Final Project 2003
-
Upload
peeyush-saxena -
Category
Documents
-
view
217 -
download
0
Transcript of Final Project 2003
-
8/9/2019 Final Project 2003
1/51
ACKNOWLEDGEMENT
Team work is the ability to work together towards
common on his achivement of my study is dedicated to
mr. sachin shrivastava who has given us an opportunity
to do his project and co-operative extend by all the
member of my class & staff. I dedicated my work to my
parents without whose help & co-operation. I would havenever felt enough conident to achive high endeavers
every time.
I am extremely thankful to
the mr.Sachin sir under whose guidence and support. I
was able to complete my project and also helped me ingathering necessary data and information about
commodity market in india.
Thank You
Anoop Mishra
-
8/9/2019 Final Project 2003
2/51
DECLARATION
I am Anoop Mishra here by declare that the project work,
which is being presented in the report, entitled
Commodity Market & scope in India Prepared for the
award of the degree of Master of Business
Administration from the Aditya College of Technology &
Science Satna.
I also declare that project is the result of my effort & I
have not submitted the matter embodied in this report
for the award of any other degree or diploma program.
(Candidates Name)
Anoop MishraMBA
-
8/9/2019 Final Project 2003
3/51
Histery
The history of organized commodity derivatives in India goes back to the
nineteenth century when Cotton Trade Association started futures trading in 1875, about a
decade after they started in Chicago. Over the time datives market developed in several
commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900),
raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay
(1920).
However many feared that derivatives fuelled unnecessary speculation and were
detrimental to the healthy functioning of the market for the underlying commodities, resultingin to banning of commodity options trading and cash settlement of commodities futures after
independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952,
which regulated contracts in Commodities all over the India. The act prohibited options trading
in Goods along with cash settlement of forward trades, rendering a crushing blow to the
commodity derivatives market. Under the act only those associations/exchanges, which are
granted reorganization from the Government, are allowed to organize forward trading in
regulated commodities.
The commodities future market remained dismantled and remained
dormant for about four decades until the new millennium when the Government, in a complete
change in a policy, started actively encouraging commodity market. After Liberalization and
Globalization in 1990, the Government set up a committee (1993) to examine the role of futurestrading.
The commodity futures traded in commodity exchanges are regulated by the Governmentunder the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The
regulator for the commodities trading is the Forward Markets Commission, situated at Mumbai,
which comes under the Ministry of Consumer Affairs Food and Public Distribution
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 IndiaLimited (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.
-
8/9/2019 Final Project 2003
4/51
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.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 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) Ahmedabad.There are other regional commodity exchanges situated in
different parts of India.
-
8/9/2019 Final Project 2003
5/51
Commodity
A commodity is a product that has commercial value, which can beproduced, bought, sold, and consumed. Commodities are basically theproducts of the primary sector of an economy. The primary sector of aneconomy is concerned with agriculture and extraction of raw materialssuch as metals, energy (crude oil, natural gas), etc., which serve as basic
inputs for the secondary sector of the economy.
Market
A market is conventionally defined as a place where buyers and sellersmeet to exchange goods or services for a consideration. Thisconsideration is usually money. In an Information Technology-enabledenvironment, buyers and sellers from different locations can transact
business in an electronic marketplace. Hence the physical marketplace isnot necessary for the exchange of goods or services for a consideration.
Electronic trading and settlement of transactions has created a revolutionin global financial and commodity markets.
-
8/9/2019 Final Project 2003
6/51
Commodity Market
Commodity markets are markets where raw or primary
products are exchanged. These raw commodities are
traded on regulated commodities exchanges, in which
they are bought and sold in standardized contracts. It
covers physical product (food, metals, electricity) markets
but not the ways that services, including those of
governments, nor investment, nor debt, can be seen as a
commodity. Articles on reinsurance markets, stock
markets, bond markets and currency markets cover those
concerns separately and in more depth. One focus of this
article is the relationship between simple commodity
money and the more complex instruments offered in the
commodity markets.
http://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Reinsurance_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Currency_markethttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Reinsurance_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Currency_markethttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_money -
8/9/2019 Final Project 2003
7/51
Size of the market
The trading of commodities consists of direct physical trading and
derivatives trading.The commodities markets have seen an
upturn in the volume of trading in recent years. In the five
years up to 2007, the value of global physical exports of
commodities increased by 17% while the notional value
outstanding of commodity OTC (over the counter) derivatives
increased more than 500% and commodity derivative trading
on exchanges more than 200%.
The notional value outstanding of banks OTC commodities derivatives contracts
increased 27% in 2007 to $9.0 trillion. OTC trading accounts for the majority oftrading in gold and silver. Overall, precious metals accounted for 8% of OTCcommodities derivatives trading in 2007, down from their 55% share a decadeearlier as trading in energy derivatives rose.
Global physical and derivative trading of commodities on exchanges increasedmore than a third in 2007 to reach 1,684 million contracts. Agricultural contractstrading grew by 32% in 2007, energy 29% and industrial metals by 30%. Preciousmetals trading grew by 3%, with higher volume in New York being partially offset
by declining volume in Tokyo. Over 40% of commodities trading on exchangeswas conducted on US exchanges and a quarter in China. Trading on exchanges inChina and India has gained in recent importance in years due to their emergence assignificant commodities consumers and producers.
Commodity futures
-
8/9/2019 Final Project 2003
8/51
A Commodity futures is an agreement between two parties to buy or sell a
specified and standardized quantity of a commodity at a certain time in future at a price
agreed upon at the time of entering into the contract on the commodity futures
exchange.
The need for a futures market arises mainly due to the hedging function
that it can perform. Commodity markets, like any other financial instrument involve risk
associated with frequent price volatility.
The objectives of Commodity future:-
Hedging with the objective of transferring risk related to the possession of physical
assets through any adverse moments in price. Liquidity and Price discovery to ensure
base minimum volume in trading of a commodity through market information anddemand supply factors that facilitates a regular and authentic price discovery
mechanism.
Maintaining buffer stock and better allocation of resources as it augments reduction in
inventory requirement and thus the exposure to risks related with price fluctuation
declines. Resources can thus be diversified for investments.
Price stabilization along with balancing demand and
supply position. Futures trading leads to predictability in assessing the domestic prices,
which maintains stability, thus safeguarding against any short term adverse price
movements. Liquidity in Contracts of the commodities traded also ensures in
maintaining the equilibrium between demand and supply.
Benefits of Commodity Futures Markets:-
The primary objectives of any futures exchange are authentic price discovery and
an efficient price risk management. The beneficiaries include those who trade in the
commodities being offered in the exchange as well as those who have nothing to do with futurestrading. It is because of price discovery and risk management through the existence of futures
exchanges that a lot of businesses and services are able to function smoothly.
1.Price Discovery:-Based on inputs regarding specific market information, the
demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates,
-
8/9/2019 Final Project 2003
9/51
Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at
futures exchanges. Thistransforms in to continuous price discovery mechanism. The execution
of trade between buyers and sellers leads to assessment of fair value of a particular commodity
that is immediately disseminated on the trading terminal.
2. Price Risk Management: - Hedging is the most common method of price riskmanagement. It is strategy of offering price risk that is inherent in spot market by taking an
equal but opposite position in the futures market. Futures markets are used as a mode by
hedgers to protect their business from adverse price change. This could dent the profitability of
their business. Hedging benefits who are involved in trading of commodities
like
farmers,
processors,
merchandisers,
manufacturers, exporters, importers etc.
3 .Import- Export competitiveness: -The exporters can hedgetheir price risk and
improve their competitiveness by making use of futures market. A majority of traders which are
involved in physical trade internationally intend to buy forwards. The purchases made from the
physical market might expose them to the risk of price risk resulting to losses. The existence of
futures market would allow the exporters to hedge their proposed purchase by temporarily
substituting for actual purchase till the time is ripe to buy in physical market. In the absence of
futures market it will be meticulous, time consuming and costly physical transactions.
4.Predictable Pricing: -The demand for certain commodities ishighly price elastic.
The manufacturers have to ensure that the prices should be stable in order to protect their
market share with the free entry of imports. Futures contracts will enable predictability in
domestic prices. The manufacturers can, as a result, smooth out the influence of changes in
their input prices very easily. With no futures market, the manufacturer can be caught between
severe short-term price movements of oils and necessity to maintain price stability, which could
only be possible through sufficient financial reserves that could otherwise be utilized for making
other profitable investments.
5.Benefits for farmers/Agriculturalists: -Price instability has adirect bearing on
farmers in the absence of futures market. There would be no need to have large reserves to
cover against unfavorable price fluctuations. This would reduce the risk premiums associated
with the marketing or processing marginsenabling more returns on produce. Storing more and
being more active in the markets. The price information accessible to the farmers determines
the extent to which traders/processors increase price to them. Since one of the objectives of
-
8/9/2019 Final Project 2003
10/51
futures exchange is to make available these prices as far as possible, it is very likely to benefit
the farmers. Also, due to the time lag between planning and production, the market-determined
price information disseminated by futures exchanges would be crucial for their production
decisions.
6.Credit accessibility: -The absence of proper risk management tools would attractthe marketing and processing of commodities to high-risk exposure making it risky business
activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned
by traders, at times making it virtually impossible to payback the loan. There is a high degree of
reluctance among banks to fund commodity traders, especially those who do not manage price
risks. If in case they do, the interest rate is likely to be high and terms and conditions very
stringent. This posses a huge obstacle in the smooth functioning and competition of
commodities market. Hedging, which is possible through futures markets, would cut down the
discount rate in commodity lending.
7.Improved product quality: -The existence of warehouses forfacilitating deliverywith grading facilities along with other related benefits provides a very strong reason to upgrade
and enhance the quality of the commodity to grade that is acceptable by the exchange. It
ensures uniform standardization of commodity trade, including the terms of quality standard: the
quality certificates that are issued by the exchange-certified warehouses have the potential to
become the norm for physical trade.
.
-
8/9/2019 Final Project 2003
11/51
Main Commodities Exchanges over the World
(Largest commodities exchanges)
Exchange Country Volume per month $M
New York Mercantile Exchange USA 19
Tokyo Commodity Exchange Japan -
NYSE Euronext EU -
Dalian Commodity Exchange China -
Multi Commodity Exchange India -
-
8/9/2019 Final Project 2003
12/51
Commodity Exchange of India
-
8/9/2019 Final Project 2003
13/51
MCX
Multi Commodity
Exchange
Type Private
Industry Business Services
Founded 2003
Headquart
ers
Exchange Square,
Suren Road,
Chakala, Andheri
(East), Mumbai,
India
Key people Joseph Massey, MD & CEO
Products Options/Futures exchange
RevenueRs 104.39 crore (2005-
2006)
Website http://www.mcxindia.com/
Multi Commodity Exchange (MCX) is an independent commodity exchangebased in India. It was established in 2003 and is based in Mumbai. The turnover ofthe exchange for the period Apr-Dec 2008 was INR 32 Trillion . MCX offersfutures trading in Agricultural Commodities, Bullion, Ferrous & Non-ferrousmetals, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other softcommodities.
http://en.wikipedia.org/wiki/Types_of_business_entityhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/w/index.php?title=Joseph_Massey&action=edit&redlink=1http://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Websitehttp://www.mcxindia.com/http://en.wikipedia.org/wiki/Types_of_business_entityhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/w/index.php?title=Joseph_Massey&action=edit&redlink=1http://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Websitehttp://www.mcxindia.com/ -
8/9/2019 Final Project 2003
14/51
MCX has also setup in joint venture the National Spot Exchange a purelyagricultural commodity exchange and National Bulk Handling Corporation(NBHC) which provides bulk storage and handling of agricultural products.
MCX is regulated by forward market commission:
MCX is India's No. 1 commodity exchange with 84% Market share in2008($0.84 trillion)
The exchange's competitor is National Commodity & Derivatives ExchangeLtd
Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil andgold in futures trading
The crude volume touched 23.49 Miliion barrels on January 3, 2009 The highest traded item is gold with an average monthly turnover of Rs 1.42
Trillion ($29 Billion). MCX has 10 strategic alliances with leading commodity exchange across the
globe The average daily turnover of MCX is about US$ 2.4 billion MCX now reaches out to about 500 cities in India with the help of about
10,000 trading terminals MCX COMDEX is India's first and only composite commodity futures price
index
METAL BULLION
Aluminium,
Copper,
Lead,
Nickel,
Sponge
Iron, Steel
Long
(Bhavnagar
), Steel
Long
(Govindgar
h), Steel
Flat, Tin,
Gold, Gold HNI,
Gold M, i-gold,
Silver, Silver
HNI, Silver M
-
8/9/2019 Final Project 2003
15/51
Zinc
FIBER ENERGY
Cotton L
Staple,Cotton M
Staple,
Cotton S
Staple,
Cotton
Yarn, Kapas
Brent Crude Oil,
Crude Oil,
Furnace Oil,
Natural Gas, M.
E. Sour Crude
Oil, ATF,
Electricity(Now
Delisted),
Carbon Credit
SPICES PLANTATIONS
Cardamom,Jeera,
Pepper,
Red Chilli
Arecanut,
Cashew Kernel,Coffee
(Robusta),
Rubber
PULSESPETROCHEMIC
ALS
Chana,
Masur,
Yellow Peas
HDPE,
Polypropylene(
PP), PVC
OIL & OIL SEEDS
Castor Oil, Castor Seeds,
Coconut Cake, Coconut Oil,
Cotton Seed, Crude Palm
Oil, Groundnut Oil, Kapasia
Khalli, Mustard Oil, Mustard
Seed (Jaipur), Mustard Seed
(Sirsa), RBD Palmolein,
Refined Soy Oil, Refined
Sunflower Oil, Rice BranDOC, Rice Bran Refined Oil,
Sesame Seed, Soymeal, Soy
Bean, Soy Seeds
CEREALS OTHERS
-
8/9/2019 Final Project 2003
16/51
Maize
Guargum, Guar
Seed,
Gurchaku,
Mentha Oil,
Potato (Agra),
Potato(Tarkeshwar),
Sugar M-30,
Sugar S-30
Key shareholders Of MCX
State Bank of India and its associates
National Bank for Agriculture and Rural Development (NABARD)
National Stock Exchange of India Ltd. (NSE)
Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International
Corporation Bank
Union Bank of India
Canara Bank
Bank of India
Bank of Baroda
HDFC Bank
SBI Life Insurance Co. Ltd.
ICICI ventures
IL&FS
Merrill Lynch
-
8/9/2019 Final Project 2003
17/51
NCDEX
National Commodity and Derivatives Exchange
National Commodity & Derivatives
Exchange
PROFILE
Type Online commodity exchange
Founded Dec 15, 2003
Headquarters
Mumbai, Maharashtra, India
Website http://www.ncdex.com/
National Commodity & Derivatives Exchange Limited (NCDEX) is an online commodityexchangebased in India. It was incorporated as a private limited company incorporated on April
http://en.wikipedia.org/wiki/Types_of_business_entityhttp://en.wikipedia.org/wiki/Websitehttp://www.ncdex.com/http://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Types_of_business_entityhttp://en.wikipedia.org/wiki/Websitehttp://www.ncdex.com/http://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/India -
8/9/2019 Final Project 2003
18/51
23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement ofBusiness on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is aclosely held private company which is promoted by national level institutions and has anindependent Board of Directors and professionals not having vested interest in commoditymarkets.
NCDEX is regulated by Forward Market Commission (FMC) in respect of futures trading incommodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act,Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations,which impinge on its working. On February 3rd, 2006, the FMC found NCDEX guilty ofviolating settlement price norms and ordered the exchange to fire one of their executive.
NCDEX is located in Mumbai and offers facilities in more than 550 centres in India. is a game ofdismanage of market
Commodities Traded
NCDEX currently facilitates trading of 57 commodities -
Agri-based commodities- Castor SeedChanaChilliCoffee - Arabica, Coffee - RobustaCotton Seed OilcakeCrude Palm Oil
Expeller Mustard OilGroundnut (in shell)Groundnut Expeller OilGuar gumGuar SeedsGur, JeeraJute sacking bagsKidney BeansIndian 28 mm CottonIndian 31 mm CottonMasoor Grain Bold
Medium Staple CottonMentha OilMulberry Green CocoonsMulberry Raw SilkRapeseed - Mustard SeedPepperRaw JuteRBD Palmolein
http://en.wikipedia.org/w/index.php?title=Forward_Market_Commission&action=edit&redlink=1http://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/w/index.php?title=Agri-based_commodities&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Agri-based_commodities&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Forward_Market_Commission&action=edit&redlink=1http://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/w/index.php?title=Agri-based_commodities&action=edit&redlink=1 -
8/9/2019 Final Project 2003
19/51
Refined Soy OilRubberSesame SeedsSoy BeanSugar - Small
Sugar - MediumTurmericUrad (Black Matpe)V-797 KapasYellow PeasYellow Red MaizeYellow Soybean Meal.
Bullion -Gold 1 KGGold 100gm
Silver 30 KGSilver 5 KG
Energy -Brent Crude OilFurnace OilLight Sweet Crude Oil.
Ferrous metalsMild Steel Ingot
PlasticsPolypropyleneLinear Low Density PolyethylenePolyvinyl Chloride.
Non-ferrous metalsAluminum Ingot,Copper CathodeNickel IngotZinc Cathode
At subsequent phases trading in more commodities would be facilitated.
Consortium of Shareholders
Life Insurance Corporation of India (LIC) National Bank for Agriculture and Rural Development (NABARD)
http://en.wikipedia.org/wiki/Bullionhttp://en.wikipedia.org/wiki/Energyhttp://en.wikipedia.org/wiki/Ferroushttp://en.wikipedia.org/wiki/Plasticshttp://en.wikipedia.org/wiki/Non-ferrous_metalshttp://en.wikipedia.org/wiki/Bullionhttp://en.wikipedia.org/wiki/Energyhttp://en.wikipedia.org/wiki/Ferroushttp://en.wikipedia.org/wiki/Plasticshttp://en.wikipedia.org/wiki/Non-ferrous_metals -
8/9/2019 Final Project 2003
20/51
National Stock Exchange of India(NSE) Punjab National Bank (PNB) CRISIL Limited (formerly the Credit Rating Information Services of India
Limited) Indian Farmers Fertiliser Cooperative Limited (IFFCO) Canara Bank Goldman Sachs ICE
Chapter 4
-
8/9/2019 Final Project 2003
21/51
-
8/9/2019 Final Project 2003
22/51
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.
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.
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
- Surveillance
- Price limits
- Position limits
II. Clearing: - This stage has following system in place-
- Matching
- Registration
- Clearing
- 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
-
8/9/2019 Final Project 2003
23/51
-Delivery upon expiration or maturity.
Chapter 6
How to invest in a 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.
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
-
8/9/2019 Final Project 2003
24/51
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 include18
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.
Broker:-
The Broker is essentially a person of firm that liaisons between individual traders and the
commodity exchange. In other words the Commodity Broker is the member of Commodity
Exchange, having direct connection with the exchange to carry out all trades legally. He is also
known as the authorized dealer.
-
8/9/2019 Final Project 2003
25/51
How to become a Commodity Trader/Broker of Commodity
Exchange?
To become a commodity trader one needs to complete certain legal and binding
obligations. There is routine process followed, which is stated by a unit of Government that lays
down the laws and acts with regards to commodity trading. A broker of Commodities is also
required to meet certain obligations to gain such a membership in exchange.To become a
member of Commodity Exchange the broker of
brokerage firm should have net worth amounting to Rs. 50 Lakh. This
sum has been determined by Multi Commodity Exchange.
How to become a Member of Commodity Exchange?
To become member of Commodity Exchange the person
should comply with the following Eligibility Criteria.
1. He should be Citizen of India.
2. He should have completed 21 years of his age.
3. He should be Graduate or having equivalent qualification.
4. He should not be bankrupt.5.
He has not been debarred from trading in Commodities by
statutory/regulatory authority,
There are following three types of Memberships of Commodity
Exchanges.
Trading-cum-Clearing Member (TCM):-
-
8/9/2019 Final Project 2003
26/51
A TCM is entitled to trade on his own account as well as on account of his clients, and clear
and settle trades himself. A sole proprietor, Partnership firm, a joint Hindu Undivided Family
(HUF), a corporate entity, a cooperative society, a public sector organization or any other
Government or non-Government entity can become a TCM.
There are two types of TCM, TCM-1 and TCM-2. TCM-1 refers to
transferable non-deposit based membership and TCM-2 refers to non-transferable depositbased membership.
A person desired to register as TCM is required to submit an application as per
the format prescribed under the business rules, along with all enclosures, fee and other
documents specified therein. He is required to go through interview by Membership Admission
Committee and committee is also empowered to frame rules or criteria relating to selection or
rejection of a member.
Institutional Trading-cum-clearing Member (ITCM):-
Only an Institution/ Corporate can be admitted by the Exchange as a member,
conferring upon them the right to trade and clear through the clearing house of exchange as anInstitutional Trading- cum-clearing Member (ITCM). The member may be allowed to make deals
for himself as well as on behalf of his clients and clear and settle such deals. ITCMs can also
appoint sub-brokers, authorized persons and Trading Members who would be registered as
trading members.
Professional Clearing Member (PCM):-
A PCM entitled to clear and settle trades executed by other members of the
exchange. A corporate entity and an institution only can apply for PCM. The member would be
allowed to clear and settle trades of such members of the Exchange who choose to clear and
settle their trades through such PCM.
Membership Details for NCDEX:-1
Trading-cum-clearing Member: - TCM
Sr.
No.Particulars
NCDEX: TCM
1
Interest
Free
Cash
-
8/9/2019 Final Project 2003
27/51
Security Deposit
15.00 Lakhs
2
Collateral Security Deposit15.00 Lakhs
3
Admission Fee
5.00 Lakhs
4
Annual Membership Fees
0.50 Lakhs
5
Advance
Minimum 0.50 Lakhs
Transaction Charges
6
Net worth Requirement
50.00 Lakhs
-
8/9/2019 Final Project 2003
28/51
-
8/9/2019 Final Project 2003
29/51
Transaction Charges
6
Net worth Requirement
50.00 Lakhs
Professional Clearing Membership: - PCM
Sr.
No.Particulars
NCDEX: PCM
1
Interest
Free
Cash
Security Deposit
-
8/9/2019 Final Project 2003
30/51
25.00 Lakhs
2
Collateral Security Deposit25.00 Lakhs
3
Annual
Subscription
Charges
1.00 Lakhs
4
Advance
Minimum
Transaction Charges
1.00 Lakhs
5
Net worth Requirement
5000.00 Lakhs
Membership Details for MCX:-2
Chapter 7
2 MCX Certified Commodity Professional Reference Material
Current Scenario in Indian Commodity Market
Need of Commodity Derivatives for India:-
India is among top 5 producers of most of the Commodities, in addition to being a major
consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian
economy. It employees around 57% of the labor force on total of 163 million hectors of land
Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicatesthat India can be promoted as a major centre for trading of commodity derivatives.
Trends in volume contribution on the three National
Multi Commodity Exchange (MCX):-
-
8/9/2019 Final Project 2003
31/51
-
8/9/2019 Final Project 2003
32/51
Trade strategy:-
It appears that speculators or operators choose commodities or contracts where the
market could be influenced and extreme speculations possible.
In view of extreme volatilities, the FMC directs the exchanges to impose restrictions on
positions and raise margins on those commodities. Consequently, the operators/speculatorschose another commodity and start operating in a similar pattern. When FMC brings restrictions
on those commodities, the operators once again move to the other commodities. Likewise, the
speculators are moving from one commodity to other (from methane to Urad to guar etc) where
the market could be influenced either individually or with a group.
Beneficiaries: - So far the beneficiaries from the current nature of
trading are
Exchangers: - making profit from mounting volumes
Arbitragers
Operators
In order to understand the extent of progress the trading the trading in Commodity
Derivatives has made towards its specified objectives (price discovery and price risk
management), the current trends are juxtaposed against the specification
Specified and actual pattern of futures trade
Thus it is evident that the realization of specified objectives is still a distinct
destination. It is further, evident from the nature of the commodities largely traded on national
exchanges that the factors driving the current pattern of futures trade are purely speculative.Reasons for prevailing trade pattern:-
No wide spread participation of all stake holders of commodity markets. The actual
benefits may be realized only when all the stake holders in commodity market including
producers, traders, consumers etc trade actively in all major commodities like rice, wheat, cotton
etc.
Some Suggestions to make futures market as a level playing field
for all stake holders:-
Creation of awareness among farmers and other rural participants to use the futures trading
platform for risk mitigation.
Contract specifications should have wider coverage, so that a large number of varieties
produced across the country could be included.
-
8/9/2019 Final Project 2003
33/51
Development of warehousing and facilities to use the warehouse receipt as a financial
instrument to encourage participation farmers.
Development of physical market through uniform grading
and
standardization
and
more
transparent
price
mechanisms.
Delivery system of exchanges is not good enough to attract investors. E.g.- In many
commodities NCDEX forces the delivery on people with long position and when they tend to
give back the delivery in next month contract the exchange simply refuses to accept the delivery
on pretext of quality difference and also auctions the product. The traders have to take a
delivery or book losses at settlement as there are huge differences between two contracts and
also sometimes few contracts are not available for trading for no reason at all.
Contract sizes should have an adequate range so that smaller traders can participate and canavoid control of trading by few big parties.
Setting of state level or district level commodities trading helpdesk run by independent
organization such as reputed NGO for educating farmers.
Warehousing and logistics management structure also needs to be created at state or area level
whenever commodity production is above a certain share of national level.
Though over 100 commodities are allowed for Derivatives trading, in practice only a few
commodities derivatives are popular for trading. Again most of the trade takes place only on few
exchanges. This problem can possibly solved by consolidating some exchanges.
-
8/9/2019 Final Project 2003
34/51
Only about 1% to 5% of total commodity derivatives traded in country are settled in physical
delivery due to insufficiencies in present warehousing system. As good delivery system is the
back bone of any Commodity trade, warehousing problem has to be handled on a war footing.
At present there are restrictions in movement of certain goods from one state to another.
These needs to be removed so that a truly national market could develop for commodities and
derivatives.
Regulatory changes are required to bring about uniformity in Octri and sales tax etc. VAT has
been introduced in country in 2005, but, has not yet been uniformly implemented by all states.
A difficult problem in Cash settlement of Commodities Derivatives contract is that, under
Forward Contracts Regulation Act 1952 cash settlement of outstanding contracts at maturity is
not allowed. That means outstanding contracts at maturity should be settled in physical delivery.To avoid this participants square off their their positions before maturity. So in practice contracts
are settled in Cash but before maturity. There is need to modify the law to bring it closer to the
wide spread practice and save participants from unnecessary hassle.
Chapter 8
Commodities
Steel: -
General Characteristics: -
Steel is an alloy of iron and carbon, containing less than 2% carbon, 1% manganese
and small amount of silicon, phosphorus, sulphur and oxygen. Steel is most important engineering
and construction material in the world. It is most important, multi functional and the most adaptable of
materials. Steel production is 20 times higher a compared to production of all non-ferrous metals put
together.
Steel compared to other materials of its type has low production costs. The
energy required for extracting iron from ore is about 25% of what is needed for extracting
aluminum.
There are altogether about 2000 grades of steel developed of which
1500 grades are high-grade steels. The large number of grades gives steel the characteristics
of basic production material.
Categories of Steel: -
-
8/9/2019 Final Project 2003
35/51
Steel market is primarily divided in to two main categories- flat and long. A flat
carbon steel product is a plate product or a (hot or cold) rolled strip product. Plate products vary
in dimensions from 10 mm to 200 mm and thin flat rolled products from 1 mm to 10 mm. Plate
products are used for ship building, construction, large diameter welded pipes and boiler
applications. Thin flat products find end use applications in automotive body panels, domestic
white goods products, tin cans and the whole host of other products from office furniture toheart pacemakers. Plates, HR coils and HR Sheet, CR Sheet and CR coils, GP/GC (galvanized
plates and coils) pipes etc. are included in this category.
A long steel product is a road or a bar. Typical rod product are the reinforcing
rods made from sponge iron for concrete, ingots, billets, engineering products, gears, tools, etc.
Wiredrawn products and seamless pipes are also part of the long products group. Bars, rods,
structures, railway materials, etc are included in this category.
Sponge Iron/ Direct reduced iron (DRI): This is a high quality product
produced by reducing iron ore in a solid state and is primarily used as an iron input in electric
arc furnace (EAF) steel making process. This industry is an integral part of the steel sector
India is one of the leading countries in terms of sponge iron production. There are a number of
coal-based sponge iron/DRI plants (in the eastern and central region) and also three natural gas
based plants (in western part of the country) in the country.
Global Scenario: -
The total output of the word crude steel in 2006 stood at 945
million tons, resulting in a growth of 6.7% over the previous year.
China is the words largest crude steel producer in the year 2006 with around
220.12 million tons of steel production, followed by Japan and USA. USA was largest importer
of steel products, both finished and semi finished, in 2005, followed by China and Germany.
The words largest exporter of semi-finished and finished steel
was Japan in 2005, followed by Russia and Ukraine.
China is the largest consumer now and consumption of steel by
China is estimated to increase by 12-13% in 2007.
Indian Scenario: -
India is the 8th largest producer of the steel with an annual production of 36.193
million tons, while the consumption is around 30 million tons.
Iron & steel can be freely exported and imported from India.
India is a net exporter of steel.
-
8/9/2019 Final Project 2003
36/51
The Government of India has taken a number of policy measures, such as
removal of iron & steel industry from the list of industries reserved for public sector, deregulation
of price and distribution of iron & steel and lowering import duty on capital goods and raw
materials, since liberalization for the growth and development of Indian iron & steel industry.
After liberalization India has seen huge scale addition to its steel making capacity.
The country faces shortage of iron and steel materials.Factors Influencing Demand & Supply of Steel Long and Steel
Flat: -
The demand for steel is dependent on the overall health of the economy and the in
fracture development activities being undertaken. The steel prices in the Indian market primarily
depend on the domestic demand and supply conditions, and international prices. Government
and different producer and consumer associations regularly monitor steel prices.
The duty imposed on import of steel and its fractions also have an impact on steel
prices. The price trend in steel in Indian markets has been a function of Worlds economic
activity
India is one of the leading countries in terms of sponge iron production. There are a number of
coal-based sponge iron/DRI plants (in the eastern and central region) and also three natural gas
based plants (in western part of the country) in the country.
Global Scenario: -
The total output of the word crude steel in 2006 stood at 945
million tons, resulting in a growth of 6.7% over the previous year.
China is the words largest crude steel producer in the year 2006 with around
220.12 million tons of steel production, followed by Japan and USA. USA was largest importer
of steel products, both finished and semi finished, in 2005, followed by China and Germany.
The words largest exporter of semi-finished and finished steel
was Japan in 2005, followed by Russia and Ukraine.
China is the largest consumer now and consumption of steel by
China is estimated to increase by 12-13% in 2007.
Indian Scenario: -
India is the 8th largest producer of the steel with an annual production of 36.193
million tons, while the consumption is around 30 million tons.
Iron & steel can be freely exported and imported from India.
-
8/9/2019 Final Project 2003
37/51
India is a net exporter of steel.
The Government of India has taken a number of policy measures, such as
removal of iron & steel industry from the list of industries reserved for public sector, deregulation
of price and distribution of iron & steel and lowering import duty on capital goods and raw
materials, since liberalization for the growth and development of Indian iron & steel industry.After liberalization India has seen huge scale addition to its steel making capacity.
The country faces shortage of iron and steel materials.
Factors Influencing Demand & Supply of Steel Long and Steel
Flat: -
The demand for steel is dependent on the overall health of the economy and the in
fracture development activities being undertaken. The steel prices in the Indian market primarily
depend on the domestic demand and supply conditions, and international prices. Government
and different producer and consumer associations regularly monitor steel prices.
The duty imposed on import of steel and its fractions also have an impact on steelprices. The price trend in steel in Indian markets has been a function of Worlds economic
activity
Key market moving Factors:
Price tends to be lower as harvesting progresses and produce starts coming in to the
market. At the time sowing and before harvesting price tend to rise in a view of tight supply
situation. Weather has profound influence on wheat production. Temperature plays crucial role
towards maturity of wheat and productivity.
Change in Minimum Support Price (MSP) by Govt. and the stock available with Food
corporation of India and the release from official stock influence of the price. Though,
international trade is limited, the ups and downs in the production and consumption at all the
major/minor producing and consuming nation dose influence the long term price trend.
ANALYSIS
Survey was conducted across Mumbai City (in areas like Andheri, Santacruz,
Bandra Church gate) to judge the awareness of peoples regarding investment in Commodity
Market.
-
8/9/2019 Final Project 2003
38/51
Sample size 30 peoples
Analysis of data shows that majority of people who are aware about
commodity market; feel that investment in commodity market is very risky. So efforts should be
done to minimize the risk in commodity investment and make peoples about minimum risk in
commodity investment.
6. Opinion about Commodity Market Advertisements
(Expressed by those who know commodity market)
100
Not Informative
There is no second opinion amongst commodity investors, that commodity market
advertisements do not give all the necessary information
Qualitative Analysis
1.Investment preferences: -
Most of the investors prefer least risky investment which gives higher returns. That
is why majority (70% of sample) of people interested in investments other than Share and
commodity market.
Very less number of people (only 7%) showed their interest in investment incommodity market. Main reason for this is lack of awareness and complete information about
commodity market.
2.Commodity Exchanges: -
People who are interested in commodity investment showed more concern
towards NCDEX; for its brand name and people think there might be surety of transaction at
NCDEX.
3. Commodities: -
Bullion is most preferred commodity for investment. Because one can expect maximum
returns from such investment due to rapidly increasing prices of bullion in market.
4. Advertisements: -
Commodity market Advertisements should be more informative. And it is the
failure of commodity markets advertisement campaign to attract peoples attention; as majority
of people are not aware about commodity market.
-
8/9/2019 Final Project 2003
39/51
ANNEXURE
Terms and Definitions related to Commodity Market: -
Accruals:- Commodities on hand ready for shipment, storage
and manufacture
Arbitragers: - Arbitragers are interested in making purchase
and sale in different markets at the same time to profit from
price discrepancy between the two markets.
At the Market: - An order to buy or sell at the best price
possible at the time an order reaches the trading pit.
Basis: - Basis is the difference between the cash price of an
asset and futures price of the underlying asset. Basis can be negative or positive depending on
the prices prevailing in the cash and futures.
Basis grade: - Specific grade or grades named in the exchanges
future contract. The other grades deliverable are subject to price
of underlying futures
Bear: - A person who expects prices to go lower.
Bid: - A bid subject to immediate acceptance made on the floor
-
8/9/2019 Final Project 2003
40/51
of exchange to buy a definite number of futures contracts at a
specific price.
Breaking: - A quick decline in price.
Bulging: - A quick increase in price.
Bull: - A person who expects prices to go higher.
Buy on Close: - To buy at the end of trading session at the price
within the closing range.
Buy on opening: - To buy at the beginning of trading session at
a price within the opening range.
Call: - An option that gives the buyer the right to a long position
in the underlying futures at a specific price, the call writer (seller) may be assigned a short
position in the underlying futures if the buyer exercises the call.
Cash commodity: - The actual physical product on which a
futures contract is based. This product can include agricultural commodities, financial
instruments and the cash equivalent of index futures.
Close: - The period at the end of trading session officially
designated by exchange during which all transactions are
considered made at the close.
Closing price: - The price (or price range) recorded during the
-
8/9/2019 Final Project 2003
41/51
period designated by the exchange as the official close.
Commission house: - A concern that buys and sells actual
commodities or futures contract for the accounts of customers.
Consumption Commodity: - Consumption commodities are
held mainly for consumption purpose. E.g. Oil, steel
Cover: - The cancellation of the short position in any futures
contract buys the purchase of an equal quantity of the same
futures contract.
Cross hedge: - When a cash commodity is hedged by using
futures contract of other commodity.
Day orders: - Orders at a limited price which are understood to
be good for the day unless expressly designated as an open
order or good till canceled order.
Delivery: - The tender and receipt of actual commodity, or in
case of agriculture commodities, warehouse receipts covering such commodity, in settlement of
futures contract. Some contracts settle in cash (cash delivery). In which case open positions are
marked to market on last day of contract based on cash market close.
Delivery month: - Specified month within which delivery may
be made under the terms of futures contract.
Delivery notice: - A notice for a clearing members intention to
deliver a stated quantity of commodity in settlement of a short
-
8/9/2019 Final Project 2003
42/51
futures position.
48
Derivatives: - These are financial contracts, which derive their
value from an underlying asset. (Underlying assets can be equity, commodity, foreign
exchange, interest rates, real estate or any other asset.) Four types of derivatives are trades
forward, futures, options and swaps. Derivatives can be traded either in an exchange or over
the counter.
Differentials: - The premium paid for grades batter than the
basis grade and the discounts allowed for the grades. These
differentials are fixed by the contract terms on most exchanges.
Exchange: - Central market place for buyers and sellers.
Standardized contracts ensure that the prices mean the same to everyone in the market. The
prices in an exchange are determined in the form of a continuous auction by members who are
acting on behalf of their clients, companies or themselves.
Forward contract: - It is an agreement between two parties to
buy or sell an asset at a future date for price agreed upon while signing agreement. Forwardcontract is not traded on an exchange. This is oldest form of derivative contract. It is traded in
OTC Market. Not on an exchange. Size of forward contract is customized as per the terms of
agreement between buyer and seller. The contract price of forward contract is not transparent,
as it is not publicly disclosed. Here valuation of open position is not calculated on a daily basis
and there is no requirement of MTM. Liquidity is the measure of frequency of trades that occur
in a particular commodity forward contract is less liquid due to its customized nature. In forward
contracts, counter- party risk is high due to customized & bilateral nature of the transaction.
Forward contract is not regulated by any exchange. Forward contract is generally settled by
physical delivery. In this case delivery is carried out at delivery center specified in the
customized bilateral agreement.
Futures Contract:-It is an agreement between two parties to
buy or sell a specified and standardized quantity and quality of an asset at certain time in the
future at price agreed upon at the time of entering in to contract on the futures exchange. It is
entered on centralized trading platform of exchange. It is standardized in terms of quantity as
-
8/9/2019 Final Project 2003
43/51
specified by exchange. Contract price of futures contract is transparent as it is available on
centralized trading screen of the exchange. Here valuation of Mark-to-Mark position is
calculated as per the official closing price on daily basis and MTM margin requirement exists.
Futures contract is more liquid as it is traded on the exchange. In futures contracts the clearing-
house becomes the counter party to each transaction, which is called novation. Therefore,
counter party risk is almost eliminated. A regulatory authority and the exchange regulate futurescontract. Futures contract is generally cash settled but option of physical settlement is available.
Delivery tendered in case of futures contract should be of standard quantity and quality as
specified by the exchange.
Futures commission merchant: - A broker who is permitted
to accept the orders to buy and sale futures contracts for the
consumers.
Futures Funds: - Usually limited partnerships for investors who prefer to participate in the
futures market by buying shares in a fund managed by professional traders or commodity
trading advisors.
Futures Market:-It facilitates buying and selling of standardized
contractual agreements (for future delivery) of underlying asset as the specific commodity and
not the physical commodity itself. The formulation of futures contract is very specific regarding
the quality of the commodity, the quantity to be delivered and date for delivery. However it does
not involve immediate transfer of ownership of commodity, unless resulting in delivery. Thus, in
futures markets, commodities can be bought or sold irrespective of whether one has possession
of the underlying commodity or not. The futures market trade in futures contracts primarily for
the purpose of risk management that is hedging on commodity stocks or forward buyers and
sellers. Most of these contracts are squared off before maturity and rarely end in deliveries.
Hedging: - Means taking a position in futures market that is
opposite to position in the physical market with the objective of
reducing or limiting risk associated with price.
In the money: - In call options when strike price is below the
price of underlying futures. In put options, when the strike price is above the underlying futures.
In-the-money options are the most expensive options because the premium includes intrinsic
value.
-
8/9/2019 Final Project 2003
44/51
Index Futures: - Futures contracts based on indexes such as
the S & P 500 or Value Line Index. These are the cash
settlement contracts.
Investment Commodities: - An investment commodity is
generally held for investment purpose. e.g. Gold, Silver
Limit: - The maximum daily price change above or below the
price close in a specific futures market. Trading limits may be
changed during periods of unusually high market activity.
Limit order: - An order given to a broker by a customer who
has some restrictions upon its execution, such as price or time.
Liquidation: - A transaction made in reducing or closing out a
long or short position, but more often used by the trade to mean
a reduction or closing out of long position.
Local: - Independent trader who trades his/her own money on
the floor of the exchanges. Some local act as a brokers as well,
but are subject to certain rules that protect customer orders.
Long: - (1) The buying side of an open futures contract or
futures option; (2) a trader whose net position in the futures or options market shows an excess
of open purchases over open sales.
Margin: - Cash or equivalent posted as guarantee of fulfillment
-
8/9/2019 Final Project 2003
45/51
of a futures contract (not a down payment).
Margin call: - Demand for additional funds or equivalent
because of adverse price movement or some other contingency.
Market to Market: - The practice of crediting or debating a
traders account based on daily closing prices of the futures
contracts he is long or short.
Market order: - An order for immediate execution at the best
available price.
Nearby: - The futures contract closest to expiration.
51
Net position: - The difference between the open contracts long
and the open contracts short held in any commodity by any
individual or group.
Offer: - An offer indicating willingness to sell at a given price
(opposite of bid).
On opening: - A term used to specify execution of an order
during the opening.
Open contracts: - Contracts which have been brought or sold
without the transaction having been completed by subsequent
sale, repurchase or actual delivery or receipt of commodity.
-
8/9/2019 Final Project 2003
46/51
Open interest: - The number of open contracts. It refers to
unliquidated purchases or sales and never to their combined
total.
Option: - It gives right but not the obligation to the option
owner, to buy an underlying asset at specific price at specific
time in the future.
Out-of-the money: - Option calls with the strike prices above
the price of the underlying futures, and puts with strike prices
below the price of the underlying futures.
Over the counter: - It is alternative trading platform, linked to
network of dealers who do not physically meet but instead
communicates through a network of phones & computers.
Pit: - An octagonal platform on the trading floor of an exchange,
consisting of steps upon which traders and brokers stand while
trading (if circular called ring).
Point: - The minimum unit in which changes in futures prices
may be expressed (minimum price fluctuation may be in
multiples of points).
Position: - An interest in the market in the form of open
commodities.
-
8/9/2019 Final Project 2003
47/51
Premium: - The amount by which a given futures contracts price
or commoditys quality exceeds that of another contract or
commodity (opposite of discount). In options, the price of a call
or put, which the buyer initially pays to the option writer (seller).
Price limit: - The maximum fluctuation in price of futures
contract permitted during one trading session, as fixed by the
rules of a contract market.
Purchase and sales statement: - A statement sent by FMC to a customer when his futures
option has been reduced or closed out (also called P and S)
Put: - In options the buyer of a put has the right to continue a
short position in an underlying futures contract at the strike price until the option expires; the
seller (writer) of the put obligates himself to take a long position in the futures at the strike price
if the buyer exercises his put.
Range: - The difference between high and low price of the
futures contract during a given period.
Ratio hedging: - Hedging a cash position with futures on a less
or more than one-for-one basis.
Reaction: - The downward tendency of a commodity after an
advance.
Round turn: - The execution of the same customer of a
purchase transaction and a sales transaction which offset each
other.
-
8/9/2019 Final Project 2003
48/51
Round turn commission: - The cost to the customer for
executing a futures contract which is charged only when the
position is liquidated.
Scalping: - For floor traders, the practice of trading in and out
of contracts through out the trading day in a hopes for making a
series of small profits.
Settlement price: - The official daily closing price of futures
contract, set by the exchange for the purpose of setting margins
accounts.
Short: - (1) The selling of an option futures contract. (2) A
trader whose net position in the futures market shows an excess
of open sales over open purchases.
Speculator: - Speculator is an additional buyer of the
commodities whenever it seems that market prices are lower
than they should be.
Spot Markets:-Here commodities are physically brought or sold
on a negotiated basis.
Spot price: - The price at which the spot or cash commodity is
selling on the cash or spot market.
-
8/9/2019 Final Project 2003
49/51
Spread: - Spread is the difference in prices of two futures
contracts.
Striking price: - In options, the price at which a futures
position will be established if the buyer exercises (also called
strike or exercise price).
Swap: - It is an agreement between two parties to exchange
different streams of cash flows in future according to
predetermined terms.
Technical analysis (charting): - In price forecasting, the use
of charts and other devices to analyze price-change patters and changes in volume and open
interest to predict future market trends (opposite of fundamental analysis).
Time value: - In options the value of premium is based on the
amount of time left before the contract expires and the volatility of the underlying futures
contract. Time value represents the portion of the premium in excess of intrinsic value. Timevalue diminishes as the expiration of the options draws near and/or if the underlying futures
become less volatile.
Volume of trading (or sales): - A simple addition of
successive futures transactions (a transaction consists of a
purchase and matching sale).
54
Writer: - A sealer of an option who collects the premium
payment from the buyer.
-
8/9/2019 Final Project 2003
50/51
Summary
This decade is termed as Decade of Commodities. Prices of all commodities
are heading northwards due to rapid increase in demand for commodities. Developing countries
like China are voraciously consuming the commodities. Thats why globally commodity market is
bigger than the stock market.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. The market 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. This should act as a major lesson
for policy makers in developing countries, that pricing and price risk management should be left
to the market forces rather than trying to achieve these through administered price mechanisms.
The management of price risk is going to assume even greater importance in future with the
promotion of free trade and removal of trade barriers in the world.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. Concerned authorities have to take initiative to make commodity trading process easy
and simple. Along with Government efforts NGOs should come forward to educate the people
about commodity markets and to encourage them to invest in to it. There is no doubt that in
near future commodity market will become Hot spot for Indian farmers rather than spot market.
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.
-
8/9/2019 Final Project 2003
51/51
BIBLIOGRAPHY
Trading Commodities and Financial Futures: A Step by Step guide to Mastering the Market, 3rd
Edition by George Kleinman
Options, Futures and Other Derivatives by Johan C. Hull
Speaker 1: - Introduction:- What is commodity? commodity exchange?
what is commodity futures? objective of commodity futures
Speaker 2: - Benifits of commodity futures, Evalution of history of
commodity markets
Speaker 3: -India and commodity markets history + legal frame
work+ FMC
Speaker 4: -Commodity Exchanges in India & International exchanges
Speaker 5: - Amar: -how commodity market works+ how to invest in
commodity market+ how to become a member
Speaker 6: -Current scenario+suggestions
.