The East India Jute & Hussian Exchange Ltd., Calcutta Hessian & sacking

11 The East India cotton Association Ltd., Calcutta Cotton

12 The Spices & Oilseeds Exchange Ltd, Sangli Turmeric

13 Kanpur Commodity Exchange Ltd., Kanpur

Rapeseed/Mustard seed, its oil and cake

14 National Board of trade, Indore

Soya seed, Soya oil and Soya meals. Rapeseed/Mustard seed its oil and oilcake and RBD Palmolien

15 The First Commodities Exchange of India Ltd., Kochi

Copra/Coconut, its oil& oilcake

16 Central India Commerce Exchange Ltd., Gwalior Gur and Mustard Seed

17 E-Sugar India Ltd., Mumbai Sugar

18 National Multi –Commodity Exchange of India Ltd., Ahmedabad

Oilseed complex and Rubber , sugar, Aluminum, nickel ,Zinc, Copper, Lead. tin ,pepper, Gram and Sacking

19 Coffee Futures Exchange India Ltd.,Bangalore Coffee

20 Surendranagar Cotton oil & Oilseeds, Surendranagar Cotton,. Cotton seed, Kapas

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21 E-Commodities Ltd.,New Delhi Sugar 22 Bullion Merchants Association , Bikaner Mustard seed its oil & oilcake

23 Multi Commodity Exchange (MCX), Mumbai Metals & Agri Commodities

24 National Commodity and Derivation Exchange ( NCDEX), Mumbai Metals & Agri Commodities

25 National Multi Commodity Exchange (NMCE) Metals & Agri Commodities

26 Indian Commodity Exchange ( ICEX) Metals & Agri Commodities

Participants of Commodity Market

1. Hedgers

- A hedger buys or sells in the futures market to secure the future price of a commodity intended to be sold at a later date in the cash market. -This helps to protect against price risks. -They have economic interest in the underlying assets and exposed to risk of fluctuations of prices of the underlying assets. 2. Speculators

- They are the participants who have no economic interest in the underlying assets. -They participate in the derivatives market to make a short term profits by taking call on direction of the price movements. For eg: Long position or Short position. - They are ready to take risk. -They are the one who brings depth to the market.

3. Arbitragers

- They are those who also have no economic interest in the underlying assets but they participate in the derivatives market to make a short term profits from difference in the price of an assets in two different market.

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For eg: Buy in the market which offers the assts at lower price and sell the asset simultaneously in other market which offers higher price.

Myths on commodities trading

In recent past, we notice that the regulators banned trading in few commodities,

thereby creating misconception in the minds of traders about the commodities market.

Hence, the following is an attempt to demystify the common myths prevailing among

the investors.

1) Commodity market is too complex to understand:

Commodities markets are not complex as the product dealt in are natural and therefore

cannot be artificially manipulated. The demand and supply also depends upon economic

factors. It is easier to understand commodities as in our daily life we are familiar with

commodities, we know the ruling prices of these commodities in the market, while in

stocks, we are not fully aware about internal affairs of the company.

2) Only farmers are interested In trading and also only they should be trading:

It is in correct to say that farmers would use this market. Actually, the farmers only use

the commodity future prices as a tool to decide which crop to grow and to what extent

and some large formers would use this market to hedge their risk through an

intermediary. These intermediaries would normally be the same commission agents

who help formers to sell their crop in cash market. Apart from farmer, others related to

commodity trading either directly or indirectly can participate in trading to hedge their

price risk.

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3) Commodity markets are operating to serve the needs of speculators and not

of the real investors:

Commodities markets existence serves for price discovery and price risk

management. Through this platform everybody related to commodities can find better

price discovery mechanism. Producers and consumers of the commodity can minimize

their price risk by way of hedging. However, speculators constitute only one dimension

the market. They can work only because someone is hedging their risk in the market.

This market provides the price signals to producers as well as consumers to meet their

long term requirement. These price signals are not available to users unless there is a

commodity futures exchange and in its absence, the markets have price fluctuations.

Price stabilization comes from the price discovery process when market participants

react positively to the information available to decide a price.

4) Large membership is required to run commodity exchanges:

It is a misconception that to be a successful commodity exchange it needs large

number of members. Success of any commodity exchange depends upon good and well-

spread brokerage houses and there penetration levels. Once the commodity futures

trading is well established, then the services will be broadened to many intermediaries

with separate trading rights and have few members with separate trading rights and

have few members with clearing rights like banks.

5) Commodities are only cash settled contracts:

Unlike equity market, commodities traded through exchanges are deliverable on

expiry. To facilitate smooth delivery process, the Forward Markets Commission (FMC)

has categorized the delivery mechanism into three dimensions viz., compulsory delivery

contracts, sellers’ option contracts. On expiry of the contracts, the open positions will be

either settled by delivery or cash depending upon sellers and buyers. Since the delivery

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process takes long time to materialize and one has to keep track of all the delivery

process transactions, nobody wants to take burden of delivery handling process.

Note:

Compulsory delivery option- it is an option where on the expiry of contract of a

particular commodity, all the open outstanding positions are closed out by way of

delivery. Heavy penalties are levied in case of default in delivery.

Seller option – it is an option where the sellers has right to deliver the particular

commodity on the expiry of the contract. In this option seller has to give his intention 5

working days prior to the expiry of the contract. The client who has not delivery

intention and having open position at the expiry of the contract has to bear a stipulated

penalty.

Both Option/Intention Matching – in both the option contract the delivery happens only

case of where the intention from buyer as well as seller received for a prescribed

commodity to the extent of matched quantity. These contracts are generally cash

selected and there is no penalty for open position.

6) The quality of produce stored in godown is guaranteed by

depository/warehouse:

Quality of produce is stored in exchange designated warehouse is not

guaranteed by anyone until the standards in warehousing management improve to

ensure preservation of the quality of goods stored. If the quality is not assured no

benefit accrues to the user. Therefore, the exchange should provide a system, whereby

the seller must ensure quality certification before tendering delivery and the buyer must

have option to recheck the at the time of collecting delivery and in case of any

discrepancies compare to the contract specifications, they should have an option to

reject it. Worldwide no demat delivery is operational in commodity.

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7) Commodity future markets are more risky and so it is not advisable to trade

in commodities:

While scrip price can go down even by 30-40 percent in a single trading session, it

cannot happen in commodity futures price is based on the intrinsic value of the

commodity. For instance, a scrip future can go down from Rs.4000 to Rs.2800 in a

trading session, but Gold Feb 2004 contract would normally not come down from

Rs.10300 to Rs.8400 in a single trading session, because the inherent value of the gold

would not fall so drastically. Therefore it would volatile than stocks.

What can commodity market offer?

If you are an investor, commodities futures represent a good form of investment

because of the following reasons..

High Leverage – The margins in the commodity futures market are less than the F&O

section of the equity market.

Less Manipulations - Commodities markets, as they are governed by international

price movements are less prone to rigging or price manipulations.

Diversification – The returns from commodities market are free from the direct

influence of the equity and debt market, which means that they are capable of being

used as effective hedging instruments providing better diversification. If you are an

importer or an exporter, commodities futures can help you in the following ways…

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Hedge against price fluctuations – Wide fluctuations in the prices of import or

export products can directly affect your bottom-line as the price at which you

import/export is fixed before-hand. Commodity futures help you to procure or sell the

commodities at a price decided months before the actual transaction, thereby ironing

out any change in prices that happen subsequently.

If you are a producer of a commodity, futures can help you as follows:

Lock-in the price for your produce – If you are a farmer, there is every chance that

the price of your produce may come down drastically at the time of harvest. By taking

positions in commodity futures you can effectively lock-in the price at which you wish to

sell your produce

Assured demand – Any glut in the market can make you wait unendingly for a buyer.

Selling commodity futures contract can give you assured demand at the time of harvest.

If you are a large scale consumer of a product, here is how this market can help you.

Control your cost – If you are an industrialist, the raw material cost dictates the final

price of your output. Any sudden rise in the price of raw materials can compel you to

pass on the hike to your customers and make your products unattractive in the market.

By buying commodity futures, you can fix the price of your raw material.

Ensure continuous supply – Any shortfall in the supply of raw materials can stall

your production and make you default on your sale obligations. You can avoid this risk

by buying a commodity futures contract by which you are assured of supply of a fixed

quantity of materials at a pre-decided price at the appointed time.

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DO’S AND DON’TS FOR DEALING IN COMMODITY FUTURES

Do`s Don`ts 1. Read the FMC/ Exchange guidelines and circulars available on the websites of the Exchanges

1. Do not fall prey to market rumors and tips

2. Refer to Forward Contracts (Regulation) Act {FC(R)A}, 1952 before dealing in futures trading in commodities

2. Do not act based on bull/bear run of market sentiment in the market.

3. Go through all rules, regulations, bye-laws and circulars issued by the Exchange available on the websites of the respective exchange

3. Do not go by any explicit/ implicit promise made by analysts/ advisors/ experts/ market intermediary until convinced.

4. Read commodity contract specifications and the concerned circulars carefully including recent modifications, if any.

4. Do not go by the reports/ predictions made in various print and electronic media without verification.

5. Understand the commodity and price impacting parameters before participating in commodity futures

5. Do not trade in any commodity without knowing the risk and rewards associated with it.

6. Study historical and seasonal price movement and keep the track of Government Policy announcements.

6. Do not trade based on long-term price prospects of the commodity without understanding your short-term risk bearing capacity

7. Be aware of the risks associated with your positions in the market and your ability to respond to margin calls on them as un favorable price movements result into higher margin requirement.

7. Do not let risks against your positions accumulate in the market beyond your capacity to bear them.

8. Collect/pay mark-to- market margins on your futures position on a daily basis from/to your Trading Member as per the Exchange rules and regulations

8. Do not miss on keeping track of your financial and contractual obligations against your positions

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9. Trade only through Exchange Registered Member and always insist on contract note against a confirmed trade.

9. Do not undertake off-market transactions in commodities. It is both risky and illegal

10.Insist on reading and signing a ‘Risk Disclosure Agreement’.

10. Do not start trading before reading and understanding the Risk Disclosure Agreement.

11. Pay required margin in time and understand the consequences of non payment.

11. Do not delay payment/ deliveries of commodities to Member.

12. State clearly to the Member who will be placing orders on your behalf

12. Do not give authority to the Member of the Exchange to make ‘sale’ and ‘purchase’ decisions on your behalf and also do not surrender the right of receiving contract notes on a daily basis. Portfolio Management Schemes (PMS) are not allowed in commodity market.

13. Ensure that the Contract Note contains all the relevant information, such as Member Registration Number, Order No., Order Date, Order time, Trade No., Trade Rate, Quantity, and Arbitration Clause.

13. Do not accept unsigned/ duplicate contract note/ confirmation memo. Do not accept contract note/ confirmation memo signed by any unauthorized person.

Rights of the Clients in Commodity Market

1. In case of any dispute with a Member regarding the trades done on a Commodity Exchange, the client can contact the Exchange for suitable redressal as per the byelaws of the Exchange including use of arbitration mechanism of the Exchange 2. All rights are available to a client for all exchange-traded transactions for which the client must have a duly authorized contract note of the broker. 3. Approach the Exchange Management or the FMC for redressal of the grievances.

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BEWARE OF THE FOLLOWING

1. Any person who promises you high returns in a short span of time. No schemes for assured returns are allowed in commodity markets.

2. Dabba’ (Bucket Shops). Dabba trading (trading outside the exchange platform) is illegal, punishable under law and highly risky.

3. Advices through television or print media. They are not the opinion of the channel or publisher but of the the individual speaker/writer.

4. SMS’s/Emails/rumors/and trading tips. Please do not be lured by such sources of information promising quick gains and unrealistic high returns.

5. Advice available on Websites/Blogs/astrology predictions or /Newspaper. Use of such unconfirmed information exposes one to undue risk.

Case Study Not much work has been existing in literature pertaining to commodity exchanges, particularly with respect to the objectives that the present study seeks to accomplish. As such, effort has been made in this chapter to review available studies pertaining to any aspect of commodity exchanges, and the studies related to the organizational structures of institutions. The intra-state spatial integration of rice markets in India was investigated by Ghosh and Madhusudan (2000) who used ML method of co-integration. Intra-state regional integration of rice markets was evaluated by testing the long run linear relationship between the prices of the state-specific variety of rice quoted in spatially separated locations in four selected states. The co integration results for Uttar Pradesh indicated that the regional markets are integrated to such an extent that the Law of one price (LOP) holds for III and IV ARWA variety of rice. However, no evidence was found in favor of the LOP for the coarse or common variety of rice marketed in Bihar, Orissa and West Bengal, even though, the regional rice markets were found to be integrated. The results

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pertaining to inter-state regional integration of rice markets represented by four market centers chosen from the four selected states, revealed that even though the markets are integrated, the LOP does not hold. Kumar Ranjit (2000) analyzed the relationship between prices of rice in domestic market (New Delhi) with major rice markets of the world viz., Bangalore and Houston (USA) by using the co integration approach. The results clearly revealed that all the price series were not stationary and were not integrated in the long run. Naik and Jain (2001) studied that on assessing the efficiency of major commodity futures markets in India using the co integration theory and they concluded that a major reason for the poor performance of Indian futures market could be the lack of adequate participation of hedgers in these markets. The management of the exchanges and the forward markets commission has to find ways to attract hedgers in order to improve the performance of these markets. Madlapure (2002) analyzed the business turnover, and operational efficiency of dairy cooperative societies in Konkan Region, Maharashtra, India. Results reveal that: the sample cooperative societies have more share capital and borrowings compared to the progressive societies, but the latter have more accumulated funds; the cooperative societies do their business with very small working capital but with great efficiency; and the progressive societies have lower turnover compared to the other societies. Basab Dasguptha (2004) in his study on the role of commodity future market in spot price stabilization, production and inventory decisions with reference to India shows the future price elasticity of production has always been greater or equal to one and increasing profit by increasing price is not possible. It also shows that the future price elasticity of inventory was inversely related with the carrying cost. Therefore, on unnecessary hoarding will increase the carrying cost leading to a lower responsiveness of inventory to future prices. Jairatt and Kamboj (2005) reported that the total commodities traded in the agricultural commodities accounted for nearly 95 per cent during 2002-03, which hovered around 92 per cent in 2004-05. He mentioned that the removal of ban, share of national commodity exchanges increased from nearly 6 per cent and that of regional exchanges declined from 94 to 27 per cent during the period.

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Aviral Chopra and Blesser (2005) studied the Price Discovery in the Black Pepper Market in Kerala, India. They explored empirically the incidence of price discovery for black pepper in spot market, the nearby and the first distant future market by using daily data employing the method of co integration and directed a cyclic graphs. The study reveals that price information is discovered in the future market and the results in these three markets are tied together in one co integration relationship, spot and first distant future contract do not respond to perturbations in the co integrating on by the near future contract adjust to shock in the long run relationships hoarding these three market together.

CONCLUSION

- As majority of Indian investors are not aware of organized commodity market. - Many of them have wrong impression about commodity market in their minds. - Concerned authorities have to take initiative to make commodity trading process

easy and simple. - Along with the government efforts NGOs should come forward to educate the

people about commodity market and to encourage them to invest in to it. - There is no doubt that in near future commodity market will become hot spot for

Indian farmers rather than spot market.

Figure 1 Figure 2

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Figure 3

All the above diagrams shows that there a massive increase in the volume and value of various commodities which are traded in various commodity exchanges. Figure 1- It shows the value and share of the major group of commodities traded in the FY 2012-2013.

Commodities Value(in lakhs crore) %

Energy Product 37.68 22 Agricultural Commodities 21.56 13

Base Metals 32.60 19 Bullion 78.63 46 Total 170.47 100

Figure 3- This diagram shows the annual growth of commodity market in India from 2002-03 to 2010-11. In Volume: 100 lakh tonnes(Estimated) in 2002-03 to 9,000 lakh tonnes(Estimated) in 2010-11. In Value: 10,000 crore(Estimated) in 2002-03 to 67,00,000 crore(Estimated) in 2010-11. It shows that the people have traded a lot through commodity market and earned their livelihood.

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BIBLIOGRAPHY

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Impact of Futures Trading on Indian Agricultural Commodity Market by Dr. Kedar nath Mukherjee

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Nath, G. C. and Lingareddy, T. (2007), Commodity derivatives contributing for rise or fall in risk, Working Paper Raizada, G. and Sahi, G.S. (2006); Commodity Futures Market Efficiency in India and Effect on Inflation; Working Paper, Indian Institute of Management (Lucknow), India Sahadevan, K. G. (July 2002) Saving agricultural commodity exchanges: growth constraints and revival policy options Economic and Political Weekly 37(30) 3153–60 36 Sahi, G S ( ); Influence of Commodity Derivatives on Volatility of Underlying; Working Paper, Indian Institute of Management (Lucknow), India Sen Abhijit (2008), Report of the Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices, Government of India Sen, S. and Paul, M. (2010); Trading In India’s Commodity Future Markets; Working Paper, Institute For Studies In Industrial Development Singh, J.B. ( ); Futures Markets and Price Stabilization - Evidence from Indian Hessian Market; Working Paper, SGGS College of Commerce (University of Delhi), Delhi, India

List of Periodicals

1. Daily (1.) The Times Of India (2.) Hindustan Times (3.) Rajasthan Patrika (4.) Dainik Bhaskar (5.) The Economics Times (6.) The Financial Express (7.) Business Line

2. Weekly (1.) Business Week (2.) Commerce (3.) Economic and Political Weekly (4.) Indian Trade Journal

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3. Monthly (1.) RBI – Bulletin (2.) SBI – Monthly Review (3.) Indian Journal Of Commerce

4. Yearly (1.) Economic Survey, New Delhi (2.) RBI – Annual Reports (3.) RBI – Report on Currency and Finance

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