Indian Commodity Markets

Topics
Commodity markets overview

Global Commodity markets

Commodity Markets
Indian Commodity markets

Regulations and Risk management

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INDIA – Macro-Economic Indicators

z One of world’s fastest growing

significant economies
z GDP growth rate > 8% pa
z Forex reserves > $ 275 billion
z Population one billion:>110 cr.
crores growing at 1.5% pa
z Third largest producer of food

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 Commodities- Defined

z Goods with economic value; traded

in bulk; usually raw material for
further processing;
z Agri: Food crops, non-food crops;
z Non-agri: metals, energy, polymers
z Others: cattle head, orange juice

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 What is a Commodity ?

ƒ Commodity includes all kinds of goods

ƒ Commodity futures contracts are
regulated under the Forward Market
Contracts (Regulation) Act, 1952
ƒ FCRA defines “goods” as “every kind of
movable property other than actionable
claims, money and securities”

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Commodities Segment wise

COMMODITIES

Metals Edible Oils Energy Softs Other Agri.

Agri.
Comm.
• Crude Palm Oil • Wheat
• Gold • Brentcrude • Cotton
• Soy Oil • Guar Seed
Oil
• Silver • Mustard Oil • Sugar • Soy Beans
• Furnace Oil
• Steel • Silk • Castor
• Mustard
•Copper • Gur
• Urad
•Nickel • Rice
•Tin • Chana Etc…..

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7
World’s Major
Commodity Exchanges

NCDEX

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Major Global Commodity Exchanges

z CBOT – Chicago Board of Trade (1848)

z Oldest existing commodity exchange in the world
z Initially started with agricultural commodities like corn,
wheat, soybeans and oats
z Now trading in non-storable agricultural commodities
and non-agricultural products also
z Electronic trading introduced in 1994 after 150 years of
existence
z NYMEX
z Two divisions
z NYMEX division trading in energy and platinum and
COMEX division trading in other metals. 9
Major Global Commodity Exchanges

z CME – Chicago Mercantile Exchange (1898)

z Largest futures exchange in the Us and the largest futures
clearing house in the world for futures and options trading
z Introduced the first financial futures
z Most volumes in interest rate futures, stock indices and
foreign exchange futures
z LME – London Metal Exchange (1877)
z World’s premier non-ferrous metals market, with highly
liquid contracts
z IPE – International Petroleum Exchange
z SIMEX – Singapore International Monetary Exchange
z Contracts in different Fuels and Gold
z SICOM – Singapore Commodity Exchange – various
rubbers and robusta coffee 10
Major Global Commodity Exchanges

z KLCE – Kuala Lumpur Commodity Exchange

z Non-fuel commodities
z First exchange to start crude palm oil contracts in 1980
z Brazil – Bosla de Mercadorias and Futuros – US$
denominated coffee, soyabean, live cattle, feeder
cattle, cotton, crystal sugar, corn and gold
z Buenos Aires Grain Exchange, Australia – 1854
– one of the oldest in the world
z Grain futures started in 1907
z Wheat, maize, sunflowers, soybeans,
z US$ denominated contracts
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Evolution of Commodity Derivatives

z Age-old phenomenon
z 12th century BC: China, Egypt, Austria, India and Japan
used forward market.
z In 17th Century, Japanese Rice Farmers have used
futures market to secure the future value of their
production.
z 1848 – CBOT
z 1875 – Bombay Cotton Traders Association
z 1919 – Calcutta Hessian Exchange Ltd which was
named in 1945 as EIJHE with the merger of East India
Jute Association Ltd

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 Indian Context - Various
Committees
z Khusro Committee
z The Khusro Committee (June 1980) had recommended reintroduction of
futures trading in most of the major commodities , including cotton, kapas,
raw jute and jute goods and suggested that steps may be taken for
introducing futures trading in commodities, like potatoes, onions, etc. at
appropriate time. The government, accordingly initiated futures trading in
Potato during the latter half of 1980 in quite a few markets in Punjab and
Uttar Pradesh
z Kabra Committee (1994)
z Reintroduction of futures trading in various commodities like Basmati
Rice, Cotton and Kapas, Raw Jute and Jute Goods, Groundnut ,
rapeseed/mustard seed , cottonseed , sesame seed , sunflower seed ,
safflower seed , copra and soybean , and oils and oilcakes of all of them,
Rice bran oil, Castor oil and its oilcake, Linseed, Silver and, Onions.
z Upgradation of existing futures exchanges
z Upgradation of facilities in the physical commodities markets also by way of
improving the quality of warehousing etc.
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Evolution of Indian Commodity
Derivatives
z 1969 – Ban on Commodity Futures
z 1990s – many committees appointed to
study need of commodity futures trading
z 1997 – invitation to set up NMCEs
z 2003 – Ban totally lifted, 54 commodities
freed up

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Pre-Requisite for Setting up of a
Commodity Exchange

z These multi-commodity exchanges have the following

essential features.
z De-mutualized form of organization
z On-line trading and clearing system with national reach
z Delivery of underlying commodity backed by a warehouse receipt
z Real time price and trade information dissemination
z Transparency in operations
z Professional management
z Participation of reliable intermediaries such as Banks/ Institutions/
Warehouses
z 3 NMCES –-- NMCE, MCX and NCDEX

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 Commodity Exchanges
National Commodity
Exchange
1 Compulsory online trading
2 exchange should be
demutualised
3 exchange is recognised on a
permanent basis
4 All commodities permitted by
government for futures trading
can be traded
Regional Commodity
Exchange
No compulsion for online trading
exchange need not be
demutualises
Exchange is recognised for a fixed
period, after which it has to apply
for re-registration
Exchange has to apply for each
commodity for futures trading.
Sensitive commodities like gold
and silver, rice and wheat are not
permitted for trading
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Objectives of Commodity
Futures Trading

z Leads to price discovery and Price Risk

Management
z Buyers and sellers at the futures exchanges conduct
trading based on their assessment of inputs regarding
specific market information, expert views and
comments, the demand supply equilibrium, government
policies, inflation rates, weather forecast, market
dynamics, hopes and fears
z Obtaining protection from uncertain adverse price
movements
z Provides hedging option
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 Investment in Commodities.. Why?

• A smart Investment choice

• Risk Adjusted returns of a portfolio comprising
commodities can be better than a pure equity
or bond portfolio
• Volatility is much lower in the commodity
market compared with that in equities and
bonds
• Commodity market has little correlation with
the equity and bond markets.

• Thus, commodity futures are ‘an other asset class’ to

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traditional equity and bond market investors.
Diversification Benefits
Risk Adjusted Returns for the period 1997-2003, in %

Prtfolio Structure Absolute Risk of Adjusted

cumulative portfolio Returns
returns

100% stocks 73.7 24.3 3.02

50% stocks + 50% gold 47.8 14.37 3.33
50% stocks + 50% silver 48.3 13.29 3.63
100% gold 21.8 10.89 2
100% silver 22.9 13.14 1.74
100% bonds 25.2 7.92 3.18
50% bonds + 50% gold 23.5 8.79 2.67
50% bonds + 50% silver 24 6.58 3.65

source: NCDEX 19
 Volatility comparison - Summary

Average annual volatility

Sensex or Nifty 25-30%
Govt Sec Index 5-10%
Gold 12-18%
Silver 15-25%
Cotton 10-12%
Oil seeds 15-20%
Commodities are less volatile compared to
equity market, but more volatile as compared
to G-Sec’s
source: NCDEX and www.ficci.com - conference on commodity derivatives 20
Correlation coefficients in Indian Markets

Gold Silver Stocks Bonds

Gold 1 0.55 -0.09 -0.028
Silver 1 -0.06 -0.015
Stocks 1 -0.112
Bonds 1
Data: LBMA bullion prices, NSE Nifty, NSE G-Sec Index
Source: NCDEX

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Objectives of Commodity
Futures Trading
z Integratesplayers and markets
z Improves cropping pattern
z Ensures Liquidity
z Provides Leverage
z Provides Credit Accessibility

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Beneficiaries

• Farmers/Primary producers
• Processors/Manufacturers
• Exporters/Importers
• Traders/Brokers/Speculators
• Government
• Banks and Financial Institutions
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 Banks as Market Players
• Owner/Promoter (ICICI , PNB, UBI,
Canara, BOI, SBI, Corporation etc.)
• Clearing Member (HDFC, ICICI etc.)
• Investor/Trader/Broker
• Financier (PNB, HDFC, Corporation,
Axis, SBI, Karur Vysya, ICICI etc.)
• Warehouse Receipts backed by a
commodity Exchange
• Non-fund based financing.
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Demand & Supply Drivers

z Fundamental factors: weather,

quantum of output, quality, stocks,
export / import trade, govt policies,
tariffs, taxes, Tastes, prices,
population, level of economic
activity, income (and changes
therein);
z Price drivers: role of funds; geo-
political concerns; inflation;
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 Global Agribusiness

z Rising output, falling prices; demand

trails supplies;
z Technology (agbiotech) & subsidy
(OECD) drive output growth
z Growth expected in Asia, both
production and consumption;
z Outlook now changing – effect of
high crude prices? WTO? Diseases?
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Global Non-agri Markets

z Energy, base metals, precious

metals – huge demand surge
(China / Asia factor), supply
constraints, natural calamities,
geo-political concerns, inflation
fears, huge speculative
interest, role of funds;

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Indian Agribusiness

z Highlyfragmented and low scale -

production, processing, marketing;
z Uncertainty in output, quality, price;
Long supply chain; too many
intermediaries; no primary grading/
processing; non-standard quality;
z Marketing restrictions
z External & internal challenges

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Indian non-agri market

z Economic growth driving

demand for energy products;
base metals; iron ore and steel;
z Will India go the China way?
z Huge appetite for bullion;
demand income and price
elastic;
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Thrust of Government Policy

z Economic liberalisation;internal
reforms; trade freedom /no controls
z National Agricultural Policy
z Protection to domestic producers
z WTO compatibility
z Risk management

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Emerging Scenario

z Expansion of commodity trade

z Shorter supply chain
z Competition from imports
z Entry of multinationals
z Dominance by a few large firms

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Emerging Scenario

z Waning role of government

z Role for technology: Information
Technology, agriculture and
biotechnology applications
z Integration of domestic market with
global market
z Heightened risk perception

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Global Commodity Market

z Market faces uncertainties: high crude

prices threaten global growth; China
factor; will supply respond to high prices?
z Rising profile of commodities – high
rewards; investors more aware; prices
touch multi-year highs; media;
z Institutional investor interest rising –
MFs, pension funds;

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Commodities Markets
z Spot Market

z Derivatives Market

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 Spot Commodities Markets
(Mandi Trading)
z Governaned by State Agricultural Marketing
Boards(SAMB), Mandi Board (Farmers, Traders,
State)
z More than 7000 Mandis trading in about 140 crops
z Participants : Farmers, Licensed Traders, Brokers
& Wholesale Dealers
z Mandi Inspectors issue type & quantity certificate
z Mandi fees :Transaction fee, Taxes; total varies
between 4% and 12%
z Trading, Clearing and Settlement
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A Derivative is ……

zA security or contract designed in

such a way that
z Its price is derived from the price
of
z An underlying asset
z Underlying asset for the derivative
z Equity shares, indices, debt instruments,
commodities, currency, interest rate,
derivatives
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 Derivatives Market

• Derivatives are financial contracts.

• The value of such contracts is derived from the value of some
underlying assets. Such underlying asset may be equity,
commodity, currency, or debt instrument or borrowing amount
etc.
With Securities Laws (Second Amendment) Act, 1999, Derivatives
has been included in the definition of Securities. The term
Derivative has been defined in Securities Contracts
(Regulations) Act, as :
A Derivative includes :
(a) A security derived from a debt instrument, share, loan, whether
secured or unsecured, risk instrument or contract for
differences or any other form of security;
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 Derivatives Market

(b) A contract which derives its value from the prices,

or index of prices, of underlying securities;
• Derivatives are a key part of the financial markets.
• Derivatives market is comprised of
(a) Derivative products or financial contracts
(b) Participants in the derivatives market
(c) Regulator(s)

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Global Derivatives Industry - Chronology of
Instruments

• Forward contract - is the oldest instrument.

• 1874 - Commodity futures.
• 1972 Futures contract on foreign currencies.
• 1973 Equity options.
• 1975 Interest rate futures.
• 1981 Currency swaps
• 1982 Interest rate swaps, equity index futures.
• 1983 Stock index options
• 1994 Introduction of credit derivatives.

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Derivative Markets in India

• The prohibition on options in SCRA was removed in

1995. Foreign currency options in currency pairs other
than rupee were the first options permitted by RBI.
• The Reserve Bank of India has permitted options,
interest rate swaps, currency swaps and other risk
reductions OTC derivative products.
• Besides the Forward market in currencies has been a
vibrant market in India for several decades.

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 Derivative Markets in India

• In addition the Forward Markets Commission has allowed the

setting up of commodities futures exchanges. Today we have 24
commodities exchanges most of which trade futures.
e.g. The Indian Pepper and Spice Traders Association (IPSTA) and
the Coffee Owners Futures Exchange of India (COFEI).
• In 2000 an amendment to the SCRA expanded the definition of
securities to included Derivatives thereby enabling stock
exchanges to trade derivative products.
• In the year 2000 exchange-traded equity derivatives were
introduced in the Indian market.

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Derivative Products

z OTC products (over the counter)

z (a) Forward contracts
z (b) Interest rate swaps

z (c) Forward rate agreements.

z Traded through exchanges

z (a) Futures contracts
z (b) Options contract.

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Forward / Futures
Contracts
z Governed by provisions of
Forward Contracts (Regulation)
Act, 1952
z Three broad categories of
contracts: Ready Delivery;
Forward; Option in goods.

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Forward / Futures contracts

z Ready Delivery Contracts:

contracts for delivery of
goods where delivery of
goods and payment thereof
completed within 11 days
from contract date; such
contracts outside purview of
FCR Act.
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Forward / Futures
Contracts
z Forward Contracts: contracts for
delivery of goods that are not
ready delivery contracts (i.e.
completion of delivery and/or
payment beyond 11 days); such
contracts governed by FCR Act.

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Forward / Futures
Contracts
z Option in goods: currently,
totally prohibited under FCR Act.
An agreement which gives option-
buyer the right but not obligation to
buy or sell a particular futures
contract at a stated price at any
time prior to a specified date

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Forward Contracts – two types

z Specific delivery contracts

z Other than specific delivery
contracts – though contract of
second type has not been defined
under FCR Act, it is called “futures
contract” in trade parlance.

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Specific Delivery Contracts

z Essentially for merchandising;

enable producers & consumers to
market / cover a commodity
z Generally negotiated directly
including contract terms by
sellers/buyers
z TSD and NTSD contracts

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Futures Contracts

z Are forward contracts other than

specific delivery contracts;
z Entered into under auspices of an
exchange or association;
z Contract terms – goods quantity,
quality, place of delivery and time
of contract maturity standardised;
parties to negotiate only rate

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Futures Contract -
Standardisation
z Trading in standard unit only
z Price quote for “basis” variety
z Delivery month standardised
z All open position marked-to-market
daily at settlement price
z Tenderable goods must meet contract
specifications
z Tendered goods to be certified by
approved surveyor
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Benefits of Futures Trading

z Pricediscovery – helps producers/

sellers and consumers/buyers as also
exporters discover price for a future
date; helps take informed decision;

z Pricerisk management – helps hedge

price risk or insure against adverse
price movement

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Benefits of Futures Trading

z Stabilisesprices: helps moderate

heavy price fluctuations
z Integrates prices nationwide
z Balances demand-supply over time
z Fosters healthy competition
z Barometer for farmers and traders

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CONCEPT OF FUTURES TRADING

z WHO BENEFITS….
z Speculators benefit through price
fluctuation.
z Intermediaries benefits through price
advantage between ready and future
prices (“Basis”) and prices between
two futures contract (“Spread”)
z End users benefit because of lock-in of
prices.
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CONCEPT OF FUTURES TRADING

z IS FUTURES TRADING SAME AS

FORWARD TRADING?
z Futures Trading is a refined approach to the
forward trading – It is a forward contract which is
not a specific delivery contract.
z Forward trading is
z a bilateral contract;
z non-standardised contract specifications

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CONCEPT OF FUTURES TRADING

z WHO ARE THE CONSTITUENTS OF

FUTURES TRADING?
z Hedgers who lock the prices in order to minimise
the risk.
z Speculators who take advantage of the price
differences and play in the market.
z Traders who offer two way quotes and provide
liquidity.

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CONCEPT OF FUTURES TRADING

z WHAT ARE THE ECONOMIC FUNCTIONS

OF FUTURES TRADING?
z Price Discovery
z Price Risk Mechanism

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CONCEPT OF FUTURES TRADING

z DOES
FUTURES TRADING
GUARANTEE ANY PROFIT?
z Futures Trading does not guarantee any profit or
minimise the loss. It is purely a hedging instrument
by which the prices are locked in as per the choice
of the parties.
z There is another derivative product called options
(not permitted in India for commodities) which acts
as an insurance by paying a premium to the writer
of the options whereby the losses are restricted but
the profits are unlimited.

57
CONCEPT OF FUTURES TRADING

z WHAT ARE THE CHARACTERISTICS

OF A GOOD FUTURES MARKET?
z There should be enough liquidity in the ready
market.
z There should be large number of players from
different categories.
z The prices quoted in the futures market should
have linkage with the ready market rates.
z The tick size should be minimum enough to attract
enough liquidity.

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CONCEPT OF FUTURES TRADING

z FUTURES MARKET SCENARIO IN

INDIA
z Illiquid markets
z Fragmented markets

z Multi-commodity risks

z Different contract specifications for the

same commodity in different Exchanges
z Absence of Options Trading

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CONCEPT OF FUTURES TRADING

z HOWTO SELECT A COMMODITY FOR

FUTURES TRADING?
z Homogenous specification
z Adequate liquidity in the ready market
z Large number of players for the commodity
z Commodities that can be stored for a
reasonable period
z Need to have a demand supply mismatch
z Prices not to be controlled by the Government
z No restriction as to movement of goods
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CONCEPT OF FUTURES TRADING

z COMMODITIES NOT COVERED UNDER

THE PRESENT PROVISION (FC(R)ACT)
z Present Act permits only moveable property other
than actionable claims, money and securities.
z Not including intangible items like electricity,
weather, indices.

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CONCEPT OF FUTURES TRADING

z CONVERGENCE OF FUTURES AND

READY MARKET:
z The difference between the ready and futures
market is generally the carry-over cost.
z On the due date, both the prices converge.
z In case the settlement rates are proper (perfect),
then it makes no difference if the deliveries are
settled within or outside the Exchange.

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CONCEPT OF FUTURES TRADING

z HOWTO ORGANISE FUTURES

TRADING?
z Select the commodities that fulfill the basic
criteria for the futures trading.
z Set contract specifications which should be in
tune with market conditions.
z Set limits for trading.
z Design appropriate risk management
techniques to ensure default-free trading,
clearing and settlement environment.
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CONCEPT OF FUTURES TRADING

z HOW TO ORGANISE ……
z Ensure contract terms are not changed during
the running of the contract.
z Trading may be open ended or bracketed.

z Positions on the due date is either settled in

cash or by physical delivery.
z Open positions are not allowed to be carried
over to the new settlement.
z Delivery may be compulsory OR at the
option of the buyer or seller.
64
CONCEPT OF FUTURES TRADING

z FUTURES TRADING FROM AN

INVESTOR’S POINT OF VIEW
z Futures trading is a form of investment which
involves speculating the price of a commodity going
up or down in the future.
z This a highly leveraged instrument: by paying a
small margin, you can play on a large scale.
z High leverage is both advantageous or loss
making: depending upon you value judgment.

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CONCEPT OF FUTURES TRADING

z FUTURES … FROM AN INVESTOR’S

….
z Spread trading catches up the fancy of the
investors; i.e; trade on buy-sell bid (if the current
rate for a derivative product “X” is say Rs. 400/-,
buy at Rs. 402/- and sell at Rs. 398/- ) Trade on this
spread.
z You may put stop-loss order to arrest losses.
z In case of highly liquid market, the volumes are
huge and hence the losses are generally minimal
with an immediate entry/exit.
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CONCEPT OF FUTURES TRADING

z HOW FUTURES WILL HELP YOUR

BUSINESS?
z Anticipate profit margins
z Improve your marketing plan
z Maintain or increase your customer base with
innovative pricing contracts
z Reduce the cost of storing commodities

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CONCEPT OF FUTURES TRADING

z FUNCTIONS OF THE COMEXES:

z Membership
z Trading, Clearing and Settlement

z Margining and Surveillance

z Disputes and Redressal Mechanism

z Disciplinary Procedures

z Emergency Measures

z Suspension and Defaults

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CONCEPT OF FUTURES TRADING

z GOVERNANCE OF THE COMEXES:

z AoP, Limited Companies
z Mutualised and Demutualised

z Board Managed

z 3 Public Representatives and one

Government Nominee
z Day to day affairs left to professionals

z Various Committees to manage the

operations
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Regulation

70
System of Regulation – 3-tier

z Central Govt: broad policy on

commodities, territorial area and
recognition of exchange
z FMC: approval of exchange rules;
permission for trading in contracts;
monitor market conditions;
z Exchange: forum to conduct trade;
records contracts, execution,
settlement, payment etc.

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Regulatory Measures

z Hedgers: those with underlying

interest in specific delivery or ready
delivery contracts, and use futures to
insure against adverse price
movement
z Speculators: may not have an
interest in ready contract, but see
opportunity of price movement
favourable to them; provide useful
economic function
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Safeguard / Regulatory Measures

z Limit on open position

z Limit on price fluctuation
z Special margin
z Minimum/ maximum prices
z Extreme steps: skipping trading;
closing market; closing out
contracts

73
Recent Developments

z Futures / forward trading in most

commodities allowed
z Three nationwide online trading
exchanges in operation
z Trading volumes expanding
z Several new products launched
z Autonomy for FMC on the cards
z FCRA amendment

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Commodity Risk
Management

9Identifying key risks

9Weather conditions
9Government policies
9Demand and supply
conditions

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RISK MANAGEMENT

z WHAT IS RISK MANAGEMENT?

z Risk Management is to assess the overall risk of
the Exchange in respect of one or more derivative
products to ensure default-free trading, clearing
and settlement mechanism

76
Risk mitigation must

z Stakeholders today face greater price

risk than ever before; Trade sentiment
changed; Longer the process, greater
the risk; Someone must assume the
risk in every economic activity;
z Enter futures trading

77
RISK MANAGEMENT

z HOW ARE COMMODITY RISKS ASSESSED?

z Every uncertainty is exposed to risk.

z Commodities, by their very nature, have risks.

z Inherent risks associated with the

commodities
z Most of the agricultural commodities undergo
change in quality over a period of time (shell
life).
z Futuristic Risk due to internal, external and
uncontrollable factors.
z Delivery risk.
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RISK MANAGEMENT

z FACTORS CONTRIBUTING TO RISK:

z Fungibility
z Production – vagaries of monsoon

z Government interference

z Transportation and Warehousing

z Effect of substitute products

79
RISK MANAGEMENT

z HOWIS RISK ASCERTAINED BY THE

EXCHANGE?
z Risk arising out of the
z daily market fluctuation
z speculative transactions
z members’ open interest
z illiquid markets – forcing Exchange to go in for
mark-up prices
z multi-contract, multi-commodity and multi-
exchange.

80
RISK MANAGEMENT

z HOW ARE RISK MANAGEMENT

INSTRUMENTS DESIGNED?
z Circuit Filters
z Circuit Breakers

z Margin calls
z Regular
z Occasional (Need-based)

z Marked-to-market
z Mark-up prices

81
RISK MANAGEMENT

z PRE-REQUSITIES
FOR A GOOD RISK
MANAGEMENT INSTRUMENT
z It should not suppress a healthy volume.
z It should be in a position to segregate hedging
risk and speculative risk.
z It should be capable of implemented for
different categories of players at different times.
z The risk should be based on the market
movement (pulse of the market rather than
price per se).
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RISK MANAGEMENT

z PRE-REQUSIITES ……
z An adequate and efficient surveillance mechanism
goes hand in hand with the risk management
implementation
z It should function independently without fear or
favour.
z It should be capable of assessing the futuristic risk
in respect of contracts / members for facilitating
corrective measures.

83
RISK MANAGEMENT

z HOW RISK MANAGEMENT IS

IMPLEMENTED?
z Creation of Trade Guarantee Fund.
z Utilisation of Trade Guarantee Fund

z Modus operandi for replenishing the TGF

z Online collection of margin.

z Daily clearing
z Tab on the price movements on real time basis.
z Monitoring the exposure of the members.

84
RISK MANAGEMENT

z HOW TO IMPLEMENT…
z Assess the market at frequent intervals and take
corrective measures.

85
RISK MANAGEMENT

z RISK MANAGEMENT FOR TRADING

z Ensure collection of transaction slips immediately
after trade (not applicable in case of online trading)
z Ensure that the slips received / bid-offer rates are
in consonance with the prevailing rates.
z Have strict vigil over out-trades – trades done
beyond the quotes (as they affect the flow of slips
as well as real price discovery)

86
RISK MANAGEMENT

z RISK MANAGEMENT FOR TRADING …

z If the trading does not take place due to abnormal
market behaviour, then re-open the trading with
realistic rates (called mark-up prices) and collect
the difference money immediately. This will avoid
potential default.
z Avoid circular trading as this will create unhealthy
and unreliable market conditions.

87
RISK MANAGEMENT

z RISK MANAGEMENT FOR TRADING ..

z It is preferred to impose margin on tapering basis
(based on the exposure / position of the members).
z Have check on Negotiated Deals.

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RISK MANAGEMENT

z RISK MANAGEMENT FOR

DELIVERIES
z Despite being a hedged instrument, the Certified
Warehouse Receipt (CWR) in itself is subjected to
price risk – rates prevailing on the date of
settlement to the actual handing over of CWR.
z Delivery margin from the buyer to cover the above
risk.
z Risk arising out of delivery committed but not
actually tendered by the seller..
z Risk arising out of delivery allotted to the buyer but
not lifted.
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RISK MANAGEMENT

z OTHER ASPECTS CONCERNING THE RISK

MANAGEMENT:
z Is there any optimum risk that can be ascertained
by the Exchange?
z Risks associated with the constituents.
z Risks associated with the CWRs of one Exchange
being tendered for delivery in other Exchange.
z Gross Exposure Vs Net exposure concept.
z Very negligible or nil deliveries being tendered.

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RISK MANAGEMENT

z EFFECT OF RISK MANAGEMENT

z Proper risk management facilitates default-
free environment
z Proper risk management ensures that
trades are done in an orderly manner.
z A sound risk management ensures that
even potential default cases are brought to
notice immediately.

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RISK MANAGEMENT

z KEY TO TIMING YOUR TRADES

z When is the best time to buy or sell
z When to use the futures market to hedge a
purchase or sale
z Which futures month to place a hedge
z When to accept suppliers offer
z Forward bids to your clients
z Resale bids

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Summary

z Commodity as an asset class

z Commodity market functions and role
z Commodities traded
z Regulations
z Risk management

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