Commodity Trading an Indian Perspective

8/13/2019 Commodity Trading an Indian Perspective

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COMMODITY TRADING AN INDIAN PERSPECTIVE

INTRODUCTION:

India has a long history of commodity futures trading, extending over one

hundred and twenty-five years. Still, such trading was interrupted suddenly

since the mid-seventies in the fond hope of ushering in an elusive socialisticpattern of society. As the country embarked on economic liberalization

policies and signed the A!! Agreement in the early nineties, the

government realized the need for futures trading to strengthen the

competitiveness of Indian agriculture and the commodity trade and industry.

"utures trading began to be permitted in several commodities, and the

ushering in of the #$st %entury saw the emergence of new &ational

%ommodity 'xchanges with countrywide reach for trading in almost all

primary commodities and their products. A commodity futures contract is

essentially a financial instrument. "ollowing the absence of futures trading in

commodities for nearly four decades, the new generation of %ommodity

producers, processors, market functionaries, financial organizations, broking

agencies and investors at large are, unfortunately, unaware at present of the

economic utility, the operational techni(ues and the financial advantages of

such trading. !he )ulti %ommodity 'xchange of India *)%+ the premier &ew

rder 'xchange in the country is, therefore, launching this %ommodity

"utures 'ducation Series to provide valuable insights into the rationale for

such trading, and the trading practices and regulatory procedures prevailing

at the 'xchange. "or easy understanding and simplification of various issues

and nuances involved in commodity futures trading, a convenient (uestion-

answer approach is adopted.

ALLIANCE BUSINESS ACADEMY 1


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COMMODITY: A. %ommodity includes all kinds of goods. "%A defines

/goods/ as /every kind of movable property other than actionable claims,

money and securities/. "utures0 trading is organized in such goods orcommodities as are permitted by the %entral overnment. At present, all

goods and products of agricultural *including plantation, mineral and fossil

origin are allowed for futures trading under the auspices of the commodity

exchanges recognized under the "%A.

!he national commodity exchanges have been recognized by the %entral

overnment for organizing trading in all permissible commodities which

include precious *gold 1 silver and nonferrous metals2 cereals and pulses2

ginned and unginned cotton2 oilseeds, oils and oilcakes2 raw 3ute and 3ute

goods2 sugar and gaur2 potatoes and onions2 coffee and tea2 rubber and

spices, etc.

FUTURES CONTRACT:

A. A futures contract is a type of /forward contract/. "%A defines forward

contract as /a contract for the delivery of goods and which is not a

ready delivery contract/. 4nder the Act, a ready delivery contract is one,

which provides for the delivery of goods and the payment of price there

fore, either immediately or within such period not exceeding $$ days

after the date of the contract, sub3ect to such conditions as may be

prescribed by the %entral overnment. A ready delivery contract is

re(uired by law to be fulfilled by giving and taking the physical delivery

of goods. In market parlance, the ready delivery contracts are

commonly known as /spot/ or /cash/ contracts. All contracts in

commodities providing for delivery of goods and5or payment of price



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after $$ days from the date of the contract are /forward/ contracts.

"orward contracts are of two types - /Specific 6elivery %ontracts/ and

/"utures %ontracts/. Specific delivery contracts provide for the actual

delivery of specific (uantities and types of goods during a specifiedfuture period, and

7. In which the names of both the buyer and the seller are mentioned. !he

term 0"utures contract0 is nowhere defined in the "%A. 7ut the Act

implies that it is a forward contract, which is not a specific delivery

contract. 8owever, being a forward contract, it is necessarily /a contract

for the delivery of goods/. A futures contract in which delivery is not

intended is void *i.e., not enforceable by law, and is, therefore, not

permitted for trading at any commodity exchange.

THE SALIENT FEATURES OF A COMMODITY FUTURES CONTRACT:

A commodity futures contract is a tradable standardized contract, the terms of

9hich are set in advance by the commodity exchange organizing trading in it:

!he futures contract is for a specified variety of a commodity, known as the

/basis/, though (uite a few other similar varieties, both inferior and superior,

are allowed to be deliverable or tender able for delivery against the specified

futures contract. !he (uality parameters of the /basis/ and the permissible

tender able varieties2 the delivery months and schedules2 the places of

delivery2 the /on/ and /off/ allowances for the (uality differences and the

transport costs2 the tradable lots2 the modes of price (uotes2 the procedures

for regular periodical *mostly daily clearings2 the payment of prescribed

clearing and margin monies2 the transaction, clearing and other fees2 the

arbitration, survey and other dispute redressing methods2 the manner of

settlement of outstanding transactions after the last trading day, the penalties



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for non issuance or non-acceptance of deliveries, etc., are all predetermined

by the rules and regulations of the commodity exchange. %onse(uently, the

parties to the contract are re(uired to negotiate only the (uantity to be bought

and sold, and the price. 'verything else is prescribed by the 'xchange.7ecause of the standardized nature of the futures contract, it can be traded

with ease at a moment0s notice.

PHYSICAL AND FUTURES COMMODITY MARKETS:

A KIND OF STATUTORY FRAMEWORK FOR REGULATING COMMODITYFUTURES EXISTS IN INDIA:

A. %ommodity futures contracts and the commodity exchanges organizing

trading in such contracts are regulated by the overnment of India under the

"orward %ontracts *egulation Act, $;


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resulting from adverse price variations. !he reason for this is obvious. !he

value losses emerging from price risks are much larger and the probability of

the recurrence is far more fre(uent than the physical losses in both the

(uantity and (uality of goods caused by accidental fires and mishaps, oroccasional thefts. %ommodity producers, merchants, stockiest and importers

face the risks of large value

>osses on their production, purchases, stocks and imports from the fall in

prices. >ikewise, the processors, manufacturers, exporters and other market

functionaries, entering into forward sale commitments in either the domestic

or export markets, are exposed to heavy risks from adverse price changes.

!rue, price variability may also lead to windfalls, when prices move favorably.

In the long run, such gains may even offset the losses from adverse price

movements. 7ut the losses, when incurred, are, at times, so huge that these

may often cause insolvencies. !he greater the exposure to commodity price

risks, the greater is the share of the commodity in the total earnings or

production costs. 8ence, the need for price risks management or hedging

through the use of futures contracts. 8edging involves buying or selling of a

standardized futures contract against the corresponding sale or purchase

respectively of the e(uivalent physical commodity. !he benefits of hedging

flow from the relationship between the prices of contracts *either ready or

forward for physical delivery and those of futures contracts. So long as these

two sets of prices move in close unison and display a parallel *or closely

parallel relationship, losses in the physical market are offset, either fully or

substantially, by the gains in the futures market. 8edging thus performs the

economic function of helping to reduce significantly, if not eliminate altogether,

the losses emanating from the price risks in commodities.



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COMMODITY FUTURES EXCHANGE WITH RESPECT TO PRICE

DISCOVERY AND PRICE RISK MANAGEMENT:

4nlike the physical market, a futures market facilitates offsetting the trades

without exchanging physical goods until the expiry of a contract. As a result,futures market attracts hedgers for risk management, and encourages

considerable external competition from those who possess market information

and price 3udgment to trade as traders in these commodities. 9hile hedgers

8ave long-term perspective of the market, the traders or arbitragers2 prefer an

immediate view of the market. 8owever, all these users participate in buying

and selling of commodities based on various domestic and global parameters

Such as price, demand and supply, climatic and market related information.

!hese factors, together, result in efficient price discovery, allowing large

number of buyers and sellers to trade on the exchange. )%+ is

communicating these prices all across the globe to make the market more

efficient and to enhance the utility of this price discovery function.

PRICE RISK MANAGEMENT:

8edging is the practice of off-setting the price risk inherent in any cash

market position by taking an e(ual butopposite position in the futures market.

!his techni(ue is very useful incase of any long-term re(uirements for which

the prices have to be firmed to (uote a sale price but to avoid buying the

physical commodity immediately to prevent blocking of funds and incurring

large holdingcosts.



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HEDGERS:

!he details of hedging can be somewhat complex but the principle is simple.

8edgers are individuals and firms that make purchases and sales in the

futures market solely for the purpose of establishing a known price level--weeks or months in advance--for something they later intend to buy or sell in

!he cash market *such as at a grain elevator or in the bond market. In this

way they attempt to protect themselves against the risk of an unfavorable

price change in the interim. r hedgers may use futures to lock in an

acceptable margin between their purchase cost and their selling price.

%onsider this example?

A 3ewelry manufacturer will need to buy additional gold from his supplier in six

months. 7etween now and then, however, he fears the price of gold may

Increase. !hat could be a problem because he has already published his

catalog for a year ahead. !o lock in the price level at which gold is presently

being (uoted for delivery in six months, he buys a futures contract at a price

of, say, @


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7orrowers can hedge against higher interest rates, and lenders against lower

interest rates. Investors can hedge against an overall decline in stock prices,

and those who anticipate having money to invest can hedge against an

increase in the over-all level of stock prices. And the list goes on. 9hateverthe hedging strategy, the common denominator is that hedgers willingly give

up the opportunity to benefit from favorable price changes in order to achieve

protection against unfavorable price changes.

SPECULATORS:

9ere you to speculate in futures contracts, the person taking the opposite

side of your trade on any given occasion could be a hedger or it might well be

another speculator--someone whose opinion about the probable direction of

prices differs from your own.

!he arithmetic of speculation in futures contracts--including the opportunities it

offers and the risks it involves--will be discussed in detail later on. "or now,

suffice it to say that speculators are individuals and firms who seek to profit

from anticipated increases or decreases in futures prices. In so doing, they

help provide the risk capital needed to facilitate hedging. Someone who

expects a futures price to increase would purchase futures contracts in the

hope of later bring able to sell them at a higher price. !his is known as /going

long./ %onversely, someone who expects a futures price to decline would sell

futures contracts in the hope of later being able to buy back identical and

offsetting contracts at a lower price. !he practice of selling futures contracts in

anticipation of lower prices is known as /going short./ ne of the attractive

features of futures trading is that it is e(ually easy to profit from declining

prices *by selling as it is to profit from rising prices *by buying.



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FLOOR TRADERS:

=ersons known as floor traders or locals, who buy and sell for their own

accounts on the trading floors of the exchanges, are the least known and

understood of all futures market participants. Det their role is an importantone. >ike specialists and market makers at securities exchanges, they help to

provide market li(uidity. If there isn0t a hedger or another speculator who is

immediately willing to take the other side of your order at or near the going

price, the chances are there will be an independent floor trader who will do so,

in the hope of minutes or even seconds later being able to make an offsetting

trade at a small profit. In the grain markets, for example, there is fre(uently

only one-fourth of a cent a bushel difference between the prices at which a

floor trader buys and sells. "loor traders, of course, have no guarantee they

will realize a profit. !hey may end up losing money on any given trade. !heir

presence, however, makes for more li(uid and competitive markets. It should

be pointed out, however, that unlike market makers or specialists, floor

traders are not obligated to maintain a li(uid market or to take the opposite

side of customer orders.

Reasons for !"#n$f!%!res &on%ra&%s

Reasons for Se''#n$f!%!res &on%ra&%s

He($ers!o lock in a price andthereby obtain protectionagainst rising prices

!o lock in a price andthereby obtain protectionagainst declining prices

S)e&!'a%ors an(f'oor Tra(ers

!o profit from risingprices

!o profit from decliningprices

THE PROCESS OF PRICE DISCOVERY?



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"utures prices increase and decrease largely because of the myriad factors

that influence buyers0 and sellers0 3udgments about what a particular

commodity will be worth at a given time in the future *anywhere from less than

a month to more than two years. As new supply and demand developmentsoccur and as new and more current information becomes available, these

3udgments are reassessed and the price of a particular futures contract may

be bid upward or downward. !he process of reassessment--of price

discovery--is continuous. !hus, in Eanuary, the price of a Euly futures contract

would reflect the consensus of buyers0 and sellers0 opinions at that time as to

what the value of a commodity or item will be when the contract expires in

Euly. n any given day, with the arrival of new or more accurate information,

the price of the Euly futures contract might increase or decrease in response

to changing expectations. %ompetitive price discovery is a ma3or economic

function--and, indeed, a ma3or economic benefit--of futures trading. !he

trading floor of a futures exchange is where available information about the

future value of a commodity or item is translated into the language of price. In

summary, futures prices are an ever changing barometer of supply and

demand and, in a dynamic market, the only certainty is that prices will change.

AFTER THE CLOSING ELL:

nce a closing bell signals the end of a day0s trading, the exchange0s clearing

organization matches each purchase made that day with its corresponding

sale and tallies each member firm0s gains or losses based on that day0s price

changes--a massive undertaking considering that nearly two-thirds of a million

futures contracts are bought and sold on an average day. 'ach firm, in turn,

calculates the gains and losses for each of its customers having futures

contracts.



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ains and losses on futures contracts are not only calculated on a daily basis,

they are credited and deducted on a daily basis. !hus, if a speculator were to

have, say, a @BB profit as a result of the day0s price changes, that amount

would be immediately credited to his brokerage account and, unless re(uiredfor other purposes, could be withdrawn. n the other hand, if the day0s price

changes had resulted in a @BB loss, his account would be immediately

debited for that amount.

!he process 3ust described is known as a daily cash settlement and is an

important feature of futures trading. As will be seen when we discuss margin

re(uirements, it is also the reason a customer who incurs a loss on a futures

position may be called on to deposit additional funds to his account.

THE ARITHMETIC OF FUTURES TRADING:

!o say that gains and losses in futures trading are the result of price changes

is an accurate explanation but by no means a complete explanation. =erhaps

more so than in any other form of speculation or investment, gains and losses

in futures trading are highly leveraged. An understanding of leverage--and of

how it can work to your advantage or disadvantage--is crucial to an

understanding of futures trading.

As mentioned in the introduction, the leverage of futures trading stems from

the fact that only a relatively small amount of money *known as initial margin

is re(uired to buy or sell a futures contract. n a particular day, a margin

deposit of only @$,BBB might enable you to buy or sell a futures contract

covering @#


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direction you anticipated, high leverage can produce large profits in relation to

your initial margin. %onversely, if prices move in the opposite direction, high

leverage can produce large losses in relation to your initial margin. >everage

is a two-edged sword."or example, assume that in anticipation of rising stock prices you buy one

Eune S1=


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ASIC TRADING STRATEGIES:

'ven if you should decide to participate in futures trading in a way that doesn0t

involve having to make day-to-day trading decisions *such as a managed

account or commodity pool, it is nonetheless useful to understand the dollarsand cents of how futures trading gains and losses are realized. And, of

course, if you intend to trade your own account, such an understanding is

essential. 6ozens of different strategies and variations of strategies are

employed by futures traders in pursuit of speculative profits. 8ere is a brief

description and illustration of several basic strategies.

7uying *oing >ong to =rofit from an 'xpected =rice Increase Someone

expecting the price of a particular commodity or item to increase over from a

given period of time can seek to profit by buying futures contracts. If correct in

forecasting the direction and timing of the price change, the futures contract

can later be sold for the higher price, thereby yielding a profit.L If the price

declines rather than increases, the trade will result in a loss. 7ecause of

leverage, the gain or loss may be greater than the initial margin deposit.

For e*a+)'e,assume it0s now Eanuary, the Euly soybean futures contract is

presently (uoted at @F.BB, and over the coming months you expect the price

to increase. Dou decide to deposit the re(uired initial margin of, say, @$,


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bushel contract

Eanuary7uy $ Euly soybean

futures [email protected] @B,BBB

AprilSell $ Euly soybean

futures [email protected] @#,BBB

ain @ .JB @ #,BBB

"or simplicity examples do not take into account commissions and

other.

!ransaction costs. !hese costs are important, however, and you should

be sure you fully understand them.

Suppose, however, that rather than rising to @F.JB, the Euly soybean futures

price had declined to @


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going long to profit from an expected price increase is the se(uence of the

trades. Instead of first buying a futures contract, you first sell a futures

contract. !he gain per unit will be the amount by which the purchase price is

below the earlier selling price. "or example, assume that in Eanuary yourresearch or other available information indicates a probable decrease in cattle

prices over the next several months. In the hope of profiting, you deposit an

initial margin of @#,BBB and sell one April live cattle futures contract at a price

of, say, F< cents a pound. 'ach contract is for JB,BBB pounds, meaning each

$ cent a pound change in price will increase or decrease the value of the

futures contract by @JBB. If, by )arch, the price has declined to FB cents a

pound, an offsetting futures contract can be purchased at < cents a pound

below the original selling price. n the JB,BBB pound contract, that0s a gain of

< cents x JB,BBB lbs. or @#,BBB less transaction costs.

=rice per

pound

Malue of JB,BBB

pound contract

EanuarySell $ April live cattle

futures contractF< cents @#F,BBB

)arch7uy $ April live cattle

futures contractFB cents @#J,BBB

ain < cents @ #,BBB

Assume you were wrong. Instead of decreasing, the April live cattle futures

price increases--to, say, CB cents a pound by the time in )arch when you

eventually li(uidate your short futures position through an offsetting purchase.!he outcome would be as follows?



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=rice per

pound

Malue of JB,BBB

pound contract

Eanuary

Sell $ April live cattle

futures contract F< cents @#F,BBB

)arch7uy $ April live cattle

futures contractCB cents @#H,BBB

>oss < cents @ #,BBB

In this example, the loss of < cents a pound on the futures transaction

resulted in a total loss of the @#,BBB you deposited as initial margin plus

transaction costs.



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RESEARCH DESIGN:

STATEMENT OF PROLEM:

=rice differences in the commodities between exchanges, portfolio

construction with a pair of commodities and suggesting of optimal investment

platform in India.

TITLE OF THE PRO-ECT:


OVERVIEW:

A commodity futures contract is essentially a financial instrument. "ollowing the

absence of futures trading in commodities for nearly four decades, the new

generation of commodity producers, processors, market functionaries, financial

organizations.

SCOPE:

!he study includes study of ten commodities taken from two exchanges in India, the

study restricts to construction of portfolio of pairs of commodities.



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O-ECTIVES:

!o Study of commodity market in India.

!o %onstruction of commodity portfolio.

!o find risk and return of various commodities taken for study.

!o "ind out of correlation and variance between commodities which

are traded in the two exchanges.

!o "ind out of the arbitrage opportunity between the two exchanges.

!o find out the suitable optimal exchange for an investor to trade onvarious commodities.

RESEARCH METHODOLOGY:

TYPE OF STUDY: "or the purpose of the study descriptive analysis is

done where the prices of commodities are taken and returns are

calculated based on the market data.

SAMPLING:

S#.e? !en commodities are taken from two exchanges for a

period of time with a duration of three months considering

the historical information from both the exchanges

Selection? &on probabilistic convenient sampling.

SOURCES OF DATA:

Secondary data have been considered for evaluation.



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!he prices of a set of ten commodities are taken for the

study from commodities exchanges.

LIMITATIONS OF THE STUDY :

Study of ten commodities from two exchanges.

=ortfolio construction is restricted to pairs of commodities.

=ortfolio constructed on historical prices.

As the methodology uses the statistical tools, hence

constraints of statistics are applicable.

PLAN OF ANALYSIS:

COVARIANCE MATRIX:

In the study covariance matrix has been calculated by the following ways and

means?

PURPOSE:



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correlations between returns are the true correlations An important (uestion is

whether these values for correlation coefficients can be used directly to

(uantify the portfolio variance the portfolio variance can be expressed as a

function of the correlation coefficients in that. 4nless the correlation matrix O,is positive definite, the portfolio variance can be negative. Since by definition

the variance is the second central moment about the expected mean, it has to

be positive.

A correlation matrix is either positive definite or positive semi-definite because

the variance of a vector of random primary variables is always greater than or

e(ual to zero, and it is positive definite if there are no linear dependencies

among the primary variables. !his is an important theoretical re(uirement that

is often ignored. A conse(uence of ignoring this re(uirement is that the

determinant of the correlation matrix can be negative implying that the derived

portfolio variance can some how be negative. !herefore, a correlation matrix

developed from a set of correlation coefficients that are estimated from

historical data for asset returns should and must be positive definite. !his can

be ensured by adopting the following procedure. "irst,. "or example, it could

be according to the analyst0s confidence in their relationship with other asset

returns. !he asset return that is selected as the /best/ is numbered one and

the /worst/ numbered n *when there are n asset returns in the optimization

exercise. !he correlation coefficient between asset returns numbered $ and #

is considered to be true because the # + # correlation matrix is always

positive definite.

HYPOTHESIS TESTING:

H/: T0ere #s no (#fferen&e #n re%!rns 1e%2een %0e %2o e*&0an$es

H3: T0ere #s (#fferen&e #n re%!rns 1e%2een %0e %2o e*&0an$es



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A t-test was conducted to find out whether there is any difference in returns leading

to arbitrage between the two exchanges. !he t-test was conducted with help of

returns and variances of the portfolios from the two exchanges.

!he result showed that there is arbitrage opportunity between the exchanges for a

certain pair of commodities which leads to optimal investments and maximum

returns.



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INDUSTRY PROFILE:

COMMODITY TRADING AN INVESTOR4S PERSPECTIVE:

Po#n%s %o 1e &ons#(ere( 1" #n5es%ors #n %er+s of #n5es%#n$ #n &o++o(#%#es

+ar6e%:

"ollow the trends. !his is probably some of the hardest advice for a trader to

follow because the personality of the typical futures trader is not /one of the

crowd./ "utures traders *and futures brokers are highly individualistic.

Apply money management techni(ues to your trading.

!rade with the trends, rather than trying to pick tops and bottoms

%alculate the risk5reward ratio before putting a trade on, then guard against

the risk of holding it too long

'stablish trading plans before the market opening to eliminate emotional

reactions

"ollow the plan. nce a position is established and stops are selected, do notget out unless the stop is reached, or the fundamental reason for taking the

position changes

4se technical signals *charts to maintain discipline P the vast ma3ority of

traders are not emotionally e(uipped to stay disciplined without some

technical tools. 4se discipline to eliminate impulse trading

8ave a disciplined, detailed trading plan for each trade2 i.e., entry, ob3ective,

exit, with no changes unless hard data changes. 6isciplined money

management means intelligent trading allocation and risk management. !he

overall ob3ective is end-of-year bottom line, not each individual trade



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!rading commodity futures and options is not for everyone. It is a volatile, complex,

and risky business. 7efore you invest any money in futures or options contracts, you

should?

%onsider the financial experience, goals, and financial resources and know

how much can afford to lose above and beyond your initial payment.

4nderstand commodity futures and option contracts and obligations in

entering into those contracts.

4nderstand exposure to risk and other aspects of trading by thoroughly

reviewing the risk disclosure documents broker is re(uired to give you.

!he brochures will provide with general information about trading commodity futures

and options. 9e encourage you to ask more (uestions and gather more information

before you open an account.

!he also issues consumer advisories to alert the public to warning signs of possible

fraudulent activity and offer precautions individuals should take before committing

funds. 9e encourage you to review these advisories before you trade.

Additionally, you may wish to visit the &ational "utures Association *&"A Investor

Services web site for more information and related publications.

A(5an%a$es of %ra(#n$ #n &o++o(#%#es for an #n5es%or:

Le5era$e---4nlike the stock market, where you might have to actually spend

up to @$BB,BBB to buy @$BB,BBB worth of a stock, through margin deposits, a

commodities trader can leverage hundreds of thousands of dollars worth of a

commodity for pennies on the dollar.

Go5ern+en% re$!'a%e(---!he futures markets are so crucial to the well being

of our nation, that the government established the %ommodity "utures



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Ho2 %o se'' so+e%0#n$ %0a% #s no% o2n, or 20" 2o!'( one 1!"

so+e%0#n$ 20#&0 #s no% nee(e(; !he answer is simple. 9hen trading

futures, you never actually buy or sell anything tangible2 you are 3ust

contracting to do so at a future date. Dou are merely taking a buying or sellingposition as a speculator, expecting to profit from rising or falling prices. Dou

have no intention of making or taking delivery of the commodity you are

trading, your only goal is to buy low and sell high, or vice-versa. 7efore the

contract expires you will need to relieve your contractual obligation to take or

make delivery by offse%%#n$*also known as !n2#n(, or '#7!#(a%e your initial

position. !herefore, if you originally entered a short position, to exit you would

buy, and if you had originally entered a long position, to exit you would sell.

LEVERAGE:

!he following contains mathematical examples of leverage in the commodity

markets. &o representation is being made that any account has, or is likely to

achieve profits similar to those shown in these examples.

If I buy a bushel of corn from a farmer for @#.F< per bushel, and it

subse(uently rises to @#.;< per bushel, havenKt I only made B cents:

If you only purchased one bushel of corn, you would be correct. 9hat if you

had purchased


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long $ corn futures contract with your A>!AM'S! 9orldwide !rading, Inc.

broker and if the price of the corn contract rose B-cents, you would reap the

same dollar reward...@$,


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%lients intending to take5give physical delivery will have to comply with

the following additional formalities?

btain Sales !ax egistration where the delivery center of the commodity

traded in is located.

E'e&%ron#& for+ of &o++o(#%" %ra(#n$:

The move to electronic trading in the commodities markets, ongoing

deregulation and the pressure to increase trading margins are all making

it more important than ever for you to improve trading efficiencies.

Now theres a unique trading solution that lets you execute across

multiple executionMenues P fully integrated within your desktop.

!he outing for %ommodities technology facilitates an open and neutral order

outing hub hosted by energy traders and incorporating !ray portKs trading

technology.

It allows continued connection by traders to their existing trading poolsL and easier

future connection to other execution venues.

'xecute on the best price for each instrument and carry out trades across multiple

marketplaces simultaneously. It all adds up to increased productivity and a

competitive advantage so crucial in todayKs fast-paced energy markets.

!rader for %ommodities to meet your needs.

9ith rder outing for %ommodities, youKre able to?

!rade more, at lower risk, increasing both company profits and individual

bonuses

ain increased trading confidence from being able to instantly compare

prices from your execution venues

Increase trading volume without alerting the market and raising prices

educe the number of trading screens and hardware providing for less

distraction and maintenance on the desktop



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educe error costs and resource demands and optimize reconciliation and

settlement using the consolidated feed of deal ticket information from the

multiple execution venues to your mid- and back-office systems.

COMPANIES PROFILE:In the area of commodity trading in India there a two exchanges with which an

investor can invest on commodities and earn profit. !he two exchanges are

MCX ife Insurance %o. >td., 4nion 7ank of India, 7ank f India, 7ank f

7aroda, %anara 7ank, %orporation 7ank. 8ead(uartered in )umbai, )%+ is led by

an expert management team with deep domain knowledge of the commodity futures

markets. !hrough the integration of dedicated resources, robust technology andscalable infrastructure, since inception )%+ has recorded many first to its credit.

)%+ has built strategic alliances with some of the largest players in commodities

eco-system, namely, 7ombay 7ullion Association, 7ombay )etal 'xchange, Solvent

'xtractors0 Association of India, =ulses Importers Association, Shetkari Sanghatana,

4nited =lanters Association of India and India =epper and Spice !rade Association.

!oday )%+ is offering spectacular growth opportunities and advantages to a large

cross section of the participants including =roducers 5 =rocessors, !raders,

%orporate, egional !rading %enters, Importers, 'xporters, %ooperatives, Industry

Associations, amongst others )%+ being nation-wide commodity exchange, offering



31/69


multiple commodities for trading with wide reach and penetration and robust

infrastructure, is well placed to tap this vast potential.

WINNING EDGE:

Va'!e Pro)os#%#on > )%+0s most important differentiator and strength is that it is an

independent and a de-mutualized exchange since inception. !his is further

strengthened by participation from different constituents of the market, such as

banks, financial institutions, warehousing companies and other stakeholders of the

marketplace. )oreover, experienced professionals with deep knowledge of the

commodity markets as well as exchange management experience manage )%+.

Ne!%ra' I+a$e >)%+ has de-mutualized status from inception that allows formation

of a broad, collaborative business partnership. S%ra%e$#& E7!#%" Par%ners0#)s >

)%+ has consolidated it base by entering into strategic e(uity partnership with

leading nationalized banks like State 7ank of India, 86"% 7ank, State 7ank of

Indore, State 7ank of 8yderabad, State 7ank of Saurashtra, S7I >ife Insurance %o.

>td., 4nion 7ank of India, 7ank f India, 7ank f 7aroda, %anara 7ank, %orporation

7ank.

Tra(e S!))or% > )%+ has already tied up exclusively with some of the largest

players in this eco-system, namely, 7ombay 7ullion Association, 7ombay )etal

'xchange, Solvent 'xtractors0 Association of India, =ulses Importers Association,

Shetkari Sanghatana, 4nited =lanters Association of India and India =epper and

Spice !rade Association.

FTIL: Te&0no'o$" Par%ner >It is here that )%+ gets the strategic advantage ofhaving "inancial !echnologies *India >td. as its technology partner for delivering

technologically advanced solutions to market participants. "!I>0s proven class of

end-to-end 'xchange !rading technologies addressing !rading 5 Surveillance 5



32/69


%learing and Settlement operations would deliver a cutting-edge to the )%+ !rade

>ife %ycle i.e. =re-!rade, !rade and =ost-!rade operations. In addition to its

*technology technological capabilities, "!I> also brings to )%+ its deep

engagements with technology giants such as )icrosoft 5 Intel and 8= which would

be used to gain the competitive edge in gaining foothold in global markets

PRODUCTS TRADED IN THE EXCHANGE:

old, old ), old 8&I, Silver, Silver ), Silver 8&I %astor Seeds, %astor Seeds

*6isa, Soy Seeds, %astor il, efined Soy il, Soy meal, 76 =almolein, %rude

=alm il, roundnut il, Sesame Seed, )ustard Seed, )ustard Seed il,


enef#%s %o In(!s%r"

8edging the price risk associated with futures contractual commitments.

Spaced out purchases possible rather than large cash purchases and its

storage.

'fficient price discovery prevents seasonal price volatility.

reater flexibility, certainty and transparency in procuring commodities

would aid bank lending.

"acilitate Informed lending

8edged positions of producers and processors would reduce the risk of

default faced by banks

>ending for agricultural sector would go up with greater transparency in

pricing and storage. %ommodity 'xchanges to act as distribution network to retail agri-finance

from 7anks to rural households.

=rovide trading limit finance to !raders in commodities 'xchanges


33/69


%ottonseed, %ottonseed ilcake =epper, ed %hilli, Eeera, !urmeric Steel >ong,

Steel "lat, %opper, &ickel, !in apas, >ong Staple %otton, )edium Staple

%otton%hana, 4rad, Dellow =eas, !ur ice, 7asmati ice, 9heat, )aize, Sarbati

ice %rude il ubber, uar Seed, ur, Sugar )-B, Sugar S-B, uargum

7andhani, uargum, %ashewernel, uarseed 7andhani, )entha il.

NCDEX imited *I%I%I

7ank, >ife Insurance %orporation of India *>I%, &ational 7ank for Agriculture and

ural 6evelopment *&A7A6 and &ational Stock 'xchange of India >imited *&S'.

=un3ab &ational 7ank *=&7, %ISI> >imited *formerly the %redit ating Information

Services of India >imited, Indian "armers "ertilizer %ooperative >imited

*I""% and %anara 7ank by subscribing to the e(uity shares have 3oined the

initial promoters as shareholders of the 'xchange. &%6'+ is the only commodity

exchange in the country promoted by national level institutions. !his uni(ue

parentage enables it to offer a bou(uet of benefits, which are currently in short

supply in the commodity markets. !he institutional promoters of &%6'+ are

prominent players in their respective fields and bring with them institutional building

experience, trust, nationwide reach, technology and risk management skills.

&%6'+ is a public limited company incorporated on April #, #BB under the

%ompanies Act, $;


34/69


commodity exchange platform for market participants to trade in a wide spectrum of

commodity derivatives driven by best global practices, professionalism and

transparency.

&%6'+ is regulated by "orward )arket %ommission in respect of futures trading in

commodities. 7esides, &%6'+ is sub3ected to various laws of the land like the

%ompanies Act, Stamp Act, %ontracts Act, "orward %ommission *egulation Act

and various other legislations, which impinge on its working.

&%6'+ is located in )umbai and offers facilities to its members in more than ;B

centers throughout India. !he reach will gradually be expanded to more centers.

&%6'+ currently facilitates trading of thirty six commodities - %ashew, %astor Seed,%hana, %hilli, %offee, %otton, %otton Seed ilcake, %rude =alm il, 'xpeller

)ustard il, old, uar gum, uar Seeds, ur, Eeera, Eute sacking bags, )ild Steel

Ingot, )ulberry reen %ocoons, =epper, apeseed - )ustard Seed ,aw Eute, 76

=almolein, efined Soy il, ice, ubber, Sesame Seeds, Silk, Silver, Soy 7ean,

Sugar, !ur, !urmeric, 4rad *7lack )atpe, 9heat, Dellow =eas, Dellow ed )aize 1

Dellow Soybean )eal. At subse(uent phases trading in more commodities would be

facilitated



35/69


RESEARCH ORGANISATIONS ROLE IN COMMODITIES TRADING:

REUTERS?

Stay ahead of the game as a player in the fast-paced commodities markets, you

know what you need P but you donKt have time to search for it. euters !rader for

%ommodities can help you stay one step ahead of the game. &ow the most sought-

after commodities content from euters is offered in an easy-to use desktop and

available in cost-effective packages to suit your precise needs. %hoose from market-

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energy P and pay only for what you need. 9ith euters !rader for %ommodities, you

get specially designed commodities workbooks. r take advantage of the open,

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you can be (uick on your feet. All the specialist data, news 1 applications P all in

one place euters !rader for %ommodities puts all the information and tools you

need to stay on top of the markets in one flexible desktop. !hat means news2

reports, prices and more are available from easy-to-navigate displays, designed by

market professionals to reflect the way you work. )aximize your productivity with awide range of market overviews, models and calculators. =re-built displays provide

easy point-and-click functionality so you can focus on analyzing and acting on the

latest market moves. =lus euters )essaging, built specifically for the needs ofthe

financial community, lets you communicate with your customers and colleagues in

real-time, as well as secure a complete audit trail to meet compliance re(uirements.

!he flexibility to customize euters !rader for %ommodities offers supreme

flexibility, enabling you to incorporate in-house and third-party data, link prices and

(uotes and create displays that reflect your exact needs. r let euters 6esktop

6esigners custom-build worksheets and analytical tools for you and your company.

4nbeatable news reporting &o one delivers the news like euters. As the worldKs

largest international news agency, our specialist commodities and energy reporters



36/69


P backed by a network of over #,BBB euterKs 3ournalists P provide timely, accurate

coverage to keep you informed. euters has been delivering commodities news for

more than $


37/69


combination of content, technology and connectivity to gain a competitive

advantage.

EXPERTISE:

As the largest international news organization in the world, our reputation isbuilt on core values of accuracy, speed and balanced reporting to uncover the

market moving news on the commodities you follow.

"7 pricing: )ergers: 7asis changes: &ew government rules: 9e deliver

the facts (uickly and put news into context to help you make decisions with

confidence

ur 3ournalists are experts in their field who draw on their knowledge,

experience and contacts to produce news with authority.

!he strength of our political, general, financial markets and macro-economic

reporting complements our commodities news to constantly keep you up to

date on the events and factors that affect your market.

9e draw on the expertise of people in the market to give you the edge in

yours. !hrough our agreements with organizations such as %4 International

*base metals, Sov'con *agriculture, " >ight *sugar, Ivan 9ong *palm oil,

il 9orld *oilseeds, 4S6A *crops, 4S %ensus 7ureau *oilseeds and others

we give you consolidated access to the voices of authority in your market P

meaning you donKt have to waste time searching for them.

THE COMPETITIVE EDGE:

ur unrivalled network of reporters talking to companies in their own

languages means we get the tip-offs and are able to immediately track down

stories by tapping our local insight and contacts. As a result, we routinely

break stories first. 9e cover all the significant news that affects and drives the market. euterKs

fast, accurate and expert coverage of political, economic, energy, debt and



38/69


e(uity markets gives commodities players a comprehensive view of all the

factors moving the market P from hurricanes to wars to corporate mergers.

4ni(ue products are built into your euters service. In base metals, our

)etals =roduction 6atabase gives you capacity and production details on allma3or base smelters and alumina plants around the world. In oilseeds, our

canola crushing calculator page yields real-time margins in %anadian dollars,

euro and yen, based on %7! and 9%' prices.

ur position as the leading commodities news provider means our 3ournalists

get access, often exclusively, to the people who move the markets.

euterKs global muscle means that we marshal resources (uickly to cover the

big events that matter to you P from >)' week to global trade talks to farm

reform.

UNRIVALLED GLOAL REACH:

ur HB-strong team of commodities reporters globally brings you breaking

news and exclusives in 'nglish, "rench, =ortuguese, Spanish, %hinese and

fourteen other languages to help you form your decisions each day.

euters commodities news service draws on the work of our entire network of

#,BB reporting staff, in nearly #BB newsrooms worldwide, to provide local

insight and access to key market players. 9e bring you the big picture on

commodities industries and the companies competing in them.

ur market reporting is anchored around the key futures markets in %hicago,

&ew Dork, >ondon, the "ar 'ast and South America, and is complemented by

daily news coverage of crops, smelters and mines, weather, cash markets,

ports and regulators in all corners of the globe.

9e bring you exclusive polls, surveys, forecasts and interviews to offeruni(ue insight into the expectations of key market participants.



39/69


PRODUCT PROFILE:

In India there a large number of commodities on which trading are being done.

In brief descriptions of various products are as fallows?-

Go'(:

old the most prominent of all precious metals, is widely sought after throughout

the world for both its investment (ualities and industrial properties. Indeed, gold

traditionally has served three functions? as a monetary instrument, as a financial

asset and as a raw material primarily used in 3ewelry and decorative ob3ects as an

investment, gold typically is viewed as a financial asset that will maintain its value

during times of political, social or economic distress. As such, gold can provide

individual and institutional investors alike a portfolio safety net against sharp

downward spikes in complementary assets such as stocks and bonds. )illions of

people all over the world continue to use gold as a hedge against inflation and as a

basic form of savings.

S#'5er:

Soft, lustrous, white silver was one of the first metals known to humans. "or the

ancient citizens, silver was an ob3ect of amazing beauty, instilled with the mystic(ualities of the moon, whose dark and mysterious nature it seemed to mirror. nce a

standard in the world monetary system, today silver plays an important role as both

a financial investment and industrial material. Investors often purchase physical

silver in either bullion bar or coin form, with the ma3ority of metal presently bought in

the 4nited States, ermany, and %anada In emerging markets, investment demand

for silver also is vibrant. 8owever, in these countries, silver tends to be held in the

form of 3ewelry, ornaments, and religious ob3ects that are easily melted down and

resold.



40/69


Co%%on:

%otton is the single most important textile fiber in the world, accounting for over JB

percent of total world fiber production. 9hile some HB countries from around the

globe produce cotton, the 4nited States, %hina, and India together provide over half

the world0s cotton. !he world0s four largest producing and consuming countries are

%hina, the 4nited States, India, and =akistan. !ogether these four account for

around FB percent of world cotton production and consumption.

India is the third-largest producer of cotton and the second-largest consumer. %otton

accounts for more than C


41/69


changes in trade policy are important contributors to India0s increasing consumption

and imports.

So"a1ean o#':

In #BB#5B, India consumed more than ;.;H million metric tons *mmt of edible oils,

up from 3ust over # mmt annually in the early $;CBs, placing India behind only %hina

and the 'uropean 4nion in total edible oil consumption. Although influenced by an

array of policies affecting domestic oil suppliesTthrough changes in oilseed

production, the efficiency of the processing sector, and imports - consumption

growth has been propelled by the demands of a rapidly expanding population.

Pa'+ o#':

=alm oil has played a positive role in the world oils and fats supply and demand

e(uation largely due to its techno-economic advantages and versatility as well as

some of the developments in the world in relation to security of supply, health and

environment. !he ma3or markets for palm oil are in the developing countries

Although these markets have great potential, there are always markets impediments

as many of these developing countries institute measures to curtail imports to

protect their domestic farming community, self-sufficiency ob3ectives or cope with

financial constraints including shortage of foreign exchange. India, which is one of

the largest importer and consumer of edible oils in the 9orld, imports more than million tons of palm oil annually *mainly from )alaysia, followed by Indonesia. !his

implies that the country is dependent on palm oil imports for over #


42/69


Cas%or:

%astor seed is one of the commodities where India en3oys supremacy as far as

production and export is concerned. India contributes C


43/69


Ma?or )ro(!n$ re$#ons

%astor is grown especially in arid and semi arid region. %astor is originated in the

tropical belt of both India and Africa. It is cultivated in B different countries on a

commercial scale. India, %hina, 7razil, 4SS, !hailand 'thiopia and =hilippines are

ma3or castor growing regions. !hey account for about HHG of the world0s production.

8istorically, 7razil, %hina and India have been the key producing countries meeting

global re(uirements.

In%erna%#ona' s&enar#o

%ountries from tropical regions dominate castor market. India is the ma3or producer

with FJ G share in the world castor market, followed by %hina and 7razil with # G

and C G share respectively. !he world castor seed production fluctuates between

$.# to $.Hmn tons.

In(#an s&enar#o

In India, with the onset of monsoon *Euly to August, the castor sowing commences

and harvested around 6ecember or Eanuary. !he seedpods are dried, de-podded

and brought to the market yards during 6ecember or Eanuary for trading. %astor is

cultivated for the commercial importance of its oil. IndiaKs castor production

fluctuates between B.F to B.;mn tons a year. In the year #BB-BJ, IndiaKs castor

production was B.Hmn tons. Indian castor variety contents JHG oil of which J#G canbe extracted. IndiaKs consumption of castor oil and its derivatives estimated at about

$BB,BBB tons. Indian climate is more suitable for castor cultivation and hence it is the

largest producer of this commodity. u3arat *)ehsana and

7anaskantha districts is the largest producer with B.Fmn tons of castor production

during #BB-BJ. Andhra =radesh with production at B.$Jmn tons and a3asthan with

B.$Bmn tons are other ma3or castor producers in the country.



44/69


Co))er:

%opper *>atin cuprum, from the island of %yprus is believed to have been mined for

over


45/69


industrialization and population growth. %hinaKs economy has been growing at a

phenomenal rate and the country is consuming everything from scrap to concentrate

to cathode to feed its rapidly building downstream industry. %hina0s copper industry

continues to astonish, with consumption rising by $


46/69


iv. Eapan was the largest exporter of steel in #BB$ followed by ussia and4kraine.

v ther significant recent developments in the global steel scenario have been?

vi !he crisis of excess capacity and prevalence of market distorting practices in the

global steel market has induced protectionist measures from a number of steel

trading countries. !o address these issues a series of high level inter-

governmental meetings have been held under the auspices of the '%6. As a part

of the long-term solution to global steel over-capacity, the proponents of the '%6

steel deliberations are of the view that subsidies and related government support

have caused and are causing significant distortions in the steel markets and these

will be re(uired to be reduced and where possible eliminated.

vii. In )arch #BB# the 4S =resident announced imposition of temporary

safeguard measures on import of key steel products into 4SA.

viii. In retaliation to the 4S action '4 has also imposed provisional safeguard

measures against import certain steel products.

ix. %hina, %anada and !hailand are some of the other countries that have

initiated safeguard investigations against import of steel products into their

countries.

In(#an S&enar#o

India produces # P million tons of steel per annum, which is mainly construction

steel. India imports its entire re(uirement of specialized steel such as for razor

blades, car body etc. !he P J integrated steel plants produce #J m tons and the

small steel manufacturers produce H m tons.

!he important ports for steel import and export are Mizak and %hennai. India also

exports construction steel to countries like %hina, which is of excess. !he important

organizations are Steel %orporation of India and the Small Steel =roducers

Association.



47/69


Mar6e% S&enar#o

After liberalization, with large scale addition to steel making capacity, there is

no shortage of iron and steel materials in the country.

Apparent consumption of steel increased from $J.HJ million tonnes in $;;$-

;# to #H.;B million tonnes in #BB#-B.

!he production of steel in #BB#-B is #.H< million tonnes as against B.F

million tonnes in #BB$-B# thereby registering an increase of C.#G.

!he demand of steel has been firmed up both at home as well as

internationally.

'fforts are being made to boost demand particularly in rural areas and also to

increase exports.

=rices of iron and steel have witnessed a steady rise over the last few

months. 6omestic prices have firmed up in the face of strong demand P both

domestic and foreign.

Pro(!&%#on

Steel industry was de-licensed and decontrolled in $;;$ and $;;#

respectively.

India is the ;thlargest producer of steel in the world.

In #BB#-B, finished steel production was #.H< million tonnes.

=ig iron production in #BB#-B was


48/69


In%erna%#ona' s&enar#o

Pro(!n$ Re$#ons

9orldwide wheat is grown in Asia, Africa, 'urope and America. n basis of area

maximum acreage comes from India that accounts for $G of total world acreage,

followed by '4, ussia, %hina, 4SA, Australia, %anada and azakhstan. !otal

acreage is around #$C million hectare which keeps fluctuating between #$B million

hectare to #B million hectare in general.

Pro(!&%#on

9orld production of wheat hovers around


49/69


50/69


9ayanad destricts in erala, %hikmagalur and %oorg in arnataka and udalur in

!amil &adu send pepper clandestinely to these centers without paying any sales tax.

According to the trade, the tax avoidance is around s.$B-$# crores every year in

erala and arnataka. India has fairly successful story in black pepper futures and is

the only country to have an exchange for pepper futures. Attempts for

internationalizing pepper futures markets have not succeeded so far.

R!11er:

In%erna%#ona' S&enar#o:

9orldwide, the automobile industry is the single largest consumer of natural rubber

in the form of auto tyres and tubes and certain other parts and accessories. "or

instance, Eapan0s 7ridgestone %orporation is world0s third largest producer of tyres.

It consumes lakh tonnes of natural rubber annually to produce FH different types of

tyres. Italy0s =irelli SpA consumes $, #B,BBB tonnes of natural rubber in the

production of tyres. 'conomic recession anywhere first hits this industry before any

other industry. !herefore, the world price of rubber goes through a cycle of few years

of boom followed by a few years of busts with the state of world economy.

Wor'( Pro(!&%#on:

9orld production has been fairly stable in the last three years even though it wasunstable in the last $B years. 9herein IndiaKs production has showed consistent

increase with an average growth rate of about F percent during the last $B years.

Indian consumption has also shown steady growth except in #BB$ where it showed a

slight fall. Significant variation in world production and consumption are source of

concern on the price front for Indian rubber sector in the free market regime where

global pressure of imports and exports could make the rubber prices more volatile.

About JC per cent of the natural rubber consumed in the country goes into the

production of auto tyres and tubes, $ percent in cycle tyres and tubes, $B per cent

in footwear, C per cent in belts and hoses, F per cent in camel black, < per cent in



51/69


latex foam, J per cent n dipped rubber goods and H per cent in other rubber

products. !his fairly establishes the diffused nature of consumption of natural rubber.

Do+es%#& S&enar#o:

In #BB$, India was the third largest producer and fourth largest consumer of natural

rubber in the world. India produces about F lakh tons of rubber *worth around s.

BBB crore annually and over ;B percent of the production is in the southern state of

erala. Indian rubber industry comprises # tyre factories, about #


52/69


In the study the criteria for commodity selection is done on the basis of availability of

historical prices. !he prices are taken on the basis of expiry date of the contract. !he

prices are of those commodities which are commonly traded in both )%+ and

&%6'+.

!he commodities size is for a period of three months, i.e. one hundred days.

!he lists of commodities taken for the study are as follows?

9heat

Soya seed

Silver

old

ice

%hana

!urmeric

Dellow peas

ubber.

CALCULATION OF AVERAGE DAILY RETURN:

!he calculation of avg returns on the commodities is done with both the exchanges

with the historical data taken and the values are as follows?

MCX NCDEX


A5$ Da#'" Re%!rns

20ea% >/;/@

so"a /;33

s#'5er /;/B

$o'( /;/3

r#&e /;/@

&0ana >/;/

$!r >/;33%!r+er#& /;/"e''o2 )eas /;3/

r!11er >/;/

A5$ Da#'" Re%!rns

20ea% >/;/3

so"a >/;/

s#'5er >/;/@

$o'( >/;/@

r#&e /;//

&0ana /;/B

$!r /;/%!r+er#& >/;/"e''o2 )eas >/;/

r!11er /;3B


53/69


CALCULATION OF ETA, /;B /;///// /;////@

so"a /;// /;////// /;/////

s#'5er /;3@ /;/////BB /;////3

$o'( /;/ /;////// /;////3B

r#&e >/;/33// /;/////// /;////&0ana /;/3// /;/////// /;////

$!r /;/B/ /;/////// /;///B/

%!r+er#& /;B3B /;///// /;///B

"e''o2 )eas /;/@33 /;//////@ /;///3/

r!11er /;/3// /;/////// /;////

e%a s"s r#s6 !n s"s

20ea% >/;B /;///// /;////@

so"a /;// /;////// /;/////

s#'5er /;3@ /;/////BB /;////3

$o'( /;/ /;////// /;////3B

r#&e >/;/33// /;/////// /;////

&0ana /;/3// /;/////// /;////

$!r /;/B/ /;/////// /;///B/

%!r+er#& /;B3B /;///// /;///B

"e''o2 )eas /;/@33 /;//////@ /;///3/

r!11er /;/3// /;/////// /;////


54/69


55/69


CALCULATION OF MINIMUM VARIANCE PORTFOLIOS


56/69


NCDEX:

Ca'&!'a%#on of &o5ar#an&e +a%r#*:

Co5ar#an&e +a%r#*M&*:

20ea% So"a s#'5er $o'(

20ea% /;///3/B@ >/;//////B//>

/;////// >/;/////3/3

so"a >/;//////B// /;//////3 /;/////B@ >/;//////@/

s#'5er >/;////// /;/////B@ /;////3B /;/////@3

$o'( >/;/////3/3 >/;//////@/ /;/////@3 /;////3/

r#&e >/;/////// /;/////@3>

/;/////@B3B >/;//////B


CODE $o'( r#&e C0ana

20ea% /;3@ /;@ /; /;@ /; /;

so"a /;B /; /;B /; /; /;

s#'5er /; /;33 /;@B /; /;3 /;

$o'( /;@/ /;@/ /;3 /; /;BB /;r#&e /; /;3 /;@/ /;@/ /;@ /;3

&0ana /; /;BB /;3 /;@ /;@/ /;@/

$!r /;B /;/ /; /;B /; /;BB

%!r+er#& /; /;/ /;/ /;B/ /; /;3

"e''o2 )eas /; /;/ /; /;BB /; /;3

r!11er /;// 3;// /;// 3;// /;// 3;//

CODE $!r %!r+er#& Ye''o2 )eas

20ea% /; /;3 /; /;3 /; /;B

so"a /;/ /; /;/ /; /;/ /;B

s#'5er /;B /;3 /;B/ /;/ /;B /;

$o'( /;/ /;B /;/ /; /;/ /;

r#&e /;B /; /;B/ /;/ /;BB /;

&0ana /;BB /; /;3 /; /;3 /;

$!r /;@/ /;@/ /;@ /;@ /; /;@

%!r+er#& /;@ /;@ /;@/ /;@/ /;B /;

"e''o2)eas

/;@ /; /; /;B /;@/ /;@/

r!11er /;// 3;// /;// 3;// /;// 3;//

r!11er

/; /;

/; /;

/;3 /;

/;BB /;

/;@ /;3

/;@/ /;@/

/; /;BB

/; /;3

/; /;3

/;// 3;//

CODE 20ea% So"a s#'5er

20ea% /;@/ /;@/ /; /; /; /;@

so"a /; /; /;@/ /;@/ /; /;3

s#'5er /; /;@ /;3 /; /;@/ /;@/

$o'( /;3@ /;@ /;B/ /;/ >/;3 3;3

r#&e /;@/ /;@/ /;B /; /;@ /;

&0ana /;B@ /;@ /;B /; /;B /;B

$!r /; /; /; /;B3 /; /;3

%!r+er#& /;/ /;/ /; /;@ /; /;B

"e''o2)eas

/; /;3 /;3 /;/ /; /;33

r!11er /;// 3;// /;// 3;// /;// 3;//

CODE $o'( r#&e&0ana

20ea% /;3@ /;@ /;@/ /;@/ /;B@ /;@

so"a /;/ /;B/ /; /;B /; /;B

s#'5er 3;3 >/;3 /; /;@ /;B /;B

$o'( /;@/ /;@/ /;3 /; /;B /;

r#&e /; /;3 /;@/ /;@/ /; /;B

&0ana /; /;B /;B /; /;@/ /;@/

$!r /;3 /;/ /;@ /;@ /; /;3

%!r+er#& /; /;B /;3 /; /;@ /;3"e''o2)eas

/; /;/B /;B /;/ /; /;/

r!11er /;// 3;// /;// 3;// /;// 3;//

r!11er

/;@ /;B

/;B@ /;@

/; /;

/;3B /;

/;3 /;@

/;3 /;3/;@@ /;@

/;B /;

/; /;3B

/;// 3;//

CODE $!r %!r+er#& "e''o2

20ea% /; /; /;/ /;/ /; /;3

so"a /;B3 /; /;@ /; /;/ /;3

s#'5er /;3 /; /;B /; /;33 /;

$o'( /;/ /;3 /;B /; /;/B /;

r#&e /;@ /;@ /; /;3 /;/ /;B

&0ana /;3 /; /;3 /;@ /;/ /;

$!r /;@/ /;@/ /; /;BB /;B /;

%!r+er#& /;BB /; /;@/ /;@/ /;3/ /;/

"e''o2)eas

/; /;B /;/ /;3/ /;@/ /;@/

r!11er /;// 3;// /;// 3;// /;// 3;//


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&0ana /;/////B3 >/;/////3@3>

/;//////@/ >/;//////B/

$!r >/;/////B@ /;////333 /;///////@ >/;/////BB@

%!r+er#& /;////BB// /;/////3>

/;////3 /;/////B

"e''o2 )eas >/;/////3B /;/////B33 >/;////33@ >/;/////@//

r!11er /;/////B3 >/;/////3@3>

/;//////@/ >/;//////B/

r#&e C0ana $!r

20ea% >/;/////// /;/////B3 >/;/////B@

so"a /;/////@3 >/;/////3@3 /;////333

s#'5er >/;/////@B3B >/;//////@/ /;///////@

$o'( >/;//////B >/;//////B/ >/;/////BB@

r#&e /;////@ >/;//////3/3 /;/////@

&0ana >/;//////3/3 /;////3@ >/;/////@$!r /;/////@ >/;/////@ /;///B/@

%!r+er#& >/;////3/ /;/////B/@/ /;////3@3B/"e''o2 )eas /;/////@/ /;//////B /;/////

r!11er >/;//////3/3 /;////3@ >/;/////@


%!r+er#& "e''o2 )eas r!11er

20ea% /;////33@ >/;/////B >/;////3@@

so"a /;////3@3@ >/;////BB/ /;////3//

s#'5er /;/////@B >/;////33/@ >/;///////

$o'( /;/////BB >/;/////3B3 >/;/////@

r#&e /;////3 /;////@3BB /;/////@&0ana >/;////// >/;////B/ >/;/////B@@$!r >/;/////B/ >/;///33B@B >/;////3@/

%!r+er#& /;////@3B >/;////B@@B >/;/////3B

"e''o2 )eas >/;////B@@B /;//3/3@ /;////

r!11er >/;/////3B /;//// /;///BB3@3

Co5ar#an&e +a%r#*n&(e*

20ea% So"a s#'5er $o'(20ea% /;///3@@3B /;/////@3 /;/////3/B >

/;//////B

so"a /;/////@3 /;////@ /;////B3 /;/////3B/s#'5er /;/////3/B /;////B3 /;///3B3B /;/////$o'( >/;//////B /;/////3B/ /;///// /;////B@@3

r#&e >/;/////33@ >/;////3 >/;/////@BB /;//////BBB&0ana >/;/////3// /;////3/B /;/////B3 /;/////3/@

$!r >/;/////33@ /;////3 >/;/////B >/;/////3B

%!r+er#& /;////33@ /;////3@3@ /;/////@B /;/////BB

"e''o2 )eas >/;/////B >/;////BB/ >/;////33/@ >/;/////3B3

r!11er >/;////3@@ /;////3// >/;/////// >/;/////@


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Por%fo'#o re%!rns:

M&*:

20ea% So"a s#'5er $o'(

20ea% >/;///@3B

so"a >/;///3/@@ /;//3/B@3

s#'5er >/;///3@ /;/// /;///3@

$o'( >/;///BB@B /;///@// ;@E>/@ ;@B3@E>/@

r#&e >;BBE>/@ /;//// /;///B /;///3@/@

&0ana >/;///@/ /;///3@B >/;/// >/;///33B$!r >/;///B3 /;/// >/;///B33@ >/;/////3

%!r+er#& /;/////B3 /;//3// /;///3@ /;///3/@"e''o2 )eas /;///@B/BB /;//3/3@ /;/// /;///3@@B3

r!11er >/;///@3/3 >/;/// >/;///@// >/;///@/3


r#&e C0ana $!r 20ea% >/;/////33@ >/;/////3// >/;/////33@

so"a >/;////3 /;////3/B /;////3s#'5er >/;/////@BB /;/////B3 >/;/////B

$o'( /;//////BBB /;/////3/@ >/;/////3B/r#&e /;///3@B@@ >/;////33@/ /;////3B@

&0ana >/;////33@/ /;////@// /;////3//B

$!r /;////3B@ /;////3//B /;///B333

%!r+er#& /;////3 >/;////// >/;/////B/

"e''o2 )eas /;////@3BB >/;////B/ >/;///33B@B

r!11er /;/////@ >/;/////B@@ >/;////3@/

%!r+er#& "e''o2 )eas r!11er 20ea% /;////33@ >/;/////B >/;////3@@

so"a /;////3@3@ >/;////BB/ /;////3//s#'5er /;/////@B >/;////33/@ >/;///////

$o'( /;/////BB >/;/////3B3 >/;/////@

r#&e /;////3 /;////@3BB /;/////@

&0ana >/;////// >/;////B/ >/;/////B@@

$!r >/;/////B/ >/;///33B@B >/;////3@/

%!r+er#& /;////@3B >/;////B@@B >/;/////3B

"e''o2 )eas >/;////B@@B /;//3/3@ /;////

r!11er >/;/////3B /;//// /;///BB3@3


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r#&e C0ana $!r %!r+er#& "e''o2 )eas r!11er

20ea%

so"as#'5er

$o'(

r#&e /;///@B&0ana >/;///3 >/;///@/

$!r ;@E>/@ >/;//// >/;//3B

%!r+er#& /;//// >/;///33 >/;/// /;///@/3

"e''o2)eas /;///3 >/;////@@

>/;///BB /;///@@B /;///@

r!11er >/;/// >/;///@/ >/;///>

/;///@>

/;///@ >/;///@/

N&(e*:

Por%fo'#o re%!rns:

)or%fo'#ore%!rn

20ea% so"a s#'5er $o'(

20ea% >/;///33@/so"a >/;///B >/;///333

s#'5er >/;///BB >/;///@ >/;///@B$o'( >/;///3 >/;//// >/;///@3 >/;///@3

r#&e >;@BE>/@ >/;///@ >/;///B@ >/;///@/

&0ana >;E>/@ >/;///3/@ >3;3/3@E>/@ >/;////

$!r /;/////@ >/;////B3 >/;///3B@ >/;///3/@

%!r+er#& >/;///B >/;///3B >/;///B//B >/;///@/"e''o2 )eas >/;///@B >/;///B >/;///@ >/;///@B@3

r!11er >/;///33@/3 /;//33@33 /;//33@3 /;//33@3@



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Por%fo'#o 5ar#an&e:

+&*

20ea% so"a s#'5er $o'(

20ea% /;///3/

so"a /;//// /;////

s#'5er /;////@ /;//// /;///3/

$o'( /;//// /;////3 /;//// /;////B

r#&e /;////@ /;//// /;//// /;////&0ana /;////@ /;//// /;////@ /;////

$!r /;///3B /;///BB /;///3 /;///B/%!r+er#& /;///3 /;/// /;///B /;////

"e''o2 )eas /;///3 /;///B /;///3 /;///B

r!11er /;///3/ /;//// /;///3/ /;////B

r#&e &0ana $!r %!r+er#&"e''o2)eas r!11er

/;////

/;//// /;////

/;///3 /;///3 /;///B

/;///B /;/// /;///BB /;///

/;///B/ /;///B /;///3@ /;///B /;///3/;//// /;//// /;///B /;/// /;///3 /;////


r#&e &0ana $!r %!r+er#&

20ea%

so"a

s#'5er

$o'(

r#&e /;///3@&0ana ;/E>/@ @;/BE>/@$!r /;///3 /;///B/@B /;///B

%!r+er#& ;E>/@ ;3B@@E>/@ /;///3 ;@E>/@"e''o2 )eas /;/// /;//// /;//// /;////B

r!11er /;///3@ @;/BBE>/@ /;///B ;@E>/@

"e''o2 )eas r!11er

20ea%So"a

s#'5er$o'(

r#&e&0ana

$!r

%!r+er#&

"e''o2 )eas /;//33/3

r!11er /;//33/ /;///BB/B


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TEST FOR DIFFERENCES IN RETURNS ETWEEN THE EXCHANGES:


COMMODITIES % %es% 5a'!es COMMODITIES % %es% 5a'!es

wheat/wheat >/;/@/@ $o'(r#&e /;//@B

20ea%so"a /;/3@ $o'(&0ana /;B//3

W0ea%s#'5er /;3B3/3 $o'($!r /;B3BB

W0ea%$o'( >/;BB/B3 $o'(%!r+er#& /;B/

W0ea%r#&e /;/3/3 $o'("e''o2)eas /;/@

W0ea%&0ana >/;3B $o'(r!11er >;/@/3B

20ea%$!r >3;3@@BB3B rice/rice /;@3B/

W0ea%%!r+er#& /;@B@ r#&e&0ana >/;B@/@3

20ea%"e''o2)eas /;/@/BB r#&e$!r >/;33@B3

W0ea%r!11er >/;/@ r#&e%!r+er#& /;//B

Soya/soya ;BB@ r#&e"e''o2)eas /;@B@@3

so"as#'5er B;//@/3 r#&er!11er >B;33B@

So"a$o'( B;@3@//B chana/chana >3;@3/

so"ar#&e B;/@ &0ana$!r >/;/3

So"a&0ana 3;3/ C0ana%!r+er#& >/;B@3@B

so"a$!r 3;/B@@3 &0ana"e''o2)eas >/;33@

so"a%!r+er#& /;B3@ C0anar!11er >B;@3B

so"a"e''o2)eas 3;B3/@BB gur/gur >3;33/3@

So"ar!11er >;3/3B $!r%!r+er#& /;/B@/

si!er/si!er /;3 $!r"e''o2)eas >/;/

S#'5er$o'( /;333@3@ G!rr!11er >3;/

S#'5err#&e /;//3 Tur"eric/tur"eric /;/@@3

s#'5er&0ana >/;@3@ T!r+er#&"e''o2)eas 3;///@@

S#'5er$!r >/;/3B T!r+er#&r!11er >/;33/

s#'5er%!r+er#& /;@/3

yeow#eas/yeow#ea

s /;@

s#'5er"e''o2)eas /;3@/ Ye''o2)easr!11er >3;3@//B

s#'5err!11er >B;//B3 ru$$er/ru$$er >B;@33

go%/go% 3;@BB


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"rom the above table we can figure out some commodities which have the paired

combination which can be traded on the exchanges based upon the t-test done on

the commodities.

In the above table the J> figures represent the combination of those commodities

which are best suited to be traded on ncdex , and the J figures represent the

combination of those commodities which are best suited to be traded on mcx.

!here are a set of commodities which can be traded much in mcx exchange

for a better return on the investment done and can be considered as optimal

investment option for an investor.


&heat/gur '()(**++(,-+

Soya/ru$$er '.),(0.12(+

Si!er/ru$$er '+),011+2(

Ru$$er/ru$$er '+)*,11-(0(

yeow#eas/ru$$er '()(2*-0,+

Gur/ru$$er '()..220--1

Gur/gur '()((-0.(,*

Chana/ru$$er '+)*,11(+1-

Chana/chana '().0*(0100

Rice/ru$$er '+)(2-(+*2

Go%/ru$$er '0)1.1,*(+


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!here are a set of commodities which can be traded much in ncdex exchange

for a better return on the investment done and can be considered as optimal

investment option for an investor.

soya/soya ()-1.*,*soya/si!er +)-*1(1-

soya/go% +)1*.(*2+

soya/rice +).*-.0221

soya/chana ()(22,2-0

soya/gur (),,+**1(,

soya/#ea ()+(*-2+,+

Go%/go% ()0.*+.2+.2 Tur"eric/yeow#eas .)20+10+0-*



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FINDINGS:

%ommodity market in India, the methodology of trading in India, and the

institutions involved in the process of investment in commodities.

!he correlations between the returns of all the selected commodities on both

of the exchanges were examined. It was found that there was significant

strong correlation *almost e(ual to V$ between commodity prices on the two

exchanges, indicating that prices on the two exchanges were very closely

related.

"urthermore, there was significant correlation between certain pairs of

commodities.

!he commodities which are to be found significantly correlated are as

fallows?

$W soya-gur #W rubber-chana W peas-turmeric.

9ith regard to the first pair of combination of commodities of

soya-gur there is a correlation of B.#BCJ$H *with a significance of

B.B$HCB


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RECOMMENDATIONS:

According to the study done it is found that there is possibility of

arbitrage between the two commodity exchanges, there are chances for

an investor to short sell in those exchange where the prices are higher

and they can earn more profit.

!he analysis can be carried out further by taking another list of

commodities which are traded in both the exchanges and a better

portfolio of commodities can be constructed for the benefit of the

investors in the market.

!he time duration for the analysis can be extended and analysis could

be done for obtaining different results.

ptimal investment option for an investor in the commodity market.

.



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CONCLUSION:

A commodity futures contract is a tradable standardized contract, the terms of

which are set in advance by the commodity exchange organizing trading in it.

!he futures contract is for a specified variety of a commodity, known as the

/basis,/ though (uite a few other similar varieties, both inferior and superior,

are allowed to be deliverable or tender able for delivery against the specified

futures contract.

!he %ommodity market in India, its methodology of trading, and the institutions

involved in the process of investment in commodities have revolutionized the

investment decisions for a trader, providing a new alternative for e(uity trading and

investment in India.

Although the prices of commodities traded in the two exchanges are strongly related,

it is possible with particular pairs of selected commodities to make profit while

trading in commodity exchange.

!here can be an arbitrage opportunity between the two exchanges because of which

an investor can trade on the exchanges which gives maximum return on the pair of

commodities selected upon.

nly in India there is physical delivery of commodities on the basis of prices traded

and also the volumes, this would be a benefiting way of making money by

investments in commodities.

In brief we can say that commodity trading is a better investment option for an

investor replacing investment in e(uity market.



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Commodity Trading an Indian Perspective

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