Future Trading & Commodity Exchange

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FUTURE TRADING & COMMODITY EXCHANGE


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CONTENTS

S.No TOPIC1 Future Trading

--Introduction--Function--Characteristic

--Evolution--Benefits-- Method Of Participating In Future Trading

Settlement Of Dispute

2 Future MarketParticipant In Future MarketFunction Of Future Market

3 Future Contracts

--Need--Types-- How To Choose Future Contract-- Process Of Price Discovery-- After The Closing Bell-- Trading-- Margins--Trading Strategies--Requisite In Future Contract--Commodity Future Contract--Trading Mechanism--Clearing System--Delivery System--Provision when Default Occur --Term Used in Future Trading

4 Commodity Exchange

--Introduction--Policy Initiatives--National Wide Multi Commodity Exchange--Indian Commodity Exchange

5 Multi Commodity Exchange Of India Ltd--Introduction--Objective--Corporate Objective--Benefits Of MCX--List Of Commodity Traded in MCX

6 Analysis

7 Recommendation

8 Bibliography


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Future Trading

The process of trading commodities is also known as futures trading.Futures Contracting is an important activity for any economy to meetraw material requirements, to facilitate storage as a profitable

economic activity and also to manage supply and demand risk,forward contracts gives rise to price risk, so to the need of price riskmanagement, unlike other kinds of investments, such as stocks andbonds, when investor trade futures, he/she do not actually buyanything or own anything. He/she are speculating on the futuredirection of the price in the commodity in which they are trading. Thisis like a bet on future price direction. The terms "buy" and "sell"merely indicate the direction you expect future prices will take.

In other word Forward/Future trading is an activity in which a trader takes a position in an equity in advance of an action which he/sheknows his/her brokerage will take that will move the equity's price in apredictable fashion also called front running. Future / forward tradinginvolves a passage of time between entering into a contract and itsperformance making thereby the contracts susceptible to risks,uncertainties, etc

Many people have become very rich in the commodity markets. It isone of a few investment areas where an individual with limited capital

can make extraordinary profits in a relatively short period of time,nevertheless most of the people lose money, commodity trading hasa bad reputation as being too risky for the average individual. Thetruth is that commodity trading is only as risky as you want to make it.


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Functions Of Futures Trading

Basically Futures trading perform two important functions

Price discoveryPrice risk management

Price discovery: Describing the possible price of future contract in thefuture

Price risk management: Price risk management related withreference to the given commodity by buying and selling futurescontracts that establish a price level now for items to be delivered

later.


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Characteristic Of Future Trading

A "Futures Contract" is a highly standardized contract with certaindistinct features. Some of the important features are as under :

a. Futures trading is necessarily organized under the auspices of a market association so that such trading is confined to or conducted through members of the association in accordancewith the procedure laid down in the Rules & Bye-laws of theassociation.

b. It is invariably entered into for a standard variety known as the"basis variety" with permission to deliver other identifiedvarieties known as "tenderable varieties".

c. The units of price quotation and trading are fixed in thesecontracts, parties to the contracts not being capable of alteringthese units.

d. The delivery periods are specified.

e. The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case hedecides to deliver goods, he can do so not only at the locationof the Association through which trading is organized but alsoat a number of other pre-specified delivery centers.

f. In futures market actual delivery of goods takes place only in avery few cases. Transactions are mostly squared up before thedue date of the contract and contracts are settled by paymentof differences without any physical delivery of goods takingplace.


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Evolution Of Futures Trading


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Organized futures market evolved in India by the setting up of "BombayCotton Trade Association Ltd." in 1875. In 1893, following widespreaddiscontent amongst leading cotton mill owners andmerchants over the functioning of the Bombay Cotton Trade Association,a separate association by the name "Bombay Cotton Exchange Ltd." wasconstituted. Futures trading in oilseeds was organized in India for the firsttime with the setting up of Gujarati Vyapari Mandali in 1900, which carriedon futures trading in groundnut, castor seed and cotton. Before theSecond World War broke out in 1939 several futures markets in oilseedswere functioning in Gujarat and Punjab.

Futures trading in Raw Jute and Jute Goods began in Calcutta with theestablishment of the Calcutta Hessian Exchange Ltd., in 1919. Later EastIndian Jute Association Ltd., was set up in 1927 for organizing futurestrading in Raw Jute. These two associations amalgamated in 1945 to form

the present East India Jute & Hessian Ltd., to conduct organized trading inboth Raw Jute and Jute goods. In case of wheat, futures markets were inexistence at several centers at Punjab and U.P. The most notableamongst them was the Chamber of Commerce at Hapur, which wasestablished in 1913. Other markets were located at Amritsar, Moga,Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda in Punjab andMuzaffarnagar, Chandausi, Meerut, Saharanpur, Hathras, Gaziabad,Sikenderabad and Barielly in U.P.

Futures market in Bullion began at Mumbai in 1920 and later similar markets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi andCalcutta. In due course several other exchanges were also created in thecountry to trade in such diverse commodities as pepper, turmeric, potato,sugar and gur (jaggory).

The National Agriculture Policy announced in July 2000 and theannouncements of Hon'ble Finance Minister in the Budget Speech for 2002-2003 were indicative of the Governments resolve to put in place amechanism of futures trade/market. As a follow up the Government issuednotifications on 1.4.2003 permitting futures trading in the commodities,with the issue of these notifications futures trading is not prohibited in anycommodity. Options trading in commodity is, however presentlyprohibited.


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After independence, the Constitution of India brought the subject of "Stock Exchanges and futures markets" in the Union list. As a result,the responsibility for regulation of commodity futures marketsdevolved on Govt. of India. A Bill on forward contracts was referred toan expert committee headed by Prof. A.D.Shroff and SelectCommittees of two successive Parliaments and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was enacted. TheAct provided for 3-tier regulatory system;

(a) An association recognized by the Government of India on therecommendation of Forward Markets Commission,

(b) The Forwar d Markets Commission (it was set up in September

1953) and(c) The Central Government.

Forward Contracts (Regulation) Rules were notified by the CentralGovernment in July,1954 The Act divides the commodities into 3categories with reference to extent of regulation, viz:

(a) The commodities in which futures trading can be organizedunder the auspices of recognized association.

(b) The Commodities in which futures trading is prohibited.

(c) Those commodities which have neither been regulated for being traded under the recognized association nor prohibited arereferred as Free Commodities and the association organized in suchfree commodities is required to obtain the Certificate of Registrationfrom the Forward Markets Commission.

In the seventies, most of the registered associations became inactive,

as futures as well as forward trading in the commodities for whichthey were registered came to be either suspended or prohibitedaltogether. The Khusro Committee (June 1980) had recommendedreintroduction of futures trading in most of the major commodities ,including cotton, kapas, raw jute and jute goods and suggested thatsteps may be taken for introducing futures trading in commodities,like potatoes, onions, etc. at appropriate time. The government,


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accordingly initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar Pradesh.

After the introduction of economic reforms since June 1991 and theconsequent gradual trade and industry liberalization in both thedomestic and external sectors, the Govt. of India appointed in June

1993 one more committee on Forward Markets under Chairmanshipof Prof. K.N. Kabra. The Committee submitted its report in September 1994. The majority report of the Committee recommended thatfutures trading be introduced in

1) Basmati Rice2) Cotton and Kapas3) Raw Jute and Jute Goods4) Groundnut, rapeseed/mustard seed, cottonseed, sesame seed,sunflower seed, safflower seed, copra and soybean, and oils andoilcakes of all of them.5) Rice bran oil6) Castor oil and its oilcake7) Linseed8) Silver and9) Onions.

The committee also recommended that some of the existingcommodity exchanges particularly the ones in pepper and castor seed, may be upgraded to the level of international futures markets.

The liberalized policy being followed by the Government of India andthe gradual withdrawal of the procurement and distribution channelnecessitated setting in place a market mechanism to perform theeconomic functions of price discovery and risk management.


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Benefits of Future trading

Futures trading is useful and beneficial to all segments of the

economy like To Producer To Consumer To Exporter Other benefits

To Producer

Futures trading is useful to the producer because he can get theidea of the price likely to prevail at a future point of the time andtherefore can decide between various competing commodities ,the best that suit him.

To Consumer

Futures trading is useful to the consumer because he/she get anidea of the price at which the commodity would be available at afuture point of the time.

To Exporters

Futures trading is useful to the exporter because it provide anadvance indication of the price likely to prevail and thereby help theexporter in quoting a realistic price and there by secure exportcontract in a competitive market , Futures trading enable exporter tohedge his/her risk by operating in future market.


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Other benefits

The other benefits which are served by futures trading are:

(i) Price stabilization-in times of violent price fluctuations - thismechanism dampens the peaks and lifts up the valleys i.e. the

amplititude of price variation is reduced.(ii) Leads to integrated price structure throughout the country.

(iii) Facilitates lengthy and complex, production and manufacturingactivities.

(iv) Helps balance in supply and demand position throughout theyear.

(v) Encourages competition and acts as a price barometer to farmersand other trade functionaries.

Futures trading is also capable of being misused by unscrupulousspeculators. In order to safeguard against uncontrolled speculationcertain regulatory measures are introduced from time to time. Theyare:

Limit on open position of an individual operator to preventover trading;

Limit on price fluctuation (daily/weekly) to prevent abruptupswing or downswing in prices;

Special margin deposits to be collected on outstandingpurchases or sales to curb excessive speculative activitythrough financial restraints;

Minimum/maximum prices to be prescribed to prevent futureprices from falling below the levels that are un remunerativeand from rising above the levels not warranted by genuinesupply and demand factors.


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Palmolien15 The First Commodities

Exchange of India Ltd., KochiCopra/Coconut, its oil&oilcake

16 Central India CommerceExchange Ltd., Gwalior

Gur and Mustard Seed

17 E-Sugar India Ltd., Mumbai Sugar

18 National Multi CommodityExchange of India Ltd.,Ahmedabad

Oilseed complex andRubber , sugar, Aluminum,nickel ,Zinc, Copper, Lead.tin ,pepper, Gram andSacking

19 Coffee Futures Exchange IndiaLtd.,Bangalore

Coffee

20 Surendranagar Cotton oil &

Oilseeds, Surendranagar

Cotton,.Cotton seed, Kapas

21 E-Commodities Ltd.,New Delhi Sugar 22 Bullion Merchants Association ,

Bikaner Mustard seed its oil &oilcake


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Futures Market

Futures markets have been described as continuous auction marketsand as clearing houses for the latest information about supply anddemand. They are the meeting places of buyers and sellers of anever-expanding list of commodities that today includes agriculturalproducts, metals, petroleum, financial instruments, foreign currenciesand stock indexes. Trading has also being imitated in futurecontracts , enabling option buyers to participate in future market withknown risks

In other words Futures markets have been described as continuousauction market and as a clearing house for the latest informationabout supply and demand.

The size of future market has increased from 14 million futurecontracts traded in 1970 to 179 million future at option on futurescontract traded in 1985.


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Most of the speculative investor have nointention of making or taking delivery of the commoditybut, rather seek to profit from a change in the price .

Floor traders

Floor traders are person who buy and sell for their ownaccounts on the trading floors of the exchange and are theleast known and understood of all futures marketparticipants ,Actually they have no guarantee they willrealize a profit , they can loss of money on any trade,basically the floor trader make more liquid and competitivemarket


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Futures Contracts

Futures contract involves obligations of both parties to perform in thefuture--the buyer (long) to purchase the asset underlying the futureand the seller (short) to deliver the asset. Thus, both the buyer andthe seller of a futures contract must initially post and maintain, on adaily basis, margin to assure contract performance and the integrityof the marketplace. In other words Futures contract is the agreementbetween two parties to buy or sell an asset at a certain time in thefuture for a certain prices. It is normally traded in the exchange

Forward contracts are bilateral contracts to manage price risk andquantity risk to certain extent and would act as a boost for futures

markets for the following reasons


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Why Need Of Futures Trading

Futures trading in commodities results in and fair price discovery onaccount of large-scale participations of entities associated with

different value chains. It reflects views and expectations of a wider section of people related to a particular commodity. It also provideseffective platform for price risk management for all segments of players ranging from producers, traders and processors toexporters/importers and end-users of a commodity. It also provideshedging, trading and arbitrage opportunities to market players.


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Types Of Futures Contract

There are two types of futures contracts which are as follows

Physical delivery of commodity contracts

Call for a cash settlement contracts

Physical delivery of commodity contracts: in this type of futurescontract the physical delivery of the commodity is based on the desireof the buyer and seller both at the time of contract expired.

Call for a cash settlement contracts: Cash settlement futurescontracts are precisely that contracts which are settled in cash rather than by delivery at the time of the contract expired.


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How To Choose The Future Contract

The market of for one commodity may be highly volatile at one time

but not highly volatile at another time. The investor must consider following thing while choosing any future contract which are asfollows:

Liquidity Timing Stop Orders Spreads Options on futures contracts

Liquidity : A liquid market will exist for offsetting a futurescontract that investor have previously brought or sold , twouseful indicator of liquidity are the volume of trading and theopen interest

Timing: In future trading it is necessary to anticipate thetiming of the price change which may reflect the decision of theinvestor

Stop Orders : A stop order is an order , placed with broker to buy or sell a particular future contract at the market price if and when the price reaches a specified level stop order areoften used by future traders in an effort to limit the amountthey have


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Spreads : Spread involves buying one future contract andselling another future contract , the main purpose is to profitfrom an expected change in the relation ship between thepurchase price of one and the selling price of the other. Inother words the spread involves the purchases of one futurescontract and the sale of a different future contract in hope of

profiting from a widening or narrowing of the price difference.

Options on futures contracts: The Put and Call option arebeing traded on a growing number of future contracts. The mainprincipal attraction of buying an option is that they make itpossible to speculate to increase or decrease future price with aknown and limited risk

In call option buyers acquires the right but not the

obligation to purchase a particular futures contract at aspecified price at any time during the life of the option.

A Put option convey the right to sell a particular futurescontract at specified price , put option can be purchased to profitfrom an anticipated price decrease.


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The Process Of Price Discovery

The process of price discovery in futures contract is continuous. Theprice of future increases and decreases largely because of the myriadfactors that influence buyers and the sellers judgment about what a

particular commodity will be worth at a given time in the future. Withthe arrival of new or more accurate information the price of thefutures contract might increase or decreases in response to changingexpectations

As a new supply and demand development occurs as new and morecurrent information becomes available, these judgments s arereassessed and the price of a particular future contract may be bidupward and downward


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After The Closing Bell

Closing bell signals the end of a days trading , the exchangesclearing organization matches each purchase made a day with thecorresponding sales and tallies each member firm gain or lossesbased on that days price change , a massive undertakingconsidering that near two-third of a million futures contracts arebought and on an average day. Gains and losses on futurescontracts are calculated on daily basis and they are credited anddebited on a daily basis.


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Trading

An absolute requisite for any one considering trading in futurescontracts that to clearly understand the concept of leverage as wellas the amount of gain and loss that will result from any givenchange in the futures price of the particular futures contract inwhich you are liking to deal. If you cannot afford the risk, or even youare not comfortable with the risk then it is not suitable to trade infutures


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Margins

Margins are basically the sum of money deposited by the investorstowards his trader or broker on his/her good faith.

In futures trading the margin is required to buy or sell afutures contract is on solely a deposit of good faith money that canbe drawn on by brokerage firm to cover loss that incurred by theinvestor in course of future trading. The minimum level of margins for a particular futures contract at a particular point of time is set by theexchange on which the trading take place. Exchange continuouslymonitor market condition and risk and as necessary, raise or reducethe margin requirements .Individual brokerage firm may charge or require higher margin amount from their customers than theexchange set minimum

There are two types of margins

Initial Margin

Maintenance Margin

Initial Margin: Initial Margin is the sum of money that thecustomer must deposit with the brokerage firm for each futurecontract to brought or sold .If on any day that profit accrues oninvestor open position, the profit will be added in the balance of investors margin account

Maintenance Margin Maintenance Margin is the additionalamount which is required to deposit by investor on call bybrokerage firm due to losses suffered in previous futurecontract to get the margin to the level of initial margin. whenbrokerage firm call for additional margin is called margin call

In short and simple words Maintenance Margin is theminimum margin balance which must be maintained by investor with brokerage firm to reduce losses at a certain level .


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Method Of Particapting In Future Trading

The method of participating in future trading is based and depend onthe need and want of the investors in making trading decision as wellas his/her perceptions like from this we can categories the method of participating in future trading in four categories which are as follows :

Trade your own account

Have someone manage your account

Use a commodity trading advisor

Participation in a commodity pool


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Trade your own account : Under this method the investor has toopen his/her individual trading account , with or with out therecommendation of the brokerage firm , in which the investor takesole decision regarding trading decisions , investor will also

responsible for assuring that adequate fund s are on deposit withthe brokerage firm for margin purposes and the such funds arepromptly provided as needed

An individual trading account can be opened either directly witha future commission Merchant or indirectly through an introducingbroker

Future Commission Merchant are required to maintain the fundsand property of their customer in segregated account (Separate fromthe firms own money)

Introducing broker do not accept or handle investor funds but mostoffer a variety of trading-related services

Have someone manage your account: A managed account is alsoan individual account. The major difference is that investor givesomeone rise to an account manager in which written power of attorney is made in favors of account manger to make and executedecisions about what and when to trade . He or she will have

discretionary authority to buy or sell for investor account or willcontract investor for approval to make traders he or she suggestsin this case the investor remain fully responsible for any losseswhich may incurred and as necessary ,for meeting margin calls ,including making up any deficiencies that exceed your margindeposit.


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Use a commodity trading advisor: A commodity trading advisor is aindividual that take a fee and provide advice on commoditytrading, include all specific recommendation such as when toestablish a particular long or short position and when to liquidatethat position , trading recommendation may be communicated byphone , wire mail.

Participation in a commodity pool : Another alternative method of participating in the future trading is through future trading, it is onlythe method of participation in which investor will not have his owntrading account , in fact his money will be combined with that of other pool participants b and in effects traders as a single account .Investor share in the profit or losses of the pool in proportion tohis/her investment in the pool. One potential advantage is greater diversification of risks than investor might obtain if investor were toestablish his own trading account. Another advantage is that theinvestor risk of loss is generally limited to his/her investment in thepool , because most pools are formed as limited partnerships a poolmust execute all of its trades through a brokerage firm which isregistered with the CFTC as a Future commission Merchant , it mayor may not have any other affiliation with brokerage firm .Somebrokerage firms, to serve those customers who prefer toparticipate[ate in commodity trading through a pool , either operate

or have a relationship with one or more commodity trading pools.


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Regulation Of Future Trading

The Forward Markets Commission (FMC) is the regulatory body for commodity futures/forward trade in India. The commission was set upunder the Forward Contracts (Regulation) Act of 1952. It isresponsible for regulating and promoting futures/forward trade incommodities. The FMC is headquartered in Mumbai while its regionaloffice is located in Kolkata.

Firms and individuals that conduct futures trading business with thepublic are subject to regulation by the CFTC and By NFA, all futureexchange are also regulated by the CFTC . NFA is a congressionallyauthorized self-regulatory organization subject to CFTC , Itexercises , regulatory Authority with the CFTC over Futurecommission Merchant , introducing Brokers , Commodity Tradingadvisors, Commodity pool operators and associated persons of allthe foregoing . The NFA staff consists of more than 140 field auditorsand investigators

Firms and individual that violate NFA rules of professionalethics and conduct or fail to comply with strictly enforced financialand record-keeping requirement can , if circumstance warrant , bepermanent barred from engaging in any future related businesswith the public .


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Settlement Of Dispute

There are million of future contracted settled every day their may belot of possibility of arising dispute between the parties who actuallyinvolved in the future contract, some of the best way of settlement of dispute are as follows

The first and the foremost method of resolving disputebetween parties is to

Make direct discussion between the parties which areinvolved in the future

Trading.

The other method of solving dispute is to seek resolution

through theExchange where the future contract were traded

Claim for reparations may be filed with the CFTC

The fastest and the less expensive alternative to solvedispute is to apply to resolve the disagreement through the arbitrationprogram conducted by National Futures Association (NFA).


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What Are The Requisite In Future Contract

Future contract is wide contract contain various thing but the followingare the some of the requisite of future contract and must be

considered by the investor before making any decision of investmentin the future which are as follows :o The Contract Unit

o Quotation of price

o Minimum Price Change

o Daily Price Limits

o Position Limit


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The Contract Unit: The Contract Unit specifies that how muchquantity is contracted in the future contract to make settlementat the expiration of the future contract.

Quotation of price: Future price are usually quoted the same

way price are quoted in the cash market while the cashsettlement contract prices are quoted in terms of an indexnumber , usually stated to two decimal points

Minimum Price Change: Exchanges establish the minimumamount that the price fluctuates upward or downward. Theprocess of establishing the minimum amount by exchange isknown as TICK

Daily Price Limits : Exchange establishes daily price limitsfor trading in future contracts , the limits are stated in terms of the previous days closing price plus and minus so many costper trading unit . Once a future price has increased by itsdaily limit , there can be no trading at any higher price untilthe next day of trading , if on the other hand if the futuresprices has declined by its daily limit there can be no trading atany lower price until the next day of trading. The daily PriceLimits set by the exchange is subject to change

Position Limit : Exchanges and the CFTC establish limits onthe maximum speculative position that one person have atone time in any one future contract, the main purpose is toprevent one buyer or seller from being able to exert undueinfluence on the price in either the establishment or liquidation of positions, Position limits are stated in thenumber of contracts or total units of the commodity.


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Function Of Future Market

There are various function performed by future market which are asfollows

Fair Price Indicator Balancing back price differences by areas and times Hedging and Arbitrage Investment Opportunity Bulky traders


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Commodity Future Contracts

Commodity futures contracts are trades of specific commodity to be

delivered at the contracted price, irrespective of any changes of market price, subject to both buyers and sellers being allowed toliquidate the contract by cash settlement of price differences betweenthe contracted price and liquidated price not later than the last tradingsession of the contract month.


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Trading Mechanism

The trade in this system is held at fixed time, 4-5 times a day at theExchange trading floor, which is called open outcry session trading.The trade starts with a guideline price indicated by an auctioner of Exchange staff and floor traders send hand-sign to show their purchasing and selling intention at the guide lined price. When buyinginterest exceeds selling interest, an auctioner raises indicated price toinduce more selling interest or let buyers withdraw their buyinginterest and an auctioner takes the other way round when sellinginterest exceeds buying interest. When buying interest and sellinginterest become equal, an auctioner declares a conclusion of contractof the session and contract month.

The following are the diagrammatically procedure throughwhich trading take place


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Clearing System

The Clearing system of future trading is as follows:

Clearing Mechanism

Feature of Clearing system

Features

In-House Clearing System Daily Clearing System


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Delivery System

There is always a provision for delivery in commodity futures trading

to ensure that the future prices are in conformity with the underlying.The option for delivery is normally with the seller; the buyer/seller hasto express his intention for delivery about five to seven days beforethe expiry. However provisions vary from exchange to exchange. Thecontracts which are not assigned for delivery will be settled in cash.

The Delivery system of future trading is simple as any contracts for current month, which are not liquidated as of current month expired,are to be settled with the delivery of contracted commodity on the lastbusiness day of the month. The Delivery Mechanism of forwardtrading is as follows:


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What Happens If Delivery Fails or Default Occurs

The exchanges have a penalty clause in case of any default by any

member. There is also a separate arbitration panel of exchanges.Both the exchanges (NCDEX and MCX) will also maintain settlementguarantee funds


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Some Terms Used in Future Trading

Arbitrage Arbitrage is the process in which simultaneous purchase and

sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.

Ask Also called "offer" Indicates a willingness to sell a futurescontract at a given price.

Back Months The futures or options on futures months being traded that arefurthest from expiration.

Bear Bear is that person who believes prices will decrease.

Bear Market A market in which prices are declining.

Bid

Bid is the price that the market participants are willing to pay.

Bull Bull is a person who expects prices to rise.

Bull Market A market in which prices are rising.

Buy On Close To buy at the end of a trading session at a price within theclosing range.

Buy On Opening To buy at the beginning of a trading session at a price withinthe opening range.


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Cabinet Trade or cab A trade that allows options traders to liquidate deep out-of-the-money options by trading the option at a price equal to one-half tick.

Call

An option to buy a commodity, security or futures contract at aspecified price any time between now and the expiration date of the option contract.

Cash Commodity The actual physical commodity as distinguished from a futurescommodity.

Close, The The period at the end of the trading session.

Closing Range (or Range) The high and low prices, or bids and offers, recorded during theperiod designated as the official close.

Commission (or Round Turn) The one-time fee charged by a broker to a customer when afutures or an option on futures position is liquidated either byoffset or delivery.

CFTC CFTC - The Commodity Futures Trading Commission ascreated by the Commodity Futures Trading Commission Act of 1974. This government agency currently regulates the UScommodity futures industry.

Contract Unit of trading for a financial or commodity future. Also, actualbilateral agreement between the parties (buyer and seller) of afutures or options on futures transaction as defined by an

exchange.


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Contract Month The month in which futures contracts may be satisfied bymaking or accepting delivery. (See delivery month.)

Day Order An order that is placed for execution during only one tradingsession. If the order cannot be executed that day, it isautomatically cancelled.

Day Trading Refers to establishing and liquidating the same position or positions within one day's trading, thus ending the day withopen position in the market.

Deferred Another term for "back months."

Delivery The tender and receipt of an actual commodity or financialinstrument, or cash in settlement of a futures contract.

Exercise or Strike Price The price at which the holder (buyer) may purchase or sell theunderlying futures contract upon the exercise of an option.

Expiration Date The last day that an option may be exercised into theunderlying futures contract. Also, the last day of trading for afutures contract.

Floor Broker An exchange member who is paid a fee for executing orders for Clearing Members or their customers. A Floor Broker executingorders must be licensed by the CFTC.

Floor Trader An exchange member who generally trades only for his/her ownaccount or for an account controlled by him/her are alsoreferred to as a "local".


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Futures A Futures Contract is an agreement between a buyer and aseller to receive and deliver on a future date a specified amountof a product at an agreed price.

Futures Commission Merchant A firm or person engaged in soliciting or accepting and handlingorders for the purchase or sale of futures contracts, subject tothe rules of a futures exchange and, who, in connection withsolicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. The FCMmust be licensed by the CFTC.

Hedge Hedgers are individuals and firms that make purchases andsales in the futures market solely for the purpose of establishinga known price level--weeks or months in advance--for something they later intend to buy or sell in the cash market.

Holder One who purchases an option.

Initial Margin (Also referred to as Initial Performance Bond)

The funds required when a futures position (or a short optionson futures position) is opened.

Limit Order An order given to a broker by a customer that specifies a price;the order can be executed only if the market reaches or bettersthat price.

Limit Price The maximum amount the contract price can change, up or

down, during one trading session, as stipulated by Exchangerules.

Liquidation Any transaction that offsets or closes out a long or short futuresposition.


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Long One who has bought a futures or options on futures contract toestablish a market position through an offsetting sale; theopposite of Short.

Long Hedge The purchase of a futures contract in anticipation of an actualpurchase in the cash market. Used by processors or exportersas protection against and advance in the cash price.

Maintenance Margin (also known as a Maintenance PerformanceBond)

A sum, usually smaller than--but part of--the initial margin,which must be maintained on deposit in the customer's accountat all times. If a customer's equity in any futures position drops

to, or under, the maintenance margin level, a "margin call" isissued for the amount of money required to restore thecustomer's equity in the account to the initial margin level.

Margin (also known as Performance Bond)Funds that must be deposited as a margin by a customer withhis or her broker, by a broker with a clearing member, or by aclearing member, with the Clearing House. The margin helps toensure the financial integrity of brokers, clearing members andthe Exchange as a whole.

Margin Call (also known as Performance Bond Call)A demand for additional funds because of adverse pricemovement.

Mark-To-Market The daily adjustment of margin accounts to reflect profits andlosses.

Market Order An order for immediate execution given to a broker to buy or sell at the best obtainable price.

Minimum Price Fluctuation Smallest increment of price movement possible in trading agiven contract often referred to as a tick.


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MIT Market-If-Touched. A price order that automatically becomes amarket order if the price is reached.

Nearby

The nearest active trading month of a futures or options onfutures contract. Also referred to as "lead month."

Offer Also called "ask". Indicates a willingness to sell a futurescontract at a given price.

Offset Selling if one has bought, or buying if one has sold, a futures or options on futures contract.

Open Interest Total number of futures or options on futures contracts thathave not yet been offset or fulfilled by delivery. An indicator of the depth or liquidity of a market (the ability to buy or sell at or near a given price) and of the use of a market for risk- and/or asset-management.

Open Order An order to a broker that is good until it is canceled or

executed.Opening, The

The period at the beginning of the trading session during whichall transactions are considered made or first transactions werecompleted.

Opening Price (Or Range) The range of prices at which the first bids and offers were madeor first transactions were completed.

Option A contract giving the holder the right, but not the obligation,hence, "option," to buy or sell a futures contract in a givencommodity at a specified price at any time between now andthe expiration of the option contract.


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Procedure by which a long or short position is offset by anopposite transaction or by accepting or making delivery of theactual financial instrument or physical commodity.

Scalp To trade for small gains. Scalping normally involvesestablishing and liquidating a position quickly, usually within thesame day, hour or even just a few minutes.

Settlement Price A figure determined by the closing range that is used tocalculate gains and losses in futures market accounts.Settlement prices are used to determine gains, losses, margincalls, and invoice prices for deliveries.

Short One who has sold a futures contract to establish a marketposition and who has not yet closed out this position through anoffsetting purchase; the opposite of long.

Short Hedge The sale of a futures contract in anticipation of a later cashmarket sale. Used to eliminate or lessen the possible decline invalue of ownership of an approximately equal amount of the

cash financial instrument or physical commodity.Speculator

One who attempts to anticipate price changes and, throughbuying and selling futures contracts, aims to make profits; doesnot use the futures market in connection with the production,processing, marketing or handling of a product. The speculator has no interest in making or taking delivery.

Spread

The simultaneous purchase and sale of futures contracts for thesame commodity or instrument for delivery in different months,or in different but related markets. A spreader is not concernedwith the direction in which the market moves, but only with thedifference between the prices of each contract.

Stop Order (Or Stop)


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An order to buy or sell at the market when and if a specifiedprice is reached.

Tick Refers to a change in price, either up or down.

Trend The general direction of the market.

Volume The number of transactions in a futures or options on futurescontract made during a specified period of time.

Writer An individual who sells an option.


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Commodity Exchange

Commodities (commodity) are basic raw materials and foodstuffs such asmetals, petroleum, coffee, grain etc. Commodities are traded on a

commodity exchange both by the companies that use them (e.g. chocolatemanufacturers) and by speculators. Futures contracts allow commodity producers and commodity users to bring some predictability and stability to pricing. By buying futures contracts, they can hedge against underlying pricechanges in the commodity.

Commodity exchange are the exchanges where the trading of futures andforwards take place, basically commodity exchange are trading in futurecontacts on those commodities which have some regional relevance it is

not going to be as easy as a share of a company to get listed in a differentexchange.

Commodity exchanges in India are expected to contribute significantly inthe strengthening Indian economy to face the challenges of globalization.The Commodity Exchange makes commodity money available to all as amedium of exchange, store of wealth and unit of account. As long as thecommodity exchange does not provide credit or interest, it is easilyestablished and avoids banking regulations. As a barter exchangemechanism, there is no fiduciary responsibility. With the value Indiacommodity economy being around Rs 300,000 crore a year

Delivery of commodity is a physical activity in which the Commodityexchange members are stakeholder in those commodities. Importance of commodity exchanges are linked to the stake holders of that particular commodity


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Prime minister s independence Day address to the nation on August 152002 which enlisted nation-building initiatives , included setting up of national commodity exchange among the important initiatives .the year 2002-03 was an eventful year in the in the term of regulatory change andmarket developments that could set agenda for development for the year to come .


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Policy Initiatives

The following are the policies imitative which is taken by governmentregarding commodity exchange

Mandatory of to four entities to set up nation wide multi commodityexchange

Expansion of permitted list of commodities under the forwardcontract(Regulation) Act

Abolishing of restriction to complete a spot market transaction(ready deliver contact ) is being abolished

Non transfer specific delivery specific delivery (NTSD) contact isremoved from the preview of the forward contract(Regulation) Act

Mandatory of to four entities to set up nation wide multi commodity

exchange :- By Mandatory of to four entities to set up nation widemulti commodity exchange , the National level exchange make theavailability of future contracts across the nation across the nation in themost effective manner through technology and at the same timewould improve the risk management system s to improve and maintainfinancial integrity of futures market in the country

Expansion of permitted list of commodities under the forwardcontract(Regulation) Act :- Expansion of the list of the commoditieswould make available risk management mechanism for allcommodities where such demand exist but not never made possible inthe past .

Abolition of 11day restriction on the spot transaction , and removal of NSTD contact from the preview of the Forward contact (Regulation)

Act would efficiently mean unhindered forward contracting among theconstituent of commodity trade value chain.


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Nation-Wide Multi Commodity Exchange

These Associations/Exchanges are at different stages of completing the procedural formalities for setting up the exchange/commencing trading.After assessing the market situation and taking into account therecommendations made by the Board of Directors of the Exchange, the FMC

prescribes various regulatory measures from time to time, for prudentialregulation of futures/forward trading. Govt. has recently removed

prohibition on further 81 more items, thereby removing prohibition on allcommodities. Similarly NTSD Contracts in commodities are also taken outof the purview of FC(R) Act. .Under a World Bank aided Grant Scheme to

support development of commodity futures markets in India, a number of consultancy assignments, training program, study tours, office automation of FMC etc. have been undertaken. The project was successfully completed on31 st October, 2000. A Plan Scheme under the 10 th Five Year Plan for generating awareness about the activities, mechanism and benefit of futurestrading among farmers is being implemented. In enhancing the institutionalcapabilities for futures trading the idea of setting up of National CommodityExchange(s) has been pursued since 1999. Recently on the basis of comprehensive examination of various applications/expressions of interestreceived from 16 parties, four exchanges/proposed exchanges have beenidentified for giving the National Status. While the Online CommodityExchange of India Ltd (OCEIL) ( later on renamed as National Multi-Commodity Exchange of India Ltd., NMCE) has been given final approval,others National Board of Trade (NBOT), Indore, National Commodity &Derivatives Exchange (NCDEX), Mumbai, and Multi CommodityExchange (MCX), Mumbai have been given in-principle approval.National Status implies that these exchanges would be automatically

permitted to conduct futures trading in all approved commodities,exempting sensitive items such as rice, wheat, gold & silver, subject to

clearance of bye-laws and contract specifications by the FMC. While the NMCE, Ahmedabad has commenced futures trading in November, 2002,and NBOT, Indore has been trading as a regional exchange since 2000, itsup-gradation to national level and NCDEX and MCX, Mumbai commencingoperations etc


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Indian Commodity Exchange

The following are the name of some commodity exchange in India where thetrading of commodity takes place which is as:

S.No Name of Commodity Exchange Commodity Traded

1 M/s NCS InfoTech Ltd., Hyderabad Sugar

2 Bombay Commodity exchange ,Mumbai

Tea

3 Unites Planets Association of south

India , Connoor

Tea

4 Tea Auction .com , Kolkata Tea

5 Bullion Merchants Association, Jaipur Mustered seed its oil &oilcake

6 SGI Commodity Exchange , Mumbai Soya bean ground nuttheir oils and oilcakes

7 National commodity & DerivativeExchange ltd. ,Mumbai

8 Multi commodity Exchange Ltd.,Mumbai


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Multi Commodity Exchange of India Limited (MCX)

MCX has started operations from November 10, 2003.It is a 'neworder' Exchange with a mandate for setting up a nationwide, onlinemulti-commodity marketplace, offering unlimited growth opportunitiesto commodities market participants. As a true neutral market, MCXhas taken several initiatives to usher in a new-generationcommodities futures market in the process, become the country'spremier Exchange.

MCX, an independent and a demutualized exchange since inception,is all set to introduce a state-of-the-art, online digital exchange for

Commodities Futures trading in the country and has accordinglyinitiated several steps to translate this vision into reality.


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Corporate Objective

The corporate objective of MCX is to emerge as the Exchange of Choice

for commodity futures trading in the country with globally competitive

best-in-class practices. MCX is positioned to propel the Indiancommodity sector at the forefront of global commodity trading. Main

objectives of MCX are as follows:

Building awareness on commodity futures market

Broad basing MCX ownership structure by inviting participationfrom all participants of the Commodities Ecosystem like Banks,Warehouse companies, Corporate and others

Extensively leverage the expertise available internally with theManagement, Exchange Advisors, Board and other supportagencies

Establish the emerging trends of the new exchange orderwherein Exchange operations need not be capital intensive.

Introduce Contracts / Commodities in a phased manner togenerate sufficient liquidity and trading interest

Establish efficient and strong Risk Management systems for

controlling market riskLeverage the association with FTIL and access the existingbusiness and technology alliances of the latter Proven,reliable and cost-efficient technology platform.

Continue enhancing penetration and expansion of the market.

To be a pioneer in providing robust integrated trading / clearingand settlement services for commodities trading.

Undertake industry wide initiatives for creating marketawareness on commodity futures in association with policymakers, regulators and opinion makers

Adopt technology intensive measures forming the backbone of an automated and secure commodity marketplace.


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Benefits Of MCX

There are various benefit of MCX which can be categorized in followingcategories :

Benefits to the Country & States

Benefits to Industry, Exporters & Importers

Benefits to Banks

Benefits to the Country & States National Market in Commodities will integrate smaller markets into the

national mainstream

Price discovery will aid Farmers, Exporters, Importers, Manufacturers andthe Government to time buy/sell decisions, ascertain expected demand

and supply, to decide on the crop to be grown. Market forces for pricing will integrate us with global market and also help

us in WTO regime.

Future scenario better understood by policy makers.

Benefits to Industry, Exporters & Importers Hedging the price risk associated with future contractualcommitments.

Spaced out purchases possible rather than large cash purchasesand its storage.

Efficient price discovery smoothens seasonal price variation Greater flexibility, certainty and transparency in procuringcommodities would aid bank lending.

Benefits to Banks Facilitate Informed lending.

Hedged positions of producers and processors wouldreduce the risk of default faced by banks

Lending for agricultural sector would go up with greater

transparency in pricing and storage. Commodity Exchange participants to act as distributionnetwork to retail agri-finance from Banks to rural sector.

Provide trading limit finance to commodity exchangemembers.


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ANALYSIS

On viewing all situation of future trading and commodity exchange andrecommendation and views of other persons I drawn a conclusion that

presently there is limited number of commodity exchange in which limitednumber of future contracted are traded in India , but in coming time it will

be mostly traded in India as well as all part of the world


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BIBLIOGRAPHY

The various materials from different source are used in collection of

information and in preparation of this valuable report. Basically major

materials are collected through Internet, books and magazines. The

following are the some sources through which information is collected are as

follows:

Websites --> futuresmag.com ,

IndianCommodity.Com

ShareKhan.com etc

Books -->Investment Management by V K Bhalla

Investment Management by Awadhani

News Papers -->Business Line

Economics Times

Future Trading & Commodity Exchange

Documents

Transcript of Future Trading & Commodity Exchange