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INDIAN COMMODITY MARKET

1. COMMODITY
1.1 Origin COMMODITY
Middle English commoditee, from Anglo of-French commoditee, from Latin commoditat-, commoditas, from commodus. First Known Use: 15th century

1.2 Meaning of COMMODITY

which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Avoiding risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be. A commodity may be defined as an article, a product or material that as bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Security. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the, risks and advantages of trading in commodities futures
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physical substance, such as food, grains, and metals, which is with another product of the same type,

inand

terchangeable

INDIAN COMMODITY MARKET before taking a leap. Historically, pricing incommodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. More generally, a product which trades on a commodity exchange; this would also include foreign currencies and financial instruments and indexes. Generally speaking, any tangible good can be categorized as a commodity. A commodity is typically a bulk good such as gold, silver, natural gas, and oil. A commodity may also be a bulk food product like grain, oats, corn, beef, pork bellies, and coffee. Traditionally, a commodity was merely a good, subject to sale or barter. Today however, a commodity can also represent an investment vehicle. One example is commodity futures. A commodity is traded at the commodities exchange. A commodities exchange not only facilitates the commodity trade, but also establishes and enforces rules and regulations pertaining to the commodity trading process. Depending on its use and trading purpose, a commodity may come in two types Cash commodity and Spot commodity whereas, A cash commodity is an actual commodity that is under a futures contract. A spot commodity on the other hand, is one that is traded on a spot market, pending delivery. In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crores (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent.
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INDIAN COMMODITY MARKET Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crores (Rs1, 400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on.

1.3 Types of COMMODITIES

Commodities are further broadly divided into four different parts; which are shown in the diagram below:

COMMODITY

PRECIOUS METALS Silver Gold

BASE METALS Copper Zinc Aluminum Nickel Lead

ENERGIES Crude oil Natural Gas

AGRI PRODUCTS Spices Pulses Oil

INDIAN COMMODITY MARKET

2. COMMODITY MARKET

ommodity markets deal in raw materials that are amenable to grading and that can be stored for considerable periods without deterioration.

Originally, the commodity markets started off as a way for farmers to sell their goods at a guaranteed price in the future. Because farmers had no way of knowing whether the harvest would turn out good or bad, it provided a way for them to lock in some profits before going to market. The commodity market also provided a way for buyers to get a price they thought was fair. Commodity is an important constituent of the financial market of any country. It is the market where a wide range of products are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

INDIAN COMMODITY MARKET

2.1 History of COMMODITY MARKET


Commodities markets, both historically and in modern times, have had tremendous economic impact on nations and people. The impact of commodity markets throughout history is still not fully known, but it has been suggested that rice futures may have been traded in China as far back as 6,000 years ago. Whereas, its said that the U.S. commodity markets began in the 19th century with the trading of staples such as cattle, wheat, corn and pigs. And according to Investopedia, the very first commodities markets began in Sumer, dealing with sheep and goats. Contracts took the shape of small baked clay tokens made in the shape of the animals that they represented; the Sumerians considered them more binding. The economic impact of the development of commodity markets is hard to overestimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade." Commodity market, organized traders' exchange in which standardized, graded products are bought and sold. Worldwide, there are 48 major commodity exchanges that trade over 96 commodities, ranging from wheat and cotton to silver and oil. An independent U.S. regulatory agency, the Commodity Futures Trading Commission was established in 1974 to regulate commodity markets. In 1982, the Chicago Mercantile Exchange introduced a futures contract for Standard & Poor's 500 U.S. companies that allow investors to speculate on the future prices of those stocks.
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INDIAN COMMODITY MARKET 2.2 Size of the COMMODITY MARKET The trading of commodities consists of direct physical trading and derivatives trading. Exchange traded commodities have seen an upturn in the volume of trading since the start of the decade. This was largely a result of the growing attraction of commodities as an asset class and a proliferation of investment options which has made it easier to access this market. The global volume of commodities contracts traded on exchanges increased by a fifth in 2010, and a half since 2008, to around 2.5 billion million contracts. During the three years up to the end of 2010, global physical exports of commodities fell by 2%, while the outstanding value of OTC commodities derivatives declined by two-thirds as investors reduced risk following a five-fold increase in value outstanding in the previous three years. Trading on exchanges in China and India has gained in importance in recent years due to their emergence as significant commodities consumers and producers. China accounted for more than 60% of exchange-traded commodities in 2009, upon its 40% share in the previous year. Commodity assets under management more than doubled between 2008 and 2010 to nearly $380bn. Inflows into the sector totaled over $60bn in 2010, the second highest year on record, down from the record $72bn allocated to commodities funds in the previous year. The bulk of funds went into precious metals and energy products. The growth in prices of many commodities in 2010 contributed to the increase in the value of commodities funds under management.

INDIAN COMMODITY MARKET

2.3 Commodity Derivatives Market

Derivative Market can broadly be classified as commodity derivative market and financial derivative market. As the name suggest, commodity derivatives trade contracts for which the underlying assets is a commodity like, wheat, soya bean ,cotton etc or precious metal like Gold and Silver. Financial derivatives markets trade contract that have a financial assets or variable as the underlying. The most financial derivatives are those, which have equity, interest rate and exchange rate as the underlying. Financial derivatives are used to hedge the exposure to market risk. The commodity derivatives differ from the financial derivatives mainly in the following two aspects: Firstly, due to the bulky nature of the Underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Secondly, in the case of commodities, the quality of the asset underlying a contract can vary largely.

INDIAN COMMODITY MARKET

3. INTERNATIONAL COMMODITY EXCHANGES

SOME LEADING EXCHANGE OF THE WORLD SR.NO. 1. GLOBAL COMMODITY EXCHANGES New York Mercantile Exchange (NYMEX)

2.

London Metal Exchange (LME)

3.

Chicago Board of Trade (CBOT)

4.

New York Board of Trade (NYBOT)

5.

Kansas Board of Trade

6.

Winnipeg Commodity Exchange, Manitoba

7.

Dalian Commodity Exchange, China

8.

Bursa Malaysia Derivatives exchange

9.

Singapore Commodity Exchange (SICOM)

10.

Chicago Mercantile Exchange (CME), US

INDIAN COMMODITY MARKET

11.

London Metal Exchange

12.

Tokyo Commodity Exchange (TOCOM)

13.

Shanghai Futures Exchange

14.

Sydney Futures Exchange

15.

London International Financial Futures and Options Exchange (LIFFE)

16.

National Multi-Commodity Exchange in India (NMCE), India

17.

National Commodity and Derivatives Exchange (NCDEX), India

18.

Multi Commodity Exchange of India Limited (MCX), India

19.

Dubai Gold & Commodity Exchange (DGCX)

20.

Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX)

INDIAN COMMODITY MARKET 3.1 Regulators Each exchange is normally regulated by a national governmental (or semigovernmental) regulatory agency:

COUNTRY Australia

REGULATORY AGENCY Australian Securities and Investments Commission

Chinese mainland

China Securities Regulatory Commission

Hong Kong

Securities and Futures Commission

India

Securities and Exchange Board of India and Forward Markets Commission (FMC)

Singapore

Monetary Authority of Singapore

UK

Financial Services Authority

USA

Commodity Futures Trading Commission

Malaysia

Securities Commission

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INDIAN COMMODITY MARKET

Recent years have witnessed a steep rise in the creation of the commodity exchanges along with a consistent expansion of the existing ones. The United States, Japan, United Kingdom, Brazil, Australia, Singapore are homes to leading commodity futures exchanges in the world.

3.2 Worlds Major Commodity Exchanges:

The New York Mercantile Exchange (NYMEX) The New York Mercantile Exchange is the world's biggest exchange for trading in physical commodity futures. It is the primary trading forum for energy products and precious metals. The Exchange has been in existence for 132 years and performs trades through two divisions, the NYMEX divisions, which deals in energy and platinum and the COMEX division which trades in all the other metals. A major contribution of the Exchange has been to develop and launch energy futures and options contract in 1978 to facilitate price transparency and risk management in this key market. Exchange has become a significant part of the commercial, civic and cultural life of New York. Exchange also clears trades for market participants who which to avoid counter-party credit risk by using standardized contracts for Natural Gas, Crude Oil, Refined products and Electricity. Commodities traded : Light Sweet Crude Oil, Natural gas, Heating Oil, Gasoline, BOB Gasoline, Electricity, Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.

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INDIAN COMMODITY MARKET London Metal Exchange (LME) The London Metal Exchange (LME) is the world's premier non-ferrous market, with highly liquid contracts. It is an innovative exchange that has maintained its traditional strengths in a modern business environment by remaining close to its core users by ensuring that its contracts continue to meet the high expectations of a demanding industry. It has become highly successful with a trading turnover value of more than US$2000 billion per annum and contributes substantially to the invisible earnings. The Exchange was formed in 1877 as a direct consequence of the industrial revolution witnessed in Britain in the 19th Century. The primary focus of LME is providing a market for participants from the non-ferrous base metals related industry to safe guard against risk due to movements in base metal prices and also arrive at a price that sets the benchmark globally. The exchange trades 24 hours a day through an inter-office telephone market and also through an electronic trading platform. It is famous for its open-outcry trading between ring dealing members that takes place on the market floor. Commodities Traded: Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy, North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low Density Polyethylene, etc.

The Chicago Board of Trade (CBOT) The first commodity exchange established on the world was the Chicago Board of Trade (CBOT).During the year 1848 by a group of Chicago merchants who were keen to establish a central market place for trade. This was situated in the premises of a flour store during its first four years, Prior to this farmers often
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INDIAN COMMODITY MARKET found no buyers for the grain they had transported to Chicago. Given the high transport cost, they have been left with little choice but to dump the unsold produce in the near by lake. Presently, the Chicago Board of Trade is one of the leading exchanges in the world for trading in futures and options. More than 50 contracts on futures and options are been offered by CBOT. Currently through open-outcry and/or electronically. CBOT is the oldest existing commodity exchange in the world having established in the year 1848. Initially, CBOT dealt only in agricultural commodities like corn, wheat, soybeans, and oats. Futures contracts in CBOT evolved over a period of time to facilitate trading in non-storable agricultural commodities and non-agricultural products like gold and silver. The first electronic trading system in CBOT was introduced in 1994 after more than 150 years of open auction trading where traders used to meet to buy and sell futures contracts. Commodities traded: - Corn, Soybeans, Soybean Oil, Soybean Meal, Wheat, Oats, Ethanol, Rough Rice, Gold, and Silver etc.

Tokyo Commodity Exchange (TOCOM) The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures exchange in the world with trade in metals and energy contracts. It has made rapid advancements in commodity trading globally since inception 20 years back. One of the biggest reasons for this is the initiative TOCOM took towards establishing Asia as the benchmark for price discovery and risk management incommodities like the Middle East Crude Oil. TOCOM's recent tie-up with the MCX to explore cooperation and business opportunities is seen as one of the steps towards providing a platform for futures price discovery in Asia for Asian
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INDIAN COMMODITY MARKET players in Crude Oil since the demand-supply situation in US that drives the MYMEX is different from the demand-supply in Asia. In January 2003, in a major overhaul over its computerized trading system, TOCOM fortified its clearing system in June by being the first commodity Exchange in Japan to introduce an in-house clearing system. Commodities Traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Palladium, Aluminum, Rubber, Etc.

Chicago Mercantile Exchange (CME) Chicago Mercantile Exchange (CME) is the largest futures exchange in the US and the largest futures clearing house in the world for futures and options trading Formed in 1898 primarily to trade in agricultural commodities, the CME introduced the world's financial futures more than 30 years ago. Today it trades heavily in interest rate futures, Stock indices and foreign exchange futures. Its products often serve as a financial benchmark and witness the larges the open interest in futures contracts compared to any other exchange in the world. The commodities futures profile of CME consists of livestock, dairy and forest products and enables small family farms to large agri-businesses to manage their price risks. Trading in the CME can be done either through pit trading or electronically. Commodities Traded:- Butter, Milk, Diammonium Phosphate, Feeder cattle, Frozen Pork bellies, Lean Hogs, live Cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate,Etc.

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INDIAN COMMODITY MARKET

4. COMMODITY MARKET IN INDIA


4.1 Introduction to INDIAN COMMODITY MARKET

I
market.

ndia, a commodity based economy where two-third of the one billion population depends on agricultural commodities, surprisingly has an

under developed commodity market. The vast geographical extent of India and her huge population is aptly complemented. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond

India Commodity Market can be subdivided into the following two categories:

Wholesale Market

Retail Market

The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to decline due to various reasons. In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country.
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INDIAN COMMODITY MARKET Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sectors on the other hand are owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion in the year 2010. Demand for commodities is likely to become four times by 2012 than what it presently is.

4.2 Evolution of Indian commodity market Although India has a long history of trade in commodity derivatives, this segment remained underdeveloped due to government intervention in many commodity markets to control prices. The production, supply and distribution of many agricultural commodities are still governed by the state and forwards and futures trading are selectively introduced with stringent controls. While free trade in many commodity items is restricted under the Essential Commodities Act

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INDIAN COMMODITY MARKET (ECA), 1955, forward and futures contracts are limited to certain commodity items under the Forward Contracts (Regulation) Act (FCRA), 1952 . The first commodity exchange was set up in India by Bombay Cotton Trade Association Ltd, and formal organized futures trading started in cotton in 1875. Subsequently, many exchanges came up in different parts of the country for futures trade in various commodities. The Guajarati Vyapari Mandali came into existence in 1900 which has undertaken futures trade in oilseeds first time in the country. The Calcutta Hessian Exchange Ltd and East India Jute Association Ltd was set up in 1919 and 1927respectively for futures trade in raw jute. In 1921, futures in cotton were organized in Mumbai under the auspices of East. India Cotton Association (EICA). Many exchanges were set up in major agricultural centres in north India before world war broke out and they were mostly engaged in wheat futures until it was prohibited. The existing exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc. were established during this period. The futures trade in spices was first organized by India Pepper and Spices Trade Association (IPSTA) in Cochin in 1957. Futures in gold and silver began in Mumbai in 1920 and continued until it was prohibited by the government by mid-1950s. Options are though permitted now in stock market, they are not allowed in commodities. The commodity options were traded during the pre-independence period. Options on cotton were traded until they along with futures were banned in 1939 (Ministry of Food and Consumer Affairs, 1999). However, the government withdrew the ban on futures with passage of FCRA in 1952. The Act has provided
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INDIAN COMMODITY MARKET for the establishment and constitution of Forward Markets Commission (FMC) for the purpose of exercising the regulatory powers assigned to it by the Act. Later, futures trade was altogether banned by the government in 1966 in order to have control on the movement of prices of many agricultural and essential commodities. After the ban of futures trade all the exchanges went out of business and many traders started resorting to unofficial and informal trade in futures. On recommendation of the Khusro Committee in 1980 government reintroduced futures on some selected commodities including cotton, jute, potatoes, etc. As part of economic liberalization of 1990s an expert committee on forward markets under the chairmanship of Prof. K.N.Kabra was appointed by the government of India in 1993. Its report submitted in 1994 recommended the reintroduction of futures which were banned in 1966 and also to widen its coverage to many more agricultural commodities and silver. In order to give more thrust on agricultural sector, the National Agricultural Policy 2000 has envisaged external and domestic market reforms and dismantling of all controls and regulations in agricultural commodity markets. It has also proposed to enlarge the coverage of futures markets to minimize the wide fluctuations in commodity prices and for hedging the risk arising from price fluctuations. In line with the proposal

many more agricultural commodities are being brought under futures trading. In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional
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INDIAN COMMODITY MARKET business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: National Commodity &Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL) Ahmadabad. There are other regional commodity exchanges situated in different parts of India.

4.3 Why are commodity derivate required?

India is among the top 5 producer of the most of the commodities in addition to being a major consumer of bullion and energy products. Agriculture contributes more than 23% to be GDP of Indian economy. It employees around 57% of the labour force on a total of 185 million hectares of land. Agriculture sector is an important factor to achieving a GDP growth of 8.10. All this indicates that India can be promoted as a major centre for trading of commodity derivatives. It is important to understand why commodity derivatives are required and the role they can play in risk management. It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The possibility of adverse price change in future creates risk for business. Derivatives are used to reduce or eliminate price risk arising from unforeseen price change. A derivatives is a financial contract whose price depends on, or is derived from the price of another assets.

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INDIAN COMMODITY MARKET 4.4 Two important derivatives are FUTURES AND OPTIONS:-

(1) Commodity Future Contract:A future contract is an agreement for buying or selling a commodity for a predetermined delivery price at as specific future time. Futures are standardized contract that are traded on organized facture exchanges that ensure performance of the contract and remove the default risk. The commodity futures have existed since the Chicago Board of Trade (CBOT) was established in 1848 to bring farmers and merchants together the major function of future market is to transfer price risk from hedger to speculators. For example suppose a farmer is expecting the crop of paddy to be ready in two months time, but is worried that the price of paddy may decline in this period. In order to minimize his risk. He can enter into a future contract to sell his crop in two months time at a price determined now. Just take another example. All we know that woolen garments demand picks up in winter season. A garment factory owner can by a factory contract of cotton to get the raw material for his products as predetermined price. This way both time is able to hedge their risk arising from a possible adverse change in the price of theirs commodity or raw material.

(2) Commodity Option Contract:Like futures, options are also financial instruments used for hedging and speculation. The commodity option holder has the right, but not the obligation to buy (or sell) a specified quantity of a commodity at specified price on or before a specified date. Option contract involve two parties the seller of the op20

INDIAN COMMODITY MARKET tion writes the option in favor of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options. A call option gives the holder a right to buy a commodity at an agreed price, while a put option gives the holder a right to sell a commodity at an agreed price on or before a specified date which is called expiry date. The option holder will exercise the option only if it is beneficial to him, otherwise he will let the option lapse. Suppose a farmer buys a put option to sell 10 MT of wheat at a price of Rs. 13000/- MT and pays a premium of Rs. 500/MT. If the price wheat decline, to say Rs. 1000/-MT before expiry, the farmer will the exercise his option and sell h is wheat at the agreed price of Rs. 1300/- MT. However, if the market price of wheat increase by Rs. 1000/-MT, it will be better for the farmer to sell it directly in the open market at the spot price, rather than his option to sell at Rs. 13000/- MT. Future and options trading therefore helps in hedging the price risk an also provide investment opportunity to speculators who are willing to assume risk for a possible return. Future trading and the ensuing discovery of price can help farmers to deciding which crops to grow. They can also help in building a competitive their earning because non-hedging of the risk would increase the Volatility of their quarterly earnings. Thus future and options market perform important functions that can not be ignored in modern business environment at the same time. It is true that too much speculative activity in essential commodities would de-stabilize the markets and therefore, these markets are normally regulated as per the law of the country. Option on trading is not permitted till now in commas.

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INDIAN COMMODITY MARKET

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Explanation: 4.5 Nature of Commodities:-

Commodities are real assets that are produced and consumed in an industrial or other process. In contrast, other asset classes of interest rates, currency or equity represent financial claims on different aspects of real assets. This aspect of commodities ha a number of dimensions, including:

1. Consumption goods Commodities are primarily consumption goods rather than investment products. This means that demand is not purely price dependent. In addition, some commodities may display characteristics not normally found in financial assets. For example, zero or negative price may occur in electricity markets where generators seek to ensure that their plants are dispatched for contiguous blocks of time longer than a simple slot for which separate time bids are accepted. This is driven by the desire of the generator to shed excess output as electricity cannot be stored. 2. Non standard structure Commodities are generally not standardized. This reflects the heterogeneous nature of commodity production in terms of quality or grade. This contrasts with other financial assets that are homogenous. This dictates that the commodity market has two layers.
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INDIAN COMMODITY MARKET The physical or cash market that trades a range of commodities of varying quality, location and structure, and a commodity derivatives market that trades arrange of instruments on (artificially) standardized commodities. This is driven by the need to facilitate trading. It creates basis risk in commodity derivatives. 3. Cost of production Commodity prices frequently gravitate towards the cost of production. This is because the market will adjust over time. If prices are significantly above or below the cost of production (including a "normal" profit component), then supply will adjust in the longer term. 4. Price behavior Commodity prices display seasonality and may change over different phases of the commodity life. Seasonal patterns in consumption and production are manifested in recurring behavior of prices and volatility. Forward prices of commodities will generally change as time to maturity changes.

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INDIAN COMMODITY MARKET

The structure of commodity markets dictates that there are several types of participants active in the trading of commodities and commodity derivatives. The structure of the participants and the nature of their activities/motivations are more complex than in other asset classes.

The major participants in commodity markets include:

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INDIAN COMMODITY MARKET Explanation: 1. Commodity Producers/Consumers:-

These participants have natural underlying outright long (producers) and short (consumers) positions in the relevant commodity. The inherent riskexposure drives the use of commodity derivatives by producers and users. The application of commodity derivatives in frequently driven by the pattern of cash flows. Producers must generally make significant capital investments (sometime significant in scale) to undertake the production of the commodity. This investment must generally be made in advance of production and sale of the commodity. This means that the producer is exposed to the price fluctuations in the commodity. If prices decline sharply, then revenues may be insufficient to cover the cost of servicing the capital investment (including debt service). This means that there is a natural tendency for producers to hedge at levels that ensure adequate returns without seeking to optimize the potential returns from higher returns. This may also be necessitated by the need to secure financing for the project. Consumer hedging behavior is more complex. Consumer desire to undertake hedges is influenced by availability of substitute products and the ability to pass on higher input costs in its own product market. In many commodities, producer and consumer deal directly with each other. The form of arrangement may include negotiated bilateral long term supply or purchase contracts between the

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INDIAN COMMODITY MARKET producers and consumers. The contracts may include fixed. Price arrangements to reduce the price risk for both parties. These arrangements create a number of difficulties. These include lack of transparency, low liquidity and exposure to counterparty credit risk. The bilateral structure also creates potential adverse performance incentives. This reflects the fact that the contracts combine supply/purchase obligations and price risk elements in a single contract.

2. Commodity Processors:-

These participants have limited outright price exposure. This reflects the fact the processors have a spread exposure to the price differential between the cost of the input and the cost of the output. For example, oil refiners are exposed to the differential between the price of the crude oil and the price of the refined oil products (diesel, gasoline, heating oil, aviation fuel, etc.). The nature of the exposure drives the types of hedging activity and the instruments used.

3. Commodity Traders:

Commodity markets have complex trading arrangements. This may include the involvement of trading companies (such as the Japanese trading companies and specialized commodity traders). Where involved, the traders act as an agent or principal to secure the sale/purchase of the commodity. Traders increasingly seek to add value to pure trading relationship by providing derivative/risk management expertise. Traders also occasionally provide financing & other services.
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INDIAN COMMODITY MARKET Commodity traders have complex hedging requirements, depending on the nature of their activities. A trader as a pure agent will generally have no price exposure. Where a trader acts as a principal, it will generally have outright commodity price risk that requires hedging. Where traders provide ancillary services such as commodity derivatives as the principal, the market risk assumed will need to be hedged or managed.

4.

Financial Institution/Dealers: -

Dealer participation in commodity markets is primarily as a provider of finance or provider of risk management products. The dealers' role is similar to that in the derivative market in other asset classes. The dealers provide credit enhancement, speed, immediacy of execution and structural flexibility. Dealers frequently bundle risk management products with other financial services such as provision of finance.

5. Investors: -

This covers financial investors seeking to invest incommodities as a distinct and a separate asset class of financial investment. The gradual recognition of commodities as a specific class of investment assets is an important factor that has influenced the structure of commodity derivatives markets.

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4.7 Different segments of COMMODITY MARKET There are two major segments of the commodities market. They are Over-the-counter (OTC) market and Exchange-traded market. Both these markets are given below. Over-the-counter (OTC) market:Over-the-counter means that there is no formal structure of trading and parties trade on the basis of bilateral understanding. In terms of commodity trading, OTC represents spot trading of commodities. Since the structure is not formal, it is also referred as customized market". Almost all the trading that takes place over in these markets is delivery based. It is entirely unregulated with respect to disclosure of information between the parties; therefore, the trades that take place are subject to counter-party risk. Like an ordinary contract each counter-party relies on the other side to fulfill their obligation. . OTC Contract:- OTC contract is a mutual contract between two parties in which they agree on how a particular trade or agreement will be settled in future. To put it in simple words, which location will the settlement takes place, the specific
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INDIAN COMMODITY MARKET date in future when the contract will be honored and the pre-arranged price for fulfilling the contract. Forwards and swaps are examples of such contracts.

Exchange-traded market:Exchange-traded market also known as derivatives market is the place where commodities are traded over the exchange. It is standardized in nature and decently regulated. An exchange acts as an intermediary to all commodity transactions, and takes initial margin from both sides of the trade to act as a guarantee. All the commodity exchanges are overseen by Forward Market Commission. 4.8 COMPARATIVE ANALYSIS OF COMMODITY AND EQUITY MARKETS FACTORS Percentage Returns COMMODITY MARKETS EQUITY MARKET

Gold gives 10-15 %re- Returns in the range of turns on the conservative 15-20 % on annual basis. basis.

Initial Margins

Lower in the range of 4-5-6%.

Higher in the range of 2540%.

Arbitrage Opportunities

Exists on 1-2 month con- Significant Arbitrage Optracts. There is a small portunities exists. difference in prices but in case of commodities,

which it is in large tonnage makes a huge dif30

INDIAN COMMODITY MARKET ference. Price Movements Price movements are Prices movements based

purely based on the sup- on the expectation of fuply and demand. Price Changes. ture performance.

Price changes are due to Price changes can also be policy changes, change due to Corporate actions, sin tariff and duties. Dividend announce-

ments, Bonus shares / Stock splits. Future Predictability Predictability of future Predictability of future prices is not in the con- performance is reasonatrol due to factors like bly high, which is supFailure of Monsoon and plemented by the History Formation of El-ninos at of management Pacific. Volatility Lower Volatility. formance. Higher Volatility. per-

Securities

Transaction Securities Transaction Act Securities Transaction Act is not applicable to com- is applicable to equity modity futures trading markets trading

Act Application.

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5. COMMODITY EXCHANGE

ommodity exchange for buying and selling commodities for future delivery.

Originally, a commodity exchange is a market organized to allow for the selling and buying of commodities. Commodities, which are hard goods, as opposed to services, may be bought and sold on a commodity exchange in three types of markets: Cash, Futures and Options Cocoa, corn, crude oil, and gold are a few examples of commodities traded on a commodity exchange. A commodity exchange is considered to be essentially public because anybody may trade through its member firms. The commodity exchange itself regulates the trading practices of its members while prices on a commodity exchange are determined by supply and demand.

A commodity exchange provides the rules, procedures, and physical for commodity trading, oversees trading practices, and gathers and disseminates marketplace information. Commodity exchange transactions take place on the commodity exchange floor, in what is called a pit, and must be affected within certain time lim-

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INDIAN COMMODITY MARKET its. Floor traders, floor brokers and futures commissions merchants working on the floor of a commodity exchange must be registered by the SEC.

5.1 Role of COMMODITY EXCHANGE Commodity exchanges provide platforms to suit the varied requirements of customers. Firstly, these exchanges enable actual users (farmers, agro processors, industry where the predominant cost is commodity input/output cost) to hedge their price risk given the uncertainty of the future - especially in agriculture where there is uncertainty regarding the monsoon and hence prices. This holds
33

INDIAN COMMODITY MARKET good also for non-agro products like metals or energy products as well where global forces could exert considerable influence. Purchasers are also assured of a fixed price which is determined in advance, thereby avoiding surprises to them. It must be borne in mind that commodity prices in India have always been woven firmly into the international fabric. Today, price fluctuations in all major commodities in the country mirror both national and international factors and not merely national factors. Secondly, by involving the group of investors and speculators, commodity exchanges provide liquidity and buoyancy to the system. Lastly, the arbitrageurs play an important role in balancing the market as arbitrage conditions, where they exist, are ironed out as arbitrageurs trade with opposite positions on different platforms and hence generate opposing demand and supply forces which ultimately narrows down the gaps in prices. It must be pointed out that while the monsoon conditions affect the prices of agro-based commodities, the phenomenon of globalization has made prices of other products such as metals, energy products, etc., vulnerable to changes in global politics, policies, growth paradigms, etc. This would be strengthened as the world moves closer to the resolution of the WTO impass, which would become a reality shortly.

34

INDIAN COMMODITY MARKET

Commodity exchanges are institutions which provide a platform for trading in commodity futures just as how stock markets provide space for trading in equities and their derivatives.

35

INDIAN COMMODITY MARKET

6. STRUCTURE OF COMMODITY EXCHANGE INDIA

In India there are 21 regional exchanges and three national level multicommodity exchanges

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INDIAN COMMODITY MARKET After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: (1) National Commodities & Derivatives Exchange Limited (NCDEX) National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC). Punjab National Bank (PNB), Credit Ratting Information Service of India Limited (CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by subscribing to the equity shares have joined the promoters as a share holder of exchange. NCDEX is the only Commodity Exchange in the country promoted by national level institutions. NCDEX is a public limited company incorporated on 23 April 2003.NCDEX is a national level technology driven on line Commodity Exchange with an independent Board of Directors and professionals not having any vested interest in Commodity Markets. It is committed to provide a world class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts Regulation Act and various other legislations.

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INDIAN COMMODITY MARKET NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers through out India. NCDEX currently facilitates trading of 57 commodities. COMMODITIES TRADED at NCDEX:BULLION MINERALS Gold KG, Silver, Brent Electrolytic Copper Cathode, Aluminum Ingot, NickelCathode, Zinc Metal Ingot, Mild steel Ingots OIL AND OILSEEDS cake, Crude Palm Oil, Groundnut (in shell),Groundnut entha oil, RBD Pamolein, RM seed oilcake, Refined

expeller Oil, Cotton,

PULSES

Urad, Yellow peas, Chana, Tur, Masoor

GRAIN

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

SPICES PLANTATION

Jeera, Turmeric, Pepper Cashew, Coffee Arabica, Coffee Robusta

FIBERS AND OTHERS

Guar Gum& seeds, Jute sacking bags, Indian cotton

ENERGY

Crude Oil, Furnace oil

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INDIAN COMMODITY MARKET (2) Multi Commodity Exchange of India Limited (MCX)

Headquartered in Mumbai, MCX is a demutualised nation wide electronic commodity future exchange. Set up by Financial Technologies (India) Ltd. permanent recognition from government of India for facilitating online trading, clearing and settlement operations for future market across the country. The exchange started operation in Nov, 2003. MCX equity partners include, NYSE Euro next, State Bank of India and its associated, NABARD NSE, SBI Life Insurance Co. Ltd. Bank of India, Bank of Baroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, etc.

MCX is well known for bullion and metal trading platform.

Bullion

Gold, Silver, Silver Coins

Minerals

Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead

Oil and Oil seeds

Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein,Groundnut ,Mustard/ Rapeseed oil

Pulses

Chana, Masur, Tur, Urad, Yellow peas

Grains Spices

Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley Pepper, Red Chili, Jeera, Cardamom, Cinnamon,

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INDIAN COMMODITY MARKET Clove,Ginger,etc Plantation Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,Coffee,etc Fiber and others Kapas, KapasKhalli, Cotton cloth/yarn,Gaur seed &gum, Gur and Sugar ,Khandsari, Mentha Oil. Petrochemicals High Density Polyethylene (HDPE), Polypropylene (PP), PolyVinyl Chloride (PVC) Energy Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil, Natural Gas

The exchanges follow best international risk management practices and provide a financially secure environment by putting in place a suitable risk management mechanism (system of upfront margining based on the Value at Risk margining system, daily mark to market and special intra-day clearing and settlement in the event of high volatility in prices). The performance of the contracts registered by the exchange are guaranteed either by the exchange or its clearing house. The exchanges also maintain their own Trade/Settlement Guarantee Fund, which can be used in case of any default. Some exchanges have also prescribed certain minimum capital adequacy norms.

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INDIAN COMMODITY MARKET

(3) National Multi Commodity Exchange of India Limited (NMCEIL) (National Multi Commodity Exchange of India Ltd.) is the first de-metalized electronic commodity exchange of India granted the National exchange on Govt. of India and operational since 26th Nov, 2002. Promoters of NMCE are, Central warehousing corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat AgroIndustries Corporation Limited (GAICL), Gujarat state agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM) and Neptune Overseas Ltd. (NOL). Main equity holders are PNB. The Head Office of NMCE is located in Ahmadabad. There are various commodity trades on NMCE Platform including Agro and non-agro commodities.

6.1 Regulatory authority for commodity Market Forward Markets Commission (FMC) The Forward Markets Commission (FMC) headquartered at Mumbai, is the regulatory authority for commodity derivatives in India. It is a statutory body set up in1953 under the Forward Contracts (Regulation) Act, 1952. FMC is in turn supervised by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. The act provides that the commission shall consist of not less than two but not exceeding four members appointed by the Central Govt. out of them being nominated by the Central Govt. be the chairman thereof.

41

INDIAN COMMODITY MARKET

The functions of the Forward Markets Commission are as follows: 1. To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952;

2. To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act;

3. To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;

4. To make recommendations generally with a view to improving the organization and working of forward markets;

5. To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary;
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INDIAN COMMODITY MARKET

6.2 Regulatory Measures Evolved By FMC

1. Limit on open position of an individual operator to prevent over-trading;

2. Limit on price fluctuation to prevent abrupt upswing or downswing in prices;

3. Special Margin deposits to be collected on outstanding purchases or sales to curb excessive speculators activity through financial restraints;

4. Minimum / Maximum prices to be prescribed to prevent futures prices from falling below the levels that are not remunerative and from rising below the levels not warranted by genuine supply and demand factors;

5. During shortages, extreme steps like skipping trading in certain deliveries of the contracts, closing the markets for a specified period and even closing out the contracts to overcome the emergency situations are taken;

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INDIAN COMMODITY MARKET

7 HOW COMMODITY MARKET WORKS

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The under pinning for futures is the warehouse receipt. A person deposits certain
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INDIAN COMMODITY MARKET amount of say, good X in a ware house and gets a warehouse receipt which allows him to ask for physical delivery of the good from the warehouse but some one trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities.

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INDIAN COMMODITY MARKET

Following diagram gives a fair idea about working of the Commodity market.

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

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INDIAN COMMODITY MARKET

The commodity trading system consists of certain prescribed steps or stages as follows: I. Trading: - At this stage the following is the system implemented-Order receiving -Execution -Matching -Reporting -Supervision -Price limits -Position limits II. Clearing: - This stage has following system in place-Matching -Registration -Clearing limits -Notation -Margining -Price limits -Position limits -Clearing house. III. Settlement: - This stage has following system followed as follows-Marking to market -Receipts and payments -Reporting -Delivery upon expiration or maturity.
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INDIAN COMMODITY MARKET

8 THE NCDEX SYSTEM

very market transaction consists of three components i.e. trading, clearing and settlement. A brief overview of how transactions happen on the NCDEXs market.

8.1 TRADING:The trading system on the NCDEX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. Order matching is essential on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to finds a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required. NCDEX trades commodity futures contracts having one month, two month and three month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading day. New
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INDIAN COMMODITY MARKET contracts will be introduced on the trading day following the expiry of the near month contract.

The figure shows the contract cycle for futures contracts on NCDEX

8.2 CLEARING:National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX. The settlement guarantee fund is maintained and managed by NCDEX. Only clearing members including professional clearing members (PCMs) only are entitled to clear and settle contracts through the clearing house. At NCDEX, after the trading hours on the expiry date, based on the available information, the matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping interview the factors such as available capacity of the vault/warehouse, commodities already deposited and dematerialized and offered for delivery etc. Matching done by this process is
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INDIAN COMMODITY MARKET binding on the clearing members. After completion of the matching process, clearing members are informed of the deliverable/ receivable positions and the unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is only for the incremental gain/loss as determined on the basis of final settlement price.

8.3 SETTLEMENT:Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. On the NCDEX, daily MTM settlement and the final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/crediting the clearing accounts of CMs with the respective clearing bank. All positions of a CM, brought forward, created during the day or closed out during the day, are market to market at the daily settlement price or the final settlement price at the close of trading hours on a day. On the date of expiry, the final settlement price is the spot price on the expiry day. The responsibility of settlement is on a trading cum clearing member for all trades done on his own account and his clients trades. A professional clearing member is responsible for settling all the participants trades, which he has confirmed to the exchange. On the expiry date of a futures contract, members submit delivery information through delivery request window on the trader workstations provided by NCDEX for all open positions for a commodity for all constituents individually. NCDEX on receipt of such information matches the informa-

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INDIAN COMMODITY MARKET tion and arrives at delivery position for a member for a commodity. The seller intending to make delivery takes the commodities to the designated warehouse. These commodities have to be as said by the exchange specified as saver. The commodities have to meet the contract specifications with allowed variances. If the commodities meet the specifications, the warehouse accepts them. Warehouse then ensures that the receipts get updated in the depository system giving a credit in the depositors electronic account. The seller the gives the invoice to his clearing member, who would courier the same to the buyers clearing member. On an appointed date, the buyer goes to the warehouse and takes physical possession of the commodities.

Membership Details for NCDEX:-

Speculator Trading-cum-clearing Member: - TCM Sr.No. 1 2 3 4 5 6 PARTICULARS Interest Free Cash Security Deposit Collateral Security Deposit Admission Fee Annual Membership Fees Advance Minimum Transaction Charges Net worth Requirement NCDEX: TCM 15.00 Lakhs 15.00 Lakhs 5.00 Lakhs 0.50 Lakhs 0.50 Lakhs 50.00 Lakhs

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INDIAN COMMODITY MARKET

9 HOW TO INVEST IN COMMODITY MARKET

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

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

a) PAN card Number b) Driving License c) Vote ID d) Passport

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

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

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INDIAN COMMODITY MARKET What are the other forms to be signed by the investor? The clearing member will ask the client to sign a) Know your client form b) Risk Discloser Document The above things are only procedure in character and the risk involved and only after understanding the business, he wants to transact business.

What aspects should be considered while selecting a commodity broker? While selecting a commodity broker investor should ideally keep certain aspects in mind to ensure that they are not being missed in any which way. These factors include:Net worth of the broker of brokerage firm. The clientele. The number of franchises/branches. The market credibility. The references. The kind of service provided- back office functioning being most important. Credit facility. The research team. These are amongst the most important factors to calculate the credibility of Commodity broker.

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INDIAN COMMODITY MARKET 9.1 DOS AND DONTS FOR TRADING IN COMMODITY MARKET When you begin commodity there are some dos and donts that you should keep in mind. Its important to go through this list especially if you are a beginner and you are about to just begin trading. These tips and guidance mentioned below will help you to smoothly run the trading while not making many mistakes. You should ensure that the broker and the brokerage that you are using is the established one and is registered one. Thus the broker should be having the contract note which is signed by authorized signatory. You should also ask for periodic statements of trading account in order to keep a record on the transactions that you have made using a forex trading account. You should not get carried away by what other research or commodity research analyst are saying but should always use your own judgment whenever thinking of buying and selling of a particular commodity taking into the factor the risk involved. Remember its your money that is being talked about here and you should not go by someone elses judgment but should do our homework well. Do not give your trading accounts user name password or login ID to any one. Also do not perform any transaction on any website which is not secured. Secured web sites are the one which begin with https. Your transaction is always safe on such a web sites.

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INDIAN COMMODITY MARKET

10 MAJOR TRADERS IN COMMDITY MARKETS

THE EXPLANATION OF THE ABOVE TRADERS ARE GIVEN BELOW;

10.1 HEDGERS A Hedger can be Farmers, manufacturers, importers and exporter. 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 protect against price risks. The holders of the long position in futures contracts (buyers of the commodity), are trying to secure as low a price as possible. The short holders of the contract (sellers of the commodity) will want to secure as high a price as possible. The commodity contract, however, provides a definite price certainty for both parties, which reduces the risks associated with price volatility. By means of futures contracts, Hedging can also be used as a means to lock in an acceptable
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INDIAN COMMODITY MARKET price margin between the cost of the raw material and the retail cost of the final product sold. EXAMPLE: A silversmith must secure a certain amount of silver in six months time for earrings and bracelets that have already been advertised in an upcoming catalog with specific prices. But what if the price of silver goes up over the next six months? Because the prices of the earrings and bracelets are already set, the extra cost of the silver can't be passed onto the retail buyer, meaning it would be passed onto the silversmith. The silversmith needs to hedge, or minimize her risk against a possible price increase in silver. How? The silversmith would enter the futures market and purchase a silver contract for settlement in six months time (let's say June) at a price of $5 per ounce. At the end of the six months, the price of silver in the cash market is actually $6 per ounce, so the silversmith benefits from the futures contract and escapes the higher price. Had the price of silver declined in the cash market, the silversmith would, in the end, have been better off without the futures contract. At the same time, however, because the silver market is very volatile, the silver maker was still sheltering himself from risk by entering into the futures contract. So that's basically what a hedger is: the attempt to minimize risk as much as possible by locking in prices for a later date purchase and sale. Someone going long in a securities future contract now can hedge against rising equity prices in three months. If at the time of the contract's expiration the equity price has risen, the investor's contract can be closed out at the higher price. The opposite could happen as well: a hedger could go short in a contract today to hedge against declining stock prices in the future. A potato farmer would
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INDIAN COMMODITY MARKET hedge against lower French fry prices, while a fast food chain would hedge against higher potato prices. A company in need of a loan in six months could hedge against rising in the interest rates future, while a coffee beanery could hedge against rising coffee bean prices next year.

10.2 Speculator: Other commodity market participants, however, do not aim to minimize risk but rather to benefit from the inherently risky nature of the commodity market. These are the speculators, and they aim to profit from the very price change that hedgers are protecting themselves against. A hedger would want to minimize their risk no matter what they're investing in, while speculators want to increase their risk and therefore maximize their profits. In the commodity market, a speculator buying a contract low in order to sell high in the future would most likely be buying that contract from a hedger selling a contract low in anticipation of declining prices in the future. Unlike the hedger, the speculator does not actually seek to own the commodity in question. Rather, he or she will enter the market seeking profits by off setting rising and declining prices through the buying and selling of contracts. In a fast-paced market into which information is continuously being fed, speculators and hedgers bounce off of--and benefit from--each other. The closer it gets to the time of the contract's expiration, the more solid the information entering the market will be regarding the commodity in question. Thus, all can expect a more accurate reflection of supply and demand and the corresponding price. Regulatory Bodies the United States' futures market is regulated by the Commodity Futures Trading Commission, CFTC, and an independent agency of the
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INDIAN COMMODITY MARKET U.S. government. The market is also subject to regulation by the National Futures Association, NFA, a self-regulatory body authorized by the U.S. Congress and subject to CFTC supervision.

LONG HEDGER

SHORT

Secure a price now to Secure a price now to protect against future ris- protect ing prices against future

declining prices

SPECULATOR

Secure a price now in anticipation prices of

Secure a price now in

rising anticipation of declining prices

A Commodity broker and/or firm must be registered with the CFTC in order to issue or buy or sell futures contracts. Futures brokers must also be registered with the NFA and the CFTC in order to conduct business. The CFTC has the power to seek criminal prosecution through the Department of Justice in cases of illegal activity, while violations against the NFA's business ethics and code of conduct can permanently bar a company or a person from dealing on the futures exchange. It is imperative for investors wanting to enter the futures market to understand these regulations and make sure that the brokers, traders or companies acting on their behalf are licensed by the CFTC.

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INDIAN COMMODITY MARKET 10.3 Arbitrage: Arbitrage refers to the opportunity of taking advantage between the price difference between 2 different markets for that same stock or commodity. In simple terms one can understand by an example of a commodity selling in one market at price x and the same commodity selling in another market at price x + y. Now this y, is the difference between the two markets is the arbitrage available to the trader. The trade is carried simultaneously at both the markets so theoretically there is no risk. (This arbitrage should not be confused with the word arbitration, as arbitration is referred to solving of dispute between two or more parties.)The person who conducts and takes advantage of arbitrage in stocks, commodities, interest rate bonds, derivative products, foreign exchange is know as an arbitrageur. An arbitrage opportunity exists between different markets because there are different kind of players in the market, some might be speculators, others jobbers, some market-markets, and some might be arbitrageurs.

In India there are a good amount of Arbitrage opportunities between NCDEX, MCX in commodities.

11 RISK ASSOCIATED WITH COMMODITIES MARKETS


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INDIAN COMMODITY MARKET

for risk. Commodity enterprises primarily face the following classes of risk. Namely: The price Risk, The quantity Risk, The yield/output risk and The political Risk

o risk can be eliminated, but the same can be transferred to someone who can handle it better or to someone who has the appetite

Explanation of the above Risk-

The price risk:The chance there will be unexpected changes in a financial price, including currency (foreign exchange) risk, interest rate risk, and commodity price risk. Basically, it's the risk the you will lose money due to a fall in the market price of a security that you own.

The quantity risk:Occurs when the quantity of an asset to be hedged is uncertain. The risk that an insufficient amount of an investment will be hedged and will result in a loss of the unhedged portion.

The yield/output risk:60

INDIAN COMMODITY MARKET The risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument. The risk is associated with either a flattening or steepening of the yield curve, which is a result of changing yields among comparable bonds with different maturities. When market yields change, this will impact the price of a fixed-income instrument. When market interest rates, or yields, increase, the price of a bond will decrease and vice versa.

The political Risk:It is a type of risk that can be understood and managed with reasoned foresight and investment. Broadly, political risk refers to any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives.. Talking about the nationwide commodity exchanges, the risk of the counter party not fulfilling his obligations on due date or at any time therefore is the most common risk. This risk is mitigated by collection of the following margins:1. Initial margins 2. Exposure margins 3. Mark to Market on daily positions. 4. Surveillance

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INDIAN COMMODITY MARKET

12 WHATS IN STORE FOR COMMODITIES MARKETS: (UNION BUDGET-2011)

The budget has incorporated measures covering the investment scenario, fiscal consolidation and infrastructure. Initiatives have been introduced for sustained and inclusive growth. The main focus of the Finance Ministry is now to revert to the high GDP growth, remove weakness at different levels of governance, improve public delivery mechanism and ensure better management of supplydemand imbalance.

he Union Budget 2010-11 has mainly focused on broad-based growth for the country and priority has been given to food security.

1. Import duty on Silver has been raised from Rs1,000/kg to Rs1,500/kg and this move could affect the demand pattern of the white metal.

2. Precious metal prices have risen sharply in the last year and this has affected demand for these commodities in India. If cost pressures on the commodity continue to rise then demand could be affected further.

3. Customs duty on Gold and Platinum has also been raised from Rs200 per 10 grams toRs300 per 10 grams. This rise in customs duty is negative for the gems and jewelry sector in India. The move will make gold and platinum costlier commodities, thereby hurting demand and imports will come down. But one aspect for gold demand from the Indian perspective is that demand for jewelry can never die out as gold has a traditional value attached in India. The country has held its position as the world's largest gold
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INDIAN COMMODITY MARKET consuming nation in 2009 as consumer demand boosted in the fourthquarter.

4. Basic

customs duty

on

Gold Ore

and

Concentrates reduced

from

2% (according to value) to a specific duty of Rs140 per 10 grams of gold content with full exemption from special additional duty. Further, excise duty on refined gold made from such ore or concentrate reduced from 8% to a specific duty of Rs280 per 10 grams. This move will help to boost domestic gold refining capacity in India.

5. The budget has overall tried to incorporate measures for each sector. This gives the country scope for further improvement in GDP growth. Special emphasis is placed on infrastructure growth which could help to boost demand for steel.

6. The budget provides Rs173,552cr for infrastructure and this accounts for more than 46%of the total plan allocation. Though no specific mention has been made with regard to Steel, growth in infrastructure will obviously translate into growth for the steel sector as well.

7. For the metals sector as well the budget could prove beneficial as 45% has been allocated for the infrastructure space. This could lead to demand for steel and other metals.

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INDIAN COMMODITY MARKET

13 FUTURES PROSPECTS

ith the gradual withdrawal of the Govt. from various sectors in the post liberalization era, the need has been left that various opera-

tors in the commodities market be provided with a mechanism to hedge and transfer their risk. Indias obligation under WTO to open agriculture sector to world trade require future trade in a wide variety of primary commodities and their product to enable divers market functionaries to cope with the price volatility prevailing n the world markets. Following are some of applications, which can utilize the power of the commodity market and create a win-win situation for all the involved parties:-

Regulatory approval/permission to FII S to trading in the commodity market. Active Involvement of mutual fund industry of India. Permission to Banks for acting as Aggregators and traders. Active involvement of small Regional stock exchanges. Newer Avenues for trading in Foreign Derivatives Exchanges. Convergence of variance market. Amendment of the commodities Act and Implementers of VAT. Introduction of option contract.

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INDIAN COMMODITY MARKET

14 RESEARCH METHODOLOGY

14.1 Research Objective:


To study the awareness about commodity futures among the retail Indian investors.

14.2 Research Type:


Descriptive

14.3 Research Method:


Survey through Questionnaire method

14.4 Research Sample Size:


100 retail investors from Mumbai region

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INDIAN COMMODITY MARKET

14.5 Research Findings:

1. Awareness about Commodity Markets

ANALYSIS Nearly 50% of the people are unaware about the commodity market. Corrective steps to be taken to create awareness among the people. 2. Various sources of information on commodity markets

ANALYSIS
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INDIAN COMMODITY MARKET News channels are the most important sources of information. Some people are aware about this due to they business line. 3. People advise commodity market products to investors

ANALYSIS Around 40% of the people act as advisor for commodity market.

4. Reasons for not trading into the commodity market

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INDIAN COMMODITY MARKET ANALYSIS 31% of people are not trading due to lack of time and interest. 34% are not trading due to lack of understanding. 5. Commodities in which people mainly trade

ANALYSIS As Agricultural products are only 19% we con say, by creating awareness to

the farmers commodity exchanges can get better turn over.

6. Purpose for trading into the commodity markets

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INDIAN COMMODITY MARKET

ANALYSIS 45% of the people are speculating in the commodity market. 7. Factors affecting commodity market the most

ANALYSIS 34% of the people think, speculations lead so no other factors effect

commodity market. 8. Scope of commodity futures in India

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INDIAN COMMODITY MARKET

ANALYSIS 30% of the people are not aware about commodity market. Maximum people are aware about the future growth of this market.

15 CONCLUSION
This decade is termed as Decade of Commodities. India is one of the top producers of large number of commodities and also has a long history of trading in commodities and related derivatives. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now it has made enormous progress in terms of technology, transparency and trading activity. Interestingly, this has happened only after the Government protection was removed from a number of Commodities, and market force was allowed to play their role. As majority of Indian investors are not aware of organized commodity market; their perception about is of risky to very risky investment. Many of them have wrong impression about commodity market in their minds. It makes them specious towards commodity market. Firstly, we should make the general people
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INDIAN COMMODITY MARKET think positive about the COMMODITY MARKET as well concerned authorities have to take initiative to make commodity trading process easy and simple and the knowledge can be spread by arranging seminars targeting general publics and people who are more risk takers in stock markets even news channels are better source for creating awareness. There is no doubt that in near future commodity market will become Hotspot for Indian farmers rather than spot market. And producers, traders as well as consumers will be benefited from it. But for this to happen one has to take initiative to standardize and popularize the Commodity Market.

16 References:
Books and Journals COMMDITY MARKET (CHATNANI ,N,) COMMODITY FUNDAMENTALS (SPURGA. R.) IUP ON COMMODITY MARKETS: Recent Trends (ALGIRI-D.)

Newspapers and Articles ECONOMIC TIMES MINT


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INDIAN COMMODITY MARKET TIMES OF INDIA

Websites www.ncdex.com business. mapsofindia.com www.indiainfoline.com indian-commodity.com www.bcel.org en.wikipedia.org/wiki

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