commodities market - snapshot (1)
TRANSCRIPT
-
8/12/2019 Commodities Market - Snapshot (1)
1/73
Anil Suvarna
Commodity Market
Study Material on
Commodity Market
Compiled by: -
Prof. Anil Suvarna
1
-
8/12/2019 Commodities Market - Snapshot (1)
2/73
Anil Suvarna
Commodity Market
Syllabus
No. Contents
Section 1: Introduction to Derivatives
1.1 Derivatives defined
1.2 Products, participants and functions
1.3 Derivatives markets
Section 2: Instruments available for trading
2.1 Forward contracts
2.2 Introduction to futures
2.3 Introduction to options
Section 3: Indian History in Commodities
3.1 Its Evolution in India
3.2 Te !a"ra committee report
3.3 #eadin$ commodit% markets of India& '(), *(DE), *'(E
Section 4: Commodity Market: Theoretical s!ects
+.1 'aor (ommodit% E-can$e
+.2 e$ulation of commodit% markets
+.3 /tructure of (ommodit% 'arket
+.+ Deliver% Process
+.0 % coose (ommodities over Euities
Section ": Commodity Market: #ractical s!ects
0.1 Pricin$ commodit% futures& Te cost of carr% model
0.2 (ommodities 'arkets 4verall Perspective
0.3 e$ulator% framework
0.+ Product *otes on 5$ro and 'etal (ommodities
Section $: #ractical Session
2
-
8/12/2019 Commodities Market - Snapshot (1)
3/73
Anil Suvarna
Commodity Market
Introduction to Derivatives
The origin of derivatives can be traced back to the need of farmers to protect themselves
against fluctuations in the price of their crop. From the time it was sown to the time it was
ready for harvest farmers would face price uncertainty. Through the use of simplederivative products it was possible for the farmer to partially or fully transfer price risks
by locking. in asset prices. These were simple contracts developed to meet the needs of
farmers and were basically a means of reducing risk. ! farmer who sowed his crop in "une
faced uncertainty over the price he would receive for his harvest in September. #n years of
scarcity he would probably obtain attractive prices. $owever during times of oversupply
he would have to dispose off his harvest at a very low price. Clearly this meant that the
farmer and his family were e%posed to a high risk of price uncertainty.
&n the other hand a merchant with an ongoing re'uirement of grains too would face a
price risk - that of having to pay e%orbitant prices during dearth although favorable pricescould be obtained during periods of oversupply. (nder such circumstances it clearly made
sense for the farmer and the merchant to come together and enter into a contract whereby
the price of the grain to be delivered in September could be decided earlier. )hat they
would then negotiate happened to be a futures. type contract which would enable both
parties to eliminate the price risk.
#n *+,+ the Chicago oard of Trade or C&T was established to bring farmers and
merchants together. ! group of traders got together and created the to.arrive/ contract that
permitted farmers to lock in to price upfront and deliver the grain later. These to-arrive
contracts proved useful as a device for hedging and speculation on price changes. These
were eventually standardi0ed and in *123 the first futures clearing house came into
e%istence. Today derivative contracts e%ist on a variety of commodities such as corn
pepper cotton wheat silver etc. esides commodities derivatives contracts also e%ist on
a lot of financial underlying like stocks interest rate e%change rate etc.
Derivatives defined
! derivative is a product whose value is derived from the value of one or more underlying
variables or assets in a contractual manner. The underlying asset can be e'uity fore%commodity or any other asset. #n our earlier discussion we saw that wheat farmers may
wish to sell their harvest at a future date to eliminate the risk of a change in prices by that
date. Such a transaction is an e%ample of a derivative. The price of this derivative is driven
by the spot price of wheat which is the underlying. in this case.
3
-
8/12/2019 Commodities Market - Snapshot (1)
4/73
Anil Suvarna
Commodity Market
The Forwards Contracts 45egulation6 !ct *132 regulates the forward7 futures contracts in
commodities all over #ndia. !s per this the Forward Markets Commission 4FMC6
continues to have 8urisdiction over commodity forward7 futures contracts. 9erivatives
trading in securities were introduced in 2*.
The term ;security< in the Securities Contracts 45egulation6 !ct *13= 4SC5!6 was
amended to include derivative contracts in securities. Conse'uently regulation of
derivatives came under the purview of Securities >%change oard of #ndia 4S>#6. )e
thus have separate regulatory authorities for securities and commodity derivative markets.
9erivatives are securities under the SC5! and hence the trading of derivatives is
governed by the regulatory framework under the SC5!. The Securities Contracts
45egulation6 !ct *13= defines ;derivative< as
! security derived from a debt instrument share loan whether secured or
unsecured risk instrument or contract for differences or any other form of security. ! contract which derives its value from the prices or inde% of prices of underlying
securities.
Products, participants and functions
9erivative contracts are of different types. The most common ones are forwards futures
options and swaps. ?articipants who trade in the derivatives market can be classified under
the following three broad categories.
$edgers
Speculators
!rbitragers.
Hedgers:The farmer/s e%ample that we discussed about was a case of hedging. $edgers
face risk associated with the price of an asset. They use the futures or options markets to
reduce or eliminate this risk.
Speculators:Speculators are participants who wish to bet on future movements in the price
of an asset. Futures and options contracts can give them leverage@ that is by putting in
small amounts of money upfront they can take large positions on the market. !s a result of
this leveraged speculative position they increase the potential for large gains as well as
large losses.
Arbitragers:!rbitragers work at making ?rofit by taking advantage of discrepancy
between prices of the same product across different markets. #f for e%ample they see the
4
-
8/12/2019 Commodities Market - Snapshot (1)
5/73
Anil Suvarna
Commodity Market
futures price of an asset getting out of line with the cash price they would take offsetting
positions in the two markets to lock in the ?rofit
Derivatives markets
9erivative markets can broadly be classified as commodity derivative market and financial
derivatives markets. !s the name suggest commodity derivatives markets trade contracts
for which the underlying asset is a commodity. #t can be an agricultural commodity like
wheat soybeans rapeseed cotton etc or precious metals like gold silver etc. Financial
derivatives markets trade contracts that have a financial asset or variable as the underlying.
The more popular financial derivatives are those which have e'uity interest rates and
e%change rates as the underlying. The most commonly used derivatives contracts are
forwards futures and options.
Spot versus forward transaction
(sing the e%ample of a forward contract let us try to understand the difference between a
spot and derivatives contract. >very transaction has three components trading clearing and
settlement. ! buyer and seller come together negotiate and arrive at a price. This is
trading. Clearing involves finding out the net outstanding that is e%actly how much of
goods and money the two should e%change. For instance ! buys goods worth 5s.* from
and sells goods worth 5s.3 to . &n a net basis ! has to pay 5s.3 to . Settlement is
the actual process of e%changing money and goods.
#n a spot transaction the trading clearing and settlement happens instantaneously i.e. .on
the spot. Consider this e%ample. &n *st "anuary 2, !ditya wants to buy some gold. The
goldsmith 'uotes 5s.= per * grams. They agree upon this price and !ditya buys 2
grams of gold. $e pays 5s.*2 takes the gold and leaves. This is a spot transaction.
Aow suppose !ditya does not want to buy the gold on the *st "anuary but wants to buy it a
month later. The goldsmith 'uotes 5s.= *3 per * grams. They agree upon the forward
price for 2 grams of gold that !ditya wants to buy and !ditya leaves. ! month later he
pays the goldsmith 5s.*2 B and collects his gold. This is a forward contract a contract
by which two parties irrevocably agree to settle a trade at a future date for a stated priceand 'uantity. Ao money changes hands when the contract is signed. The e%change of
money and the underlying goods only happens at the future date as specified in the
contract. #n a forward contract the process of trading clearing and settlement does not
happen instantaneously.
The trading happens today but the clearing and settlement happens at the end of the
specified period. ! forward is the most basic derivative contract. )e call it a derivative
5
-
8/12/2019 Commodities Market - Snapshot (1)
6/73
Anil Suvarna
Commodity Market
because it derives value from the price of the asset underlying the contract in this case
gold. #f on the *st of February gold trades for 5s.=3 in the spot market the contract
becomes more valuable to !ditya because it now enables him to buy gold at 5s.=*3. #f
however the price of gold drops down to 5s.3 11 he is worse off because as per the
terms of the contract he is bound to pay 5s.= *3 for the same gold. The contract has now
lost value from !ditya/s point of view. Aote that the value of the forward contract to the
goldsmith varies e%actly in an opposite manner to its value for !ditya.
Exchange traded versus !" derivatives
9erivatives have probably been around for as long as people have been trading with one
another. Forward contracting dates back at least to the *2th century and may well have
been around before then. These contracts were typically &TC kind of contracts. &ver the
counter 4&TC6 derivatives are privately negotiated contracts. Merchants entered into
contracts with one another for future delivery of specified amount of commodities atspecified price. ! primary motivation for pre - arranging a buyer or seller for a stock of
commodities in early forward contracts was to lessen the possibility that large swings
would inhibit marketing the commodity after a harvest. ater many of these contracts were
standardi0ed in terms of 'uantity and delivery dates and began to trade on an e%change.
The &TC derivatives markets have the following features compared to e%change-traded
derivatives:
The management of counter-party 4credit6 risk is decentrali0ed and located within
individual institutions.
There are no formal centrali0ed limits on individual positions leverage or
margining.
There are no formal rules for risk and burden-Sharing.
There are no formal rules or mechanisms for ensuring market stability and
integrity and for safeguarding the collective interests of market participants.
The &TC contracts are generally not regulated by a regulatory authority and the
e%change/s self-regulatory organi0ation although they are affected indirectly by
national legal systems banking supervision and market surveillance.
The &TC derivatives markets have witnessed rather sharp growth over the last few years
which have accompanied the moderni0ation of commercial and investment banking and
globali0ation of financial activities. The recent developments in information technology
have contributed to a great e%tent to these developments. )hile both e%change-traded and
&TC derivative contracts offer many benefits the former have rigid structures compared to
6
-
8/12/2019 Commodities Market - Snapshot (1)
7/73
Anil Suvarna
Commodity Market
the latter. The largest &TC derivative market is the interbank foreign e%change market.
Commodity derivatives the world over are typically e%change-traded and not &TC in
nature.
Some commonly used derivatives
$ere we define some of the more popularly used derivative contracts. Some of these
namely futures and options will be discussed in more details at a later stage.
#orwards: !s we discussed a forward contract is an agreement between two entities to
buy or sell the underlying asset at a future date at today/s pre-agreed price.
#utures: ! futures contract is an agreement between two parties to buy or sell the
underlying asset at a future date at today/s future price. Futures contracts differ from
forward contracts in the sense that they are standardi0ed and e%change traded.
ptions: There are two types of options - calls and puts. Calls give the buyer the right but
not the obligation to buy a given 'uantity of the underlying asset at a given price on or
before a given future date. ?uts give the buyer the right but not the obligation to sell a
given 'uantity of the underlying asset at a given price on or before a given date.
$arrants: &ptions generally have lives of upto one year the ma8ority of options traded on
options e%changes having a ma%imum maturity of nine months. onger-dated options are
called warrants and are generally traded over-the-counter.
%askets: asket options are options on portfolios of underlying assets. The underlying
asset is usually a weighted average of a basket of assets. >'uity inde% options are a form of
basket options.
Swaps: Swaps are private agreements between two parties to e%change cash Dows in the
future according to a prearranged formula. They can be regarded as portfolios of forward
contracts. The two commonly used swaps are :
Interest rate swaps: These entail swapping only the interest related cash flowsbetween the parties in the same currency.
Currency swaps: These entail swapping both principal and interest between the
parties with the cash flows in one direction being in a different currency than those
in the opposite direction.
7
-
8/12/2019 Commodities Market - Snapshot (1)
8/73
Anil Suvarna
Commodity Market
Swaptions: Swaptions are options to buy or sell a swap that will become operative at the
e%piry of the options. Thus a swaption is an option on a forward swap.
Instruments available for trading
#n recent years derivatives have become increasingly popular due to their applications for
hedging speculation and arbitrage. efore we study about the applications of commodity
derivatives we will have a look at some basic derivative products. )hile futures and
options are now actively traded on many e%changes forward contracts are popular on the
&TC market.
#orward contracts
! forward contract is an agreement to buy or sell an asset on a specified date for a
specified price. &ne of the parties to the contract assumes a long position and agrees to buy
the underlying asset on a certain specified future date for a certain specified price. Theother party assumes a short position and agrees to sell the asset on the same date for the
same price. &ther contract details like delivery date price and 'uantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally traded outside
the e%changes.
The salient features of forward contracts are:
8
-
8/12/2019 Commodities Market - Snapshot (1)
9/73
Anil Suvarna
Commodity Market
They are bilateral contracts and hence e%posed to counter party risk. >ach contract
is custom designed and hence is uni'ue in terms of contract si0e e%piration date
and
The asset type and 'uality.
The contract price is generally not available in public domain.
&n the e%piration date the contract has to be settled by delivery of the asset.
#f the party wishes to reverse the contract it has to compulsorily go to the same
counterparty which often results in high prices being charged.
$owever forward contracts in certain markets have become much standardi0ed as in the
case of foreign e%change thereby reducing transaction costs and increasing transactions
volume. This process of standardi0ation reaches its limit in the organi0ed futures market.
Forward contracts are very useful in hedging and speculation. The classic hedging
application would be that of an e%porter who e%pects to receive payment in dollars threemonths later. $e is e%posed to the risk of e%change rate fluctuations. y using the currency
forward market to sell dollars forward he can lock on to a rate today and reduce his
uncertainty. Similarly an importer who is re'uired to make a payment in dollars two
months hence can reduce his e%posure to e%change rate fluctuations by buying dollars
forward.
#f a speculator has information or analysis which forecasts an upturn in a price then he
can go long on the forward market instead of the cash market. The speculator would go
long on the forward wait for the price to rise and then take a reversing transaction to book
profits.
Speculators may well be re'uired to deposit a margin upfront. $owever this is generally a
relatively small proportion of the value of the assets underlying the forward contract. The
use of forward markets here supplies leverage to the speculator.
&imitations of forward markets
Forward markets world-wide are affected by several problems:
ack of centrali0ation of trading
#lli'uidity and
Counterparty risk
#n the first two of these the basic problem is that of too much fle%ibility and generality.
The forward market is like a real estate market in that any two consenting adults can form
9
-
8/12/2019 Commodities Market - Snapshot (1)
10/73
Anil Suvarna
Commodity Market
contracts against each other. This often makes them design terms of the deal which are
very convenient in that specific situation but makes the contracts non-tradeable.
Counterparty risk arises from the possibility of default by any one party to the transaction.
)hen one of the two sides to the transaction declares bankruptcy the other suffers. >ven
when forward markets trade standardi0ed contracts and hence avoid the problem of
illi'uidity still the counterparty risk remains a very serious issue.
Introduction to futures
Futures markets were designed to solve the problems that e%ist in forward markets. !
futures contract is an agreement between two parties to buy or sell an asset at a certain time
in the future at a certain price. ut unlike forward contracts the futures contracts are
standardi0ed and e%change traded. To facilitate li'uidity in the futures contracts the
e%change specifies certain standard features of the contract. #t is a standardi0ed contractwith standard underlying instrument a standard 'uantity and 'uality of the underlying
instrument that can be delivered
4or which can be used for reference purposes in settlement6 and a standard timing of such
settlement. ! futures contract may be offset prior to maturity by entering into an e'ual and
opposite transaction. More than 11E of futures transactions are offset this way.
The standardi0ed items in a futures contract are:
uantity of the underlying
uality of the underlying
The date and the month of delivery
The units of price 'uotation and minimum price change
ocation of settlement
Distinction between futures and forwards contracts
Fundamentally forward and futures contracts have the same function: both types
of contracts allow people to buy or sell a specific type of asset at a specific time at a givenprice.
$owever it is in the specific details that these contracts differ. First of all futures contracts
are e%change-traded and therefore are standardi0ed contracts. Forward contractson the
other hand are private agreements between two parties and are not as rigid in their stated
terms and conditions. ecause forward contracts are private agreements there is always a
10
http://www.investopedia.com/terms/f/futurescontract.asphttp://www.investopedia.com/terms/f/forwardcontract.asphttp://www.investopedia.com/terms/f/forwardcontract.asphttp://www.investopedia.com/terms/f/futurescontract.asphttp://www.investopedia.com/terms/f/forwardcontract.asp -
8/12/2019 Commodities Market - Snapshot (1)
11/73
Anil Suvarna
Commodity Market
chance that a party may defaulton its side of the agreement. Futures contracts
have clearing housesthat guarantee the transactions which drastically lowers the
probability of default to almost never.
Secondly the specific details concerning settlement and deliveryare 'uite distinct.
For forward contracts settlement of the contract occurs at the end of the contract. Futures
contracts are marked-to-marketdaily which means that daily changes are settled day by
day until the end of the contract. Furthermore settlement for futures contracts can occur
over a range of dates. Forward contracts on the other hand only possess one settlement
date.
astly because futures contracts are 'uite fre'uently employed speculators who bet
on the direction in which an asset/s price will move they are usually closed out prior to
maturity and delivery usually never happens. &n the other hand forward contracts
are mostly used by hedgers that want to eliminate the volatilityof an asset/s priceand delivery of the asset or cash settlementwill usually take place.
#utures terminology
Spot price:The price at which an asset trades in the spot market.
Futures price:The price at which the futures contract trades in the futures market.
Contract cycle:The period over which a contract trades. The commodity futures
contracts on the AC9>G have one-month two-months and three-month e%piry cycles
which e%pire on the 2thday of the delivery month. Thus a "anuary e%piration contract
e%pires on the 2th of "anuary and a February e%piration contract ceases trading on the
2th of February. &n the ne%t trading day following the 2th a new contract having a
three-month e%piry is introduced for trading.
Expiry date:#t is the date specified in the futures contract. This is the last day on which the
contract will be traded at the end of which it will cease to e%ist.
elivery unit:The amount of asset that has to be delivered under one contract. For
instance the delivery unit for futures on ong Staple Cotton on the AC9>G is 33 bales.
The delivery unit for the Hold futures contract is * kg.
!asis:asis can be defined as the futures price minus the spot price. There will be a
different basis for each delivery month for each contract. #n a normal market basis will bepositive. This reflects that futures prices normally e%ceed spot prices.
Cost of carry:The relationship between futures prices and spot prices can be summari0ed
in terms of what is known as the cost of carry. This measures the storage cost plus the
interest that is paid to Finance the asset less the income earned on the asset.
"nitial margin: The amount that must be deposited in the margin account at the
time a futures contract is first entered into is known as initial margin.
11
http://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/c/clearinghouse.asphttp://www.investopedia.com/terms/d/delivery.asphttp://www.investopedia.com/terms/m/marktomarket.asphttp://www.investopedia.com/terms/s/settlementdate.asphttp://www.investopedia.com/terms/s/settlementdate.asphttp://www.investopedia.com/terms/s/settlementdate.asphttp://www.investopedia.com/terms/s/speculator.asphttp://www.investopedia.com/terms/v/volatility.asphttp://www.investopedia.com/terms/c/cashsettlement.asphttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/c/clearinghouse.asphttp://www.investopedia.com/terms/d/delivery.asphttp://www.investopedia.com/terms/m/marktomarket.asphttp://www.investopedia.com/terms/s/settlementdate.asphttp://www.investopedia.com/terms/s/settlementdate.asphttp://www.investopedia.com/terms/s/speculator.asphttp://www.investopedia.com/terms/v/volatility.asphttp://www.investopedia.com/terms/c/cashsettlement.asp -
8/12/2019 Commodities Market - Snapshot (1)
12/73
Anil Suvarna
Commodity Market
Marking#to#market $M%M&: #n the futures market at the end of each trading day the
margin account is ad8usted to reflect the investor/s gain or loss depending upon the futures
closing price.
Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure
that the balance in the margin account never becomes negative. #f the balance in the margin
account falls below the maintenance margin the investor receives a margin call and is
e%pected to top up the margin account to the initial margin level before trading commences
on the ne%t day.
Introduction to options
#n this section we look at another interesting derivative contract namely options. &ptionsare fundamentally different from forward and futures contracts. !n option gives the holder
of the option the right to do something. The holder does not have to e%ercise this right. #n
contrast in a forward or futures contract the two parties have committed themselves to
doing something. )hereas it costs nothing 4e%cept margin re'uirements6 to enter into a
futures contract the purchase of an option re'uires an upfront payment.
ption terminology
Commodity options: Commodity options are options with a commodity as the underlying.
For instance a gold options contract would give the holder the right to buy or sell a
specified 'uantity of gold at the price specified in the contract.
Stock options:Stock options are options on individual stocks. &ptions currently trade on
over 3 stocks in the (nited States. ! contract gives the holder the right to buy or sell
shares at the specified price.
!uyer of an option:The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to e%ercise his option on the seller7 writer.
'riter of an option:The writer of a call7 put option is the one who receives the option
premium and is thereby obliged to sell7 buy the asset if the buyer e%ercises on him.
There are two basic types of options call options and put options.Call option: ! call option gives the holder the right but not the obligation to buy an asset
by a certain date for a certain price.
Put option:! put option gives the holder the right but not the obligation to sell an asset by
a certain date for a certain price.
(ption price:&ption price is the price which the option buyer pays to the option seller. #t
is also referred to as the option premium.
12
-
8/12/2019 Commodities Market - Snapshot (1)
13/73
Anil Suvarna
Commodity Market
Expiration date:The date specified in the options contract is known as the e%piration date
the e%ercise date the strike date or the maturity.
Strike price:The price specified in the options contract is known as the strike price or the
e%ercise price.
Different types of ptions
American options: !merican options are options that can be e%ercised at any time upto the
e%piration date. Most e%change-traded options are !merican.
European options:>uropean options are options that can be e%ercised only on thee%piration date itself. >uropean options are easier to analy0e than !merican options and
properties of an !merican option are fre'uently deduced from those of its >uropean
counterpart.
"n#t)e#money option:!n in-the-money 4#TM6 option is an option that would lead to a
positive cash flow to the holder if it were e%ercised immediately. ! call option on the
inde% is said to be in-the-money when strike price 4i.e. spot price I strike price6 #f the
inde% is much higher than the strike price the call is said to be #TM. #n the case of a put
the put is #TM if the inde% is below the strike price.
At#t)e#money option:!n at-the-money 4!TM6 option is an option that would lead to 0ero
cash flow if it were e%ercised immediately. !n option on the inde% is at-the-money when
the current inde% e'uals the strike price 4i.e. spot price J strike price6.
(ut#of#t)e#money option:!n out-of-the-money 4&TM6 option is an option that would
lead to a negative cash flow if it were e%ercised immediately. ! call option on the inde% is
out-of-the-money when the current inde% stands at a level which is less than the strike
price 4i.e. spot price D strike price6. #f the inde% is much lower than the strike price the call
is said to be deep &TM. #n the case of a put the put is &TM if the inde% is above the strike
price.
"ntrinsic value of an option:The option premium can be broken down into two
components K intrinsic value and time value. The intrinsic value of a call is the amount theoption is #TM if it is #TM. #f the call is &TM its intrinsic value is 0ero. ?utting it another
way the intrinsic value of a call is Ma% L 4S t-6N which means the intrinsic value of a call
is the greater of or 4St-6.Similarly the intrinsic value of a put is Ma%L4-S t6Ni.e. the
greater of or 4-St6. is the strike price and St6 O is the spot price.
%ime value of an option:The time value of an option is the difference between its
premium and its intrinsic value. oth calls and puts have time value. !n option that is
13
-
8/12/2019 Commodities Market - Snapshot (1)
14/73
Anil Suvarna
Commodity Market
&TM or !TM has only time value. (sually the ma%imum time value e%ists when the
option is !TM. The longer the time to e%piration the greater is an option/s time value all
else e'ual. !t e%piration an option should have no time value.
Indian 'istory in "ommodities
Introduction
#ndia a commodity based economy where two-
third of the one billion population depends on
agricultural commodities surprisingly has an
under developed commodity market. (nlike thephysical market futures markets trades in
commodity are largely used as risk management
4hedging6 mechanism on either physical
commodity itself or open positions in commodity
stock. For instance a 8eweler can hedge his inventory against perceived short-term
downturn in gold prices by going short in the future markets. The article aims at know
how of the commodities market and how the commodities traded on the e%change. The
idea is to understand the importance of commodity derivatives and learn about the market
from #ndian point of view. #n fact it was one of the most vibrant markets till early Ps. #ts
development and growth was shunted due to numerous restrictions earlier. Aow with most
of these restrictions being removed there is tremendous potential for growth of this market
in the country.
"ommodity
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators. 5etail investors who claim to understand the
e'uity markets may find commodities an unfathomable market. ut commodities are easy
to understand as far as fundamentals of demand and supply are concerned. 5etail investors
should understand the risks and advantages of trading in commodities futures before taking
a leap. $istorically pricing in commodities futures has been less volatile compared with
e'uity and bonds thus providing an efficient portfolio diversification option.
14
-
8/12/2019 Commodities Market - Snapshot (1)
15/73
Anil Suvarna
Commodity Market
#n fact the si0e of the commodities markets in #ndia is also 'uite significant. &f the
country/s H9? of 5s *B 2PB crore 45s *B2P.B billion6 commodities related 4and
dependent6 industries constitute about 3+ per cent.
Currently the various commodities across the country clock an annual turnover of 5s *
, crore 45s *, billion6. )ith the introduction of futures trading the si0e of the
commodities market grows many folds here on.
It(s Evolution in India
ombay Cotton Trade !ssociation td. set up in *+P3 was the first organi0ed futures
market. ombay Cotton >%change td. was established in *+1B following the widespread
discontent amongst leading cotton mill owners and merchants over functioning of ombay
Cotton Trade !ssociation. The Futures trading in oilseeds started in *1 with the
establishment of the Hu8arati Qyapari Mandali which carried on futures trading in
groundnut castor seed and cotton. Futures/ trading in wheat was e%istent at several places
in ?un8ab and (ttar ?radesh. ut the most notable futures e%change for wheat was
chamber of commerce at $apur set up in *1*B. Futures trading in bullion began in Mumbai
in *12. Calcutta $essian >%change td. was established in *1*1 for futures trading in raw
8ute and 8ute goods. ut organi0ed futures trading in raw 8ute began only in *12P with the
establishment of >ast #ndian "ute !ssociation td. These two associations amalgamated in
*1,3 to form the >ast #ndia "ute R $essian td. to conduct organi0ed trading in both 5aw
"ute and "ute goods. Forward Contracts 45egulation6 !ct was enacted in *132 and the
Forwards Markets Commission 4FMC6 was established in *13B under the Ministry ofConsumer !ffairs and ?ublic 9istribution. #n due course several other e%changes were
created in the country to trade in diverse commodities.
!he )abra committee report
!fter the introduction of economic reforms since "une *11* and the conse'uent gradual
trade and industry liberali0ation in both the domestic and e%ternal sectors the Hovernment
of #ndia appointed in "une *11B a committee on Forward Markets under chairmanship of
?rof. .A. abra. The committee was setup with the following ob8ectives:
To assess
The working of the commodity e%changes and their trading practices in #ndia
and to make suitable recommendations with a view to making them compatible
with those of other countries
15
-
8/12/2019 Commodities Market - Snapshot (1)
16/73
Anil Suvarna
Commodity Market
The role of the Forward Markets Commission and to make suitable
recommendations with a view to making it compatible with similar regulatory
agencies in other countries so as to see how effectively these agencies can cope
up with the reality of the fast changing economic scenario.
To review the role that forward trading has played in the #ndian commodity
markets during the last * years.
To e%amine the e%tent to which forward trading has special role to play in
promoting e%ports.
To suggest amendments to the Forward Contracts 45egulation6 !ct in the light of
the 5ecommendations particularly with a view to effective enforcement of the !ct
to check illegal forward trading when such trading is prohibited under the !ct.
To suggest measures to ensure that forward trading in the commodities in which it
is allowed to be operative remains constructive and helps in maintaining priceswithin reasonable limits.
To assess the role that forward trading can play in marketing7 distribution system in
the commodities in which forward trading is possible particularly in commodities
in which resumption of forward trading is generally demanded.
The committee submitted its report in September *11,. The recommendations of the
committee were as follows
The Forward Markets Commission 4FMC6 and the Forward Contracts 45egulation6!ct *132 would need to be strengthened.
9ue to the inade'uate infrastructural facilities such as space and telecommunication
facilities the commodities e%changes were not able to function effectively.
>nlisting more members ensuring capital ade'uacy norms and encouraging
computeri0ation would enable these e%changes to place themselves on a better
footing.
#n-built devices in commodity e%changes such as the vigilance committee and the
panels of surveyors and arbitrators be strengthened further.
The FMC which regulates forward7 futures trading in the country should continue
to act a watch.dog and continue to monitor the activities and operations of the
commodity e%changes. !mendments to the rules regulations and bye-laws of the
commodity e%changes should re'uire the approval of the FMC only.
#n the conte%t of globali0ation commodity markets in #ndia could not function
effectively in an isolated manner. Therefore some of the commodity e%changes
16
-
8/12/2019 Commodities Market - Snapshot (1)
17/73
Anil Suvarna
Commodity Market
particularly the ones dealing in pepper and castor seed be upgraded to the level of
international futures markets.
The ma8ority of the committee recommended that futures trading be introduced in the
following commodities:
The liberali0ed policy being followed by the government of #ndia and the gradual
withdrawal of the procurement and distribution channel necessitated setting in place a
market mechanism to perform the economic functions of price discovery and risk
management.
The national agriculture policy announced in "uly 2 and the announcements in the
budget speech for 22-2B were indicative of the governments resolve to put in place a
mechanism of futures trade7market. !s a follow up the government issued notifications on
*7,72B permitting futures trading in the commodities with the issue of these
notifications futures trading is not prohibited in any commodity. !n option trading in
commodity is however presently prohibited.
Different types of "ommodities !raded
)orld-over one will find that a market e%its for almost all the commodities known to us.These commodities can be broadly classified into the following:
Pulses: Chana (rad R Tur
Spices: ?epper 8eera Chilli Turmeric R Cardamom
Precious *etals: Hold Silver ?latinum etc
ther *etals: Aickel !luminum Copper etc
+gro%ased "ommodities: )heat Corn Cotton &ils &ilseeds.
Soft "ommodities: Coffee Cocoa Sugar etc
&iveStock: ive Cattle ?ork ellies etc
Energy: Crude &il Aatural Has Hasoline etc
thers: Huar Seed )heat Sugar Mentha &il ?otato apas Soya >tc.
&eading commodity markets of India
17
asmati rice Cotton and kapas inseed
5aw 8ute Hroundnut rapeseed7mustard seed Silver
5ice bran oil Castor oil and its oilcake &nions
-
8/12/2019 Commodities Market - Snapshot (1)
18/73
Anil Suvarna
Commodity Market
Conse'uently four commodity e%changes have been approved to commence business in
this regard. They are:
Multi Commodity >%change 4MCG6 located at Mumbai.
Aational Commodity and 9erivatives >%change td 4AC9>G6 located at Mumbai.
Aational Multi Commodity >%change 4AMC>6 located at !hmadabad. Aational oard of Trade 4A&T6 located at #ndore.
*ulti "ommodity Exchange
*ulti "ommodity Exchange 4*"-6 is an independent commodity e%changebased in
#ndia. #t was established in 2B and is based in Mumbai. #t has an average daily turnover
of around (S*.33 billion. MCG offers futures trading in !gricultural Commodities
ullion Ferrous R Aon-ferrous metals ?ulses &ils R &ilseeds >nergy ?lantations
Spices and other soft commodities.
MCG has also setup in 8oint venture the Aational Spot >%change a purely agricultural
commodity e%change and Aational ulk $andling Corporation 4A$C6 which provides
bulk storage and handling of agricultural products.
MCG is an independent and de-mutilated multi commodity e%change. #t was inaugurated
on Aovember * 2B by Mr. Mukesh !mbani Chairman and Managing 9irector
5eliance #ndustries td.@ and has permanent recognition from the Hovernment of #ndia for
facilitating online trading clearing and settlement operations for commodities futures
market across the country. Today MCG features amongst the world/s top three bullion
e%change and top four energy e%change. MCG offers a wide spectrum of opportunities to a
large cross section of participants including producers7 processors traders corporate
regional trading centre importers e%porters co-operatives and industry associations
amongst others. $ead'uartered in the financial capital of #ndia Mumbai MCG is led by an
e%pert management team with deep domain knowledge of the commodities futures market.
?resently the average daily turnover of MCG is around (S9*.33 bn 45s.P crore -
!pril 2=6 with a record peak turnover of (S9B.1+ bn 45s.*P 1+P crore6 on !pril 2
2=. #n the first calendar 'uarter of 2= MCG holds more than 33E market share of the
total trading volume of all the domestic commodity e%changes. The e%change has alsoaffected large deliveries in domestic commodities signifying the efficiency of price
discovery.
eing a nation-wide commodity e%change having state-of-the-art infrastructure offering
multiple commodities for trading with wide reach and penetration MCG is well placed to
tap the vast potential poised by the commodities market.
18
http://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/National_Spot_Exchangehttp://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/National_Spot_Exchange -
8/12/2019 Commodities Market - Snapshot (1)
19/73
Anil Suvarna
Commodity Market
+chievement and #eatures
)ith a growing share of P2E MCG continues to be #ndia/s Ao. * commodity
e%change
Hlobally MCG ranks no. * in silver no. 2 in natural gas no. B in crude oil and gold
in futures trading
MCG has * strategic alliances with leading commodity e%change across the globe
The average daily turnover of MCG is about (S 2.+ billion
MCG now reaches out to about 3 cities in #ndia with the help of about *
trading terminals
MCG C&M9>G is #ndia/s first and only composite commodity futures price inde%
ive Trading Since Aovember * 2B
!verage 9aily Turnover K 5s. +2B2 crores 4Single Sided6
$ighest Single 9ay Turnover - 5s.*P1+P.=3 Crores
Crude &il ?eak 9aily Turnover: +1.B ac barrels 45s.23, Cr6
&pen #nterest: Crude oil 4*+ lakh barrels6 Hold 4+ Tons6 Silver 43 tons6
&perations from 3O centers with over *O members R 3O Trading
Terminals 4T)S6 Connectivity through QS!T #nternet leased line etc.
5eal-time price R information dissemination through website and info vendors.
19
-
8/12/2019 Commodities Market - Snapshot (1)
20/73
Anil Suvarna
Commodity Market
!urnover in Different "ommodities Segments
20
-
8/12/2019 Commodities Market - Snapshot (1)
21/73
Anil Suvarna
Commodity Market
.ational "ommodity and Derivatives Exchange &td
AC9>G is the only commodity e%change in the country promoted by national level
institutions. This uni'ue parentage enables it to offer a bou'uet of benefits which are
currently in short supply in the commodity markets. The institutional promoters and
shareholders of AC9>G are prominent players in their respective fields and bring with
them institutional building e%perience trust nationwide reach technology and risk
management skills.
AC9>G is a public limited company incorporated on !pril 2B 2B under the Companies
!ct *13=. #t obtained its Certificate for Commencement of usiness on May 1 2B. #t
commenced its operations on 9ecember *3 2B.
AC9>G is a nation-level technology driven de-mutualised on-line commodity e%change
with an independent oard of 9irectors and professional management - both not having
any vested interest in commodity markets. #t is committed to provide a world-class
commodity e%change platform for market participants to trade in a wide spectrum of
commodity derivatives driven by best global practices professionalism and transparency.
AC9>G is regulated by Forward Markets Commission. AC9>G is sub8ected to variouslaws of the land like the Forward Contracts 45egulation6 !ct Companies !ct Stamp !ct
Contract !ct and various other legislations. #t is located in Mumbai and offers facilities to
its members about 33 centres throughout #ndia. The reach will gradually be e%panded to
more centers.
21
-
8/12/2019 Commodities Market - Snapshot (1)
22/73
Anil Suvarna
Commodity Market
!urnover in Different "ommodities Segments
22
-
8/12/2019 Commodities Market - Snapshot (1)
23/73
Anil Suvarna
Commodity Market
.ational *ulti "ommodity Exchange /.*"E0
Aational Multi Commodity >%change of #ndia td. 4AMC>6 was promoted by Central
)arehousing Corporation 4C)C6 Aational !gricultural Cooperative Marketing
Federation of #ndia 4A!F>96 Hu8arat !gro-#ndustries Corporation imited 4H!#C6
Hu8arat State !gricultural Marketing oard 4HS!M6 Aational #nstitute of !gricultural
Marketing 4A#!M6 and Aeptune &verseas imited 4A&6. )hile various integral aspects
of commodity economy vi0. warehousing cooperatives private and public sector
marketing of agricultural commodities research and training were ade'uately addressed in
structuring the >%change finance was still a vital missing link. ?un8ab Aational ank
4?A6 took e'uity of the >%change to establish that linkage. >ven today AMC> is theonly >%change in #ndia to have such investment and technical support from the commodity
relevant institutions.
AMC> facilitates electronic derivatives trading through robust and tested trading platform
9erivative Trading Settlement System 49TSS6 provided by CMC. #t has robust delivery
mechanism making it the most suitable for the participants in the physical commodity
markets. #t has also established fair and transparent rule-based procedures and
demonstrated total commitment towards eliminating any conflicts of interest. #t is the only
Commodity >%change in the world to have received #S& 1*:2 certification from
ritish Standard #nstitutions 4S#6. AMC> was the first commodity e%change to provide
trading facility through internet through Qirtual ?rivate Aetwork 4Q?A6.
AMC> follows best international risk management practices. The contracts are marked to
market on daily basis. The system of upfront margining based on Qalue at 5isk is followed
to ensure financial security of the market. #n the event of high volatility in the prices
special intra-day clearing and settlement is held. AMC> was the first to initiate process of
demateriali0ation and electronic transfer of warehoused commodity stocks. The uni'ue
strength of AMC> is its settlements via a 9elivery acked System an imperative in the
commodity trading business. These deliveries are e%ecuted through a sound and reliable)arehouse 5eceipt System leading to guaranteed clearing and settlement.
23
-
8/12/2019 Commodities Market - Snapshot (1)
24/73
Anil Suvarna
Commodity Market
*arket Share of .ational Exchange in India
24
-
8/12/2019 Commodities Market - Snapshot (1)
25/73
Anil Suvarna
Commodity Market
*a1or "ommodity Exchange
! commodities exchange is an exc)ange where various commodities and derivatives
products are traded. Most commodity marketsacross the world trade in agricultural
products and other ra* materials 4like *)eat barley sugar mai+e cotton cocoa
coffee milkproducts oilmetals etc.6 and contracts based on them. These contracts
can include spot prices for*ards futures and options on futures. &ther
sophisticated products may include interest rates environmental instrumentss*aps
or ocean freight contracts.
#n today/s world of speciali0ation we see that domestic and international commodity
e%changes have also grabbed on to the concept of focusing in on an area of e%pertise. The
most robust commodity e%changes in the world today and their specialty commodities
include:
.ew 2ork %oard of !rade /.2%!0 - which includes coffee cocoa cotton
orange 8uice and sugar.
.ew 2ork *ercantile Exchange /.2*E-0 - which speciali0es in energy
products such as crude and heating oil gasoline natural gas coal propane as well
as metal such as gold silver platinum copper aluminum and palladium.
"hicago %oard of !rade /"%!0 - which speciali0es in bonds and more
traditional commodities such as corn 7 mai0e oats rough rice soybeans soybean
meal soybean oil and wheat.
25
http://en.wikipedia.org/wiki/Exchangehttp://en.wikipedia.org/wiki/Exchangehttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Commodity_marketshttp://en.wikipedia.org/wiki/Commodity_marketshttp://en.wikipedia.org/wiki/Raw_materialshttp://en.wikipedia.org/wiki/Wheathttp://en.wikipedia.org/wiki/Barleyhttp://en.wikipedia.org/wiki/Sugarhttp://en.wikipedia.org/wiki/Maizehttp://en.wikipedia.org/wiki/Cottonhttp://en.wikipedia.org/wiki/Cocoahttp://en.wikipedia.org/wiki/Coffeehttp://en.wikipedia.org/wiki/Milkhttp://en.wikipedia.org/wiki/Metalhttp://en.wikipedia.org/wiki/Metalhttp://en.wikipedia.org/wiki/Spot_pricehttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Swap_(finance)http://www.nybot.com/http://www.nymex.com/http://www.cbot.com/http://en.wikipedia.org/wiki/Exchangehttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Commodity_marketshttp://en.wikipedia.org/wiki/Raw_materialshttp://en.wikipedia.org/wiki/Wheathttp://en.wikipedia.org/wiki/Barleyhttp://en.wikipedia.org/wiki/Sugarhttp://en.wikipedia.org/wiki/Maizehttp://en.wikipedia.org/wiki/Cottonhttp://en.wikipedia.org/wiki/Cocoahttp://en.wikipedia.org/wiki/Coffeehttp://en.wikipedia.org/wiki/Milkhttp://en.wikipedia.org/wiki/Metalhttp://en.wikipedia.org/wiki/Spot_pricehttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Swap_(finance)http://www.nybot.com/http://www.nymex.com/http://www.cbot.com/ -
8/12/2019 Commodities Market - Snapshot (1)
26/73
Anil Suvarna
Commodity Market
"hicago *ercantile Exchange /"*E0- which speciali0es in bond futures and
more traditional commodities such as live and feeder cattle lumber beef boneless
beef trimmings lean hogs fro0en pork bellies fresh pork bellies milk and butter.
&ondon *etal Exchange /&*E0- which speciali0es in the trading of metals such
as copper lead 0inc aluminum tin and nickel.
&ondon "ommodity Exchange 3 Euro next - which speciali0es in the trading of
commodities such as grains and meat.
I"E #utures - the #nternational ?etroleum >%change speciali0es in commodities
such as crude and heating oil natural gas and unleaded gasoline
Shanghai *etal Exchange /S'*E0 - one of the national level futures e%changesof China was established on 2+ May*112. S$M> is a non-profit self-regulating
corporation. The e%change was created for trading in non-ferrous metals and
currently contracts for several non-ferrous metals including copper aluminum
lead0inctin and nickel.
)ansas %oard of !rade - ansas oard of Trade in (S speciali0es in hard red
winter wheat. $ard winter wheat constitutes the ma%imum of (S production. This
e%change is benchmark for bread wheat prices.
!okyo "ommodity Exchange /!"*0 - Tokyo Commodity >%change
4T&C&M6 is the largest e%change in "apan and second largest commodity
e%change in the world for futures and options. Crude oil gasoline kerosene gas
oil gold silver aluminium platinum and rubber are the commodities that are
actively traded.
&ondon International #inancial #utures and ptions Exchange /&I##E0
ondon #nternational Financial Futures and &ptions >%change 4#FF>6 also know
as >uro ne%t. !mong actively commodities trades are cocoa robusta coffee corn
potato rapeseed sugar and wheat. 5obusta coffee prices are determined throughthis e%change.
Dalian "ommodity Exchange - 9alian Commodity >%change in China trades in
corn and soybean. The e%change is planning to introduce futures and options in
crude oil power steel and plastic.
26
http://www.cme.com/http://www.lme.co.uk/http://www.euronext.com/https://www.theice.com/homepage.jhtmlhttp://en.wikipedia.org/wiki/Shanghai_Metal_Exchangehttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/May_28http://en.wikipedia.org/wiki/1992http://en.wikipedia.org/wiki/Metalhttp://en.wikipedia.org/wiki/Copperhttp://en.wikipedia.org/wiki/Aluminumhttp://en.wikipedia.org/wiki/Leadhttp://en.wikipedia.org/wiki/Zinchttp://en.wikipedia.org/wiki/Tinhttp://en.wikipedia.org/wiki/Nickelhttp://www.cme.com/http://www.lme.co.uk/http://www.euronext.com/https://www.theice.com/homepage.jhtmlhttp://en.wikipedia.org/wiki/Shanghai_Metal_Exchangehttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/May_28http://en.wikipedia.org/wiki/1992http://en.wikipedia.org/wiki/Metalhttp://en.wikipedia.org/wiki/Copperhttp://en.wikipedia.org/wiki/Aluminumhttp://en.wikipedia.org/wiki/Leadhttp://en.wikipedia.org/wiki/Zinchttp://en.wikipedia.org/wiki/Tinhttp://en.wikipedia.org/wiki/Nickel -
8/12/2019 Commodities Market - Snapshot (1)
27/73
Anil Suvarna
Commodity Market
"hicago %oard of !rade /"%!0
This commodity e%change was established in *+,+. #t trades in financial and agricultural
contracts. &riginally this e%change only traded agricultural commodities such as corn
soybeans and wheat. Aow it offers futures and options contracts on a variety of products
including Silver Hold >nergy and (.S. Treasury bonds. More than 3 different options
and futures contractsare traded by over B= C&T members through open outcryand e-
Trading.Qolumes at the e%change in 2Bwere a record breaking ,3, million contracts.
&n*2 "uly2P the C&T merged with the CM>and ceased to e%ist as an independent
entity.
History
4567,
C&T listed the first ever standardi0ed e%change traded forward contracts which were
called futures contracts. #n *1*1 the Chicago utter and >gg oard a spin-off of the
C&T was reorgani0ed to enable member traders to allow future trading and its name
was changed to Chicago Mercantile >%change4CM>6.
4868,
C&T begins trade in first non-grain product with a Silver futures contract and C&T
started trade in B kilo gold future in *1P,.
489,
Members of the C&T start Chicago oard &ptions >%change 4C&>6 the world/s first
stock options e%change.
489;,
C&T launches first interest rate futures contract Hovernment Aational Mortgage
!ssociation futures@ sets stage for a huge increase in trading volume a new era of growth
and trading instruments for futures e%changes around the world.
4887,
C&T launches ?ro8ect ! its after-hours electronic trading system for futures and futures-
options.
4889,
C&T launches the C&T 9ow "ones #ndustrial !verage #nde%U
futures and options onfutures contracts. C&T opens the world/s largest trading floor = s'. ft. for financial
futures and futures-options on February *+ *11P.
merged to form the CM> Hroup.
27
http://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/ETradinghttp://en.wikipedia.org/wiki/ETradinghttp://en.wikipedia.org/wiki/ETradinghttp://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/July_12http://en.wikipedia.org/wiki/July_12http://en.wikipedia.org/wiki/July_12http://en.wikipedia.org/wiki/2007http://en.wikipedia.org/wiki/CMEhttp://en.wikipedia.org/wiki/1864http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/1919http://en.wikipedia.org/wiki/Chicago_Butter_and_Egg_Boardhttp://en.wikipedia.org/wiki/Chicago_Mercantile_Exchangehttp://en.wikipedia.org/wiki/2007http://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/ETradinghttp://en.wikipedia.org/wiki/ETradinghttp://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/July_12http://en.wikipedia.org/wiki/2007http://en.wikipedia.org/wiki/CMEhttp://en.wikipedia.org/wiki/1864http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/1919http://en.wikipedia.org/wiki/Chicago_Butter_and_Egg_Boardhttp://en.wikipedia.org/wiki/Chicago_Mercantile_Exchangehttp://en.wikipedia.org/wiki/2007 -
8/12/2019 Commodities Market - Snapshot (1)
28/73
Anil Suvarna
Commodity Market
!rading Products
Today the C&T supports the trading of four product types - agricultural metals interest
rates and the 9ow.
+gricultural "ommodities!gricultural commodities include items such as corn soybeans 4meal and oil6 ethanol
oats wheat and rice. Trading in these products is standardi0ed as to 'uantities and product
condition. For e%ample agricultural products are traded in a raw 7 unprocessed state.
*etal "ommodities
The most common metal commodities are gold and silver - the price of which is stated in
dollars per ounce. The most familiar trading 'uantities on the C&T include:
* ounce Hold Futures
Mini-si0ed Hold - BB.2 fine troy ounces of gold
3 ounce Silver Futures
Mini-si0ed Silver - * troy ounces of silver
Dow #utures
9ow futures include the 9ow "ones !#H Commodity inde% the 9ow "ones #ndustrial
!verage Futures and the mini-si0ed 9ow. The strategy of trading in 9ow futures is also
called trading the markets. )ith 9ow futures you are attempting to predict the future
direction of the stock market and the 9ow in particular.
Interest >ates
Finally the last product type offered by the C&T falls into the category of interest rates.
The most common of the interest rate trades includes treasury bonds fed funds and
municipal bonds. )hen trading in the interest rate market you are attempting to capitali0e
on the long and short term changes in the yield curve. Said another way you/re taking a
financial position that interest rates are going to rise or fall in the future.
ther "ommodities
There are many other commodities that can be traded from tin to coffee beans or stock
inde%es to pork bellies.
"hicago *ercantile Exchange4!he *erc6
Chicago Mercantile >%change is an !merican financial e%changebased in Chicago. The
CM> was founded in *+1+ as the Chicago utter and >gg oard. &riginally the e%change
was a not-for-profit organi0ation. The e%change demutuali0ed in Aovember 2 went
28
http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Exchangehttp://en.wikipedia.org/wiki/Chicagohttp://en.wikipedia.org/wiki/Chicago_Butter_and_Egg_Boardhttp://en.wikipedia.org/wiki/Demutualizedhttp://en.wikipedia.org/wiki/2000http://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Exchangehttp://en.wikipedia.org/wiki/Chicagohttp://en.wikipedia.org/wiki/Chicago_Butter_and_Egg_Boardhttp://en.wikipedia.org/wiki/Demutualizedhttp://en.wikipedia.org/wiki/2000http://en.wikipedia.org/wiki/Initial_public_offering -
8/12/2019 Commodities Market - Snapshot (1)
29/73
Anil Suvarna
Commodity Market
public in 9ecember 22and merged with the Chicago oard of Tradein "uly 2P. The
Chief >%ecutive &fficer of the Merc is Craig S. 9onohue.
!nother one of the ma8or e%changes is in Chicago as well. This one popularly known as
CM> has been in business for over a hundred years. The main commodities traded here
are live and feeder cattle hogs pork bellies lumber milk butter and fertili0er. Aow it
serves as a marketplace for stock inde% interest rate foreign e%change and single-stock
futures. &ne of the fairly uni'ue instruments being traded is the weather and real estate
derivatives. These future contracts speculate on weather anywhere in the world at
different times of the year.
&n &ctober *P 2= the Chicago Mercantile >%change announced the purchase of the
Chicago oard of Tradefor + billion in stock re8oining the two financial institutions as
CM> Hroup #nc. C&T currently uses outsourced technology platforms but will move to
CM>/s Hlobe% trading system. This will provide much of the merger/s anticipated savings.
The merger will also strengthen the combined group/s position in the global derivatives
market
!rading *ethods
Trading is conducted in two methods@ an open outcry format and the CM> Hlobe%U
electronic trading platform. !ppro%imately P percent of total volume at the e%change
occurs on CM> Hlobe%.
pen utcry
"*E ?lobex
.ew 2ork *ercantile Exchange /.2*E-0
The Aew Vork Mercantile >%change 4AVM>G6 is the world/s largest physical commodity
e%change and oldest e%changes located in Aew Vork City. #t speciali0es in petroleum and
metal products. #ts two principal divisions are the Aew Vork Mercantile >%change and the
Aew Vork Commodities >%change 4C&M>G6 which were once independent companies
but are now merged.The Aew Vork Mercantile >%change is now traded publicly as its
parent company@ AVM>G $oldings became listed on the Aew Vork Stock >%changeonAovember *P 2= under the ticker symbol AMG.
The Aew Vork Mercantile >%change handles billions of dollars worth of energy products
metals and other commodities being bought and sold on the trading floor and the
overnight electronic trading computer systems. The prices 'uoted for transactions on the
e%change are the basis for prices that people pay for throughout the world.
29
http://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/2002http://en.wikipedia.org/wiki/Chicago_Board_of_Tradehttp://en.wikipedia.org/w/index.php?title=Craig_S._Donohue&action=edithttp://en.wikipedia.org/wiki/October_17http://en.wikipedia.org/wiki/October_17http://en.wikipedia.org/wiki/2006http://en.wikipedia.org/wiki/Chicago_Board_of_Tradehttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/Worldhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/New_York_Cityhttp://en.wikipedia.org/wiki/Companieshttp://en.wikipedia.org/wiki/Mergedhttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/November_17http://en.wikipedia.org/wiki/2006http://en.wikipedia.org/wiki/Energyhttp://en.wikipedia.org/wiki/Metalshttp://en.wikipedia.org/wiki/Buyhttp://en.wikipedia.org/wiki/Sellhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Computerhttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Worldhttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/2002http://en.wikipedia.org/wiki/Chicago_Board_of_Tradehttp://en.wikipedia.org/w/index.php?title=Craig_S._Donohue&action=edithttp://en.wikipedia.org/wiki/October_17http://en.wikipedia.org/wiki/2006http://en.wikipedia.org/wiki/Chicago_Board_of_Tradehttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/Worldhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/New_York_Cityhttp://en.wikipedia.org/wiki/Companieshttp://en.wikipedia.org/wiki/Mergedhttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/November_17http://en.wikipedia.org/wiki/2006http://en.wikipedia.org/wiki/Energyhttp://en.wikipedia.org/wiki/Metalshttp://en.wikipedia.org/wiki/Buyhttp://en.wikipedia.org/wiki/Sellhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Computerhttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/World -
8/12/2019 Commodities Market - Snapshot (1)
30/73
-
8/12/2019 Commodities Market - Snapshot (1)
31/73
Anil Suvarna
Commodity Market
>stablished for over *B years and located in the heart of The City of ondon the ondon
Metal >%change is the worldWs premier non-ferrous metals market. The ondon Metal
>%change or M> is the futures e%changewith the world/s largest market in optionsand
futures contractson baseand other metals. !s the M> offers contracts with daily e%piry
dates up to three months from trade date along with longer dated contracts it also allows
for cash trading. #t offers hedging worldwide reference pricing and storage for physical
delivery of trades. The M> is a highly li'uid market and in 2= achieved volumes of +P
million lots e'uivalent to +* billion annually and between B3-,3 billion on an
average business day. 9espite its ondon location the M> is a global market with an
international membership and with more than 13E of its business coming from overseas.
'istory
The ondon Metal Market and >%change Company were founded in *+PPbut the market
traces its origins back to *3P* during the reign of ueen >li0abeth period and the opening
of the 5oyal >%change. !t first only copperwas traded leadand 0incwere soon added butonly gained official trading status in *12. The e%change was closed over )) ##and did
not re-open until *132. &ther metals traded e%tended to include aluminum4*1P+6 nickel
4*1P16 and aluminum alloy 4*1126. ase metals are traded through the M> since 2. #n
23 the >%change launched the worldWs first futures contracts for plastics@ for
polypropylene and linear low density polyethylene with the introduction of regional
plastics contracts in 2P. #n addition it offers M> minis which are smaller-si0ed
contracts for copper aluminum and 0inc plus an inde% contract 4M>G6.
The >%change is forward looking and is in the process of implementing its ;2 by 2 developing two streams of organic growth from non-ferrous into ferrous metals and from Futures into &TC trading. #t is designed to double
trading volumes at the M> within the ne%t three to five years.
*ember of the Exchange
!malgamated Metal TradinH MF Hlobal Metdist Trading
Aati%is Commodity Markets SociXtX HXnXrale Sucden 4(6 imited
Calyon Financial SAC Triland Metals Sempra Metals
M!5>G Financial imited arclays Capital
$orld "ommodities Exchanges Aolumes
-
8/12/2019 Commodities Market - Snapshot (1)
32/73
Anil Suvarna
Commodity Market
Source: >%change data
Percentage $ise Aolumes
Source: >%change data
32
-
8/12/2019 Commodities Market - Snapshot (1)
33/73
Anil Suvarna
Commodity Market
>egulation of commodity markets
Structure of "ommodity *arket
33
"ountry Exchange >egulator
B@S@+ Chicago oard of Trade
Chicago Mercantile >%change
Aew Vork oard of Trade
Aew Vork Mercantile >%change
ansas City oard of Trade
CommodityFuture Trading
Commission
India Aational Commodity R 9erivatives
>%change
AationalMulti-Commodity >%change
Forward Markets
Commission
B@) ondon Metal >%change
>urone%t ondon #nternational
Financial Futures >%change
Financial Services !uthority
4*1+=6
"hina 9alian Commodity >%change
Shanghai Futures >%changeChinaSecurities 5egulatory
Commission
Ministry of Consumer
Affairs
FMC
Commodity Exchange
http://en.wikipedia.org/wiki/Commodity_Futures_Trading_Commissionhttp://en.wikipedia.org/wiki/Commodity_Futures_Trading_Commission -
8/12/2019 Commodities Market - Snapshot (1)
34/73
Anil Suvarna
Commodity Market
Delivery Process
Pre>eCuisite for Delivery
pen a commodity demat account
9eliveries at >%changes take place in demat form. #t is mandatory to open an 9emat
account with both the depositories i.e. AS9 R C9S.
Sales !ax >egistration
oth seller R buyer should have sales ta% registration at the location of the warehouse. #n
case the client does not have a sales ta% registration he has to appoint a CRF agent for the
same.
;9 Days advance intimation to delivery team@
$arehouse "ost
34
National Exchange Regional Exchange
NCDEX
MCX
NMCE
NBOT ! other RegionalExchange
-
8/12/2019 Commodities Market - Snapshot (1)
35/73
Anil Suvarna
Commodity Market
The warehouse cost has to be borne by the holder of the commodity till the time he holds
the commodity in the warehouse. )arehousing cost differs from commodity to commodity
as prescribed the warehouses from time to time.
Aalidity Date
#t means the date up to which the commodity is valid for delivery on the e%change
platform. !fter the e%piry of the validity date the commodity should be either withdrawn
from warehouse or further revalidated if final e%piry date is not reached.
*argins
The client has to pay all applicable margins i.e. #nitial 7e%posure 7additional 7tender period
R delivery period margins for his open position marked for delivery from time to time as
per the rates prescribed by the >%changes.
Delivery Process
35
"ettlement of
#remium$
Discounts %
sales Tax
#ay Out of
Commodity$
Funds
Deli&ery
'ntension
Ta(e
#osition
) Days
#rior
) Days
#rior
-
8/12/2019 Commodities Market - Snapshot (1)
36/73
Anil Suvarna
Commodity Market
Delivery Process for Seller
36
Exchange of
Buyers %
"ellers
'dentity
#ay*'n of
Commodity$
Funds
Matching By
Exchange
#ay
Deli&ery
Margin) Days
#rior
O+en a
Commodity
Demat A$C ,ith
Designated D-#
Contact the
.arehousefor
A&aila/ility of
"+ace
Assayer ta(es
"am+le and
'ssues a 0uality
Re+ort
'f A++ro&ed /y
Assayer Clienthas to su/mit
Commodity
De+osit form
along ,ith
Assayer
RE#ORT
Client 1et
Demat Credit in
his A$c after the
"tandard
Deduction
-
8/12/2019 Commodities Market - Snapshot (1)
37/73
Anil Suvarna
Commodity Market
Delivery Process for %uyer
37
Ta(e #hysical
Commodity to
the .arehouse
for Assaying
.arehouse'ssues s Recei+t
against the
De+osit of
Commodity
Ta(e O+en
#osition
Mar( Deli&ery
'ntension
#ay*in$ #ay*
out of funds$
Commodity
-
8/12/2019 Commodities Market - Snapshot (1)
38/73
Anil Suvarna
Commodity Market
Daily !ime of Different Exchange
Exchange !iming IS!
Tokyo Commodity >%change 3.B am K *2 pm
Shanghai Metal >%change =.B am - *2.B pm
ondon Metal >%change3:2 ?M - *:B ?M 4)inter6
,:2 ?M - 1:B ?M 4Summer6
C&M>G7AVM>G7C&T=:, ?M - **:B ?M 4)inter6
3:, ?M - *:B ?M 4Summer6
MCG R AC9>G*: !M - 2B:33 ?M 4)inter6
*: !M - 2B:B ?M 4Summer6
$hy choose "ommodities over ECuities
#n developed countries commodity market is 5 timesbigger than e'uity markets.
38
"ales Tax
"ettlement
Re&alidate 'f
2alidity of 's
in has to /e
Extended
Remat if Client
,ant #hysical
Deli&ery or 's in
has Ex+ired
http://en.wikipedia.org/wiki/Shanghai_Metal_Exchangehttp://www.lme.co.uk/http://en.wikipedia.org/wiki/Shanghai_Metal_Exchangehttp://www.lme.co.uk/ -
8/12/2019 Commodities Market - Snapshot (1)
39/73
Anil Suvarna
Commodity Market
Market has grown from 2 Cr in 2B to *, Cr in 2= per day R e%pected to
be around 23 Cr till 9ec 2P.
ow number of commodities therefore choice is easy.
Ao need to go into e%otic ma0e of financial statements created by corporate world.
Margins are low@ therefore return ratios are favorable on winning deals.
Ao single individual can control on longer terms basis on demand and supply in
commodities.
9oes not involve individual 7 company specific risk.
"ommodity Derivatives and #inancial Derivatives
C(MM("%, E-"A%"ES F"/A/C"A0 E-"A%"ES
Commodity 9erivatives are settled by actual
deliveries
Financial 9erivatives are only cash settled
today
uantity and 'uality differences e%ist Ao such differences e%ist
$olding cost includes assaying warehousing
R insurance costs
$olding costs normally consists of only
interest costs.
?hysical markets are seasonal in nature Cash markets are active throughout the year.
Factors #mpacting :
9emand R Supply
#mport->%port 5egulations
Hovernment #ntervention
Factors #mpacting :
Hlobal R ocal >conomic Condition ?erformance of the entity
Ta%ation Structure
39
-
8/12/2019 Commodities Market - Snapshot (1)
40/73
Anil Suvarna
Commodity Market
"omparative returns from Aarious +sset "lasses
Commodity
$'ndices 3nits Fe/!4
Months ago 5Months ago 6Months ago 7ear ago
#rice 8 #rice 8 #rice 8 #rice 8
MCX Energy - 96 !:; )-< 56! *6-9 496 *9
#e++er Rs$9!!(gs 96< 94:) *;-9 999!) 9!-) 99)
>eera Rs$(gs 9!;
-
8/12/2019 Commodities Market - Snapshot (1)
41/73
Anil Suvarna
Commodity Market
Pricing commodity futures
!he cost of carry model
)e use arbitrage arguments to arrive at the fair value of futures. For pricing purposes we
treat the forward and the futures market as one and the same. A futures contract is nothing
but aforward contract that is exchange traded and that is settled at the end of each day .
The buyer who needs an asset in the future has the choice between buying the underlying
asset today in the spot market and holding it or buying it in the forward market. #f he buysit in the spot market today it involves opportunity costs. $e incurs the cash outlay for
buying the asset and he also incurs costs for storing it. #f instead he buys the asset in the
forward market he does not incur an initial outlay. $owever the costs of holding the asset
are now incurred by the seller of the forward contract who charges the buyer a price that is
higher than the price of the asset in the spot market. This forms the basis for the cost-of-
carry model where the price of the futures contract is defined as:
FJS-C 4*6
)here:
F -Futures price
S -Spot price
C -$olding costs or carry costs
The fair value of a futures contract can also be e%pressed as:
41
-
8/12/2019 Commodities Market - Snapshot (1)
42/73
Anil Suvarna
Commodity Market
FJ S 4*Or6r 426
)here:
r ?ercent cost of financing
T Time till e%piration
)henever the futures price moves away from the fair value there would be opportunities
for arbitrage. #f FIS 4*Or6r or FYS 4*Or6r arbitrage would e%ist. )e know what are the spot
and futures prices but what are the components of holding costsZ The components of
holding cost vary with contracts on different assets. !t times the holding cost may even be
negative. #n the case of commodity futures the holding cost is the cost of financing plus
cost of storage and insurance purchased. #n the case of e'uity futures the holding cost is
the cost of financing minus the dividends returns.
>'uation 426 uses the concept of discrete compounding where interest rates are
compounded at discrete intervals for e%ample annually or semiannually. ?ricing ofoptions and other comple% derivative securities re'uires the use of continuously
compounded interest rates. Most books on derivatives use continuous compounding for
pricing futures too. )hen we use continuous compounding e'uation 426 is e%pressed as:
F- SerT 4B6
)here:
r Cost of financing 4using continuously compounded interest rate6
T Time till e%piration
e 2.P*+2+
So far we were talking about pricing futures in general. To understand the pricing of
commodity futures let us start with the simplest derivative contract . a forward contract.
)e use e%amples of forward contracts to e%plain pricing concepts because forward
contracts are easier to understand. $owever the logic for pricing a futures contract is
e%actly the same as the logic for pricing a forward contract. )e begin with a forward
contract on an asset that provides the holder with no income and has no storage or other
costs. Then we introduce real world factors as they apply to investment commodities and
later to consumption commodities.
Consider a three-month forward contract on a stock that does not pay dividend. !ssume
that the price of the underlying stock is 5s., and the three-month interest rate is 3E per
annum. )e consider the strategies open to an arbitrager in two e%treme situations.
42
-
8/12/2019 Commodities Market - Snapshot (1)
43/73
Anil Suvarna
Commodity Market
Suppose that the forward price is relatively high at 5s.,B. !n arbitrager can borrow 5s.,
from the market at an interest rate of 3E per annum buy one share in the spot market and
sell the stock in the forward market at 5s.,B. !t the end of three months the arbitrager
delivers the share and receives 5s.,B. The sum of money re'uired to pay off the loan is ,e.3[.23 -,.3. y following this strategy the arbitrager locks in a profit of 5s.,B. -
5s.,.3 J 5s.2.3 at the end of the three month period.
Suppose that the forward price is relatively low at 5s.B1. !n arbitrager can short one share
for 5s.,@ invest the proceeds of the short sale at 3E per annum for three months and take
a long position in a three-month forward contract. The proceeds of the short sale grow to
,e .3[.23J ,.3 in three months. !t the end of the three months the arbitrager pays
5s.B1 takes delivery of the share under the terms of the forward contract and uses it to
close his short position in the process making a net gain of 5s.*.3 at the end of three
months.
Pricing futures contracts on investment commodities
#n the e%ample above we saw how a futures contract on gold could be priced using
arbitrage arguments and the cost-of-carry model. #n the e%ample we considered the gold
contract was for * grams of gold. $ence we ignored the storage costs. $owever if the
one-month contract was for a * kgs of gold instead of * Hms then it would involve
non-0ero holding costs which would include storage and insurance costs. The price of the
futures contract would then be 5s.P+=.+ plus the holding costs. Table 4*6 gives the
indicative warehouse charges for accredited warehouses7 vaults that will function as
delivery centres for contracts )arehouse charges include a fi%ed charge per deposit of
commodity into the warehouse and a per unit per week charge. The per unit charges
include storage costs and insurance charges.
)e saw that in the absence of storage costs the futures price of a commodity that is an
investment asset is given by FJSerT.Storage costs add to the cost of carry. #f is the
present value of all the storage costs that will be incurred during the life of a futures
contract it follows that the futures price will be e'ual to
FJ 4SO(6 erT 4,6
)here:
r Cost of financing 4annuali0ed6
T Time till e%piration
( ?resent value of all storage costs
43
-
8/12/2019 Commodities Market - Snapshot (1)
44/73
Anil Suvarna
Commodity Market
For ease of understanding let us consider a one-year futures contract on gold. Suppose the
fi%ed charge is 5s.B* per deposit upto 3 kgs. and the variable storage costs are 5s.33
per week it costs 5s.B*P to store one kg of gold for a year432 weeks6. !ssume that the
payment is made at the beginning of the year. !ssume further that the spot gold price is
5s.= per * grams and the risk-free rate is PE per annum. )hat would the price of one
year gold futures be if the delivery unit is one kgZ
FJ4SO(6 e rT
J 4=OB*O2+=6 e .P[*
J =,=1,.P=
"ommodity #ixed "harges $arehouse "harges per unit3week?old 4= ;; per )?
)e see that the one-year futures price of a kg of gold would be 5s.= ,=1,.P=. The one-
year futures price for * grams of gold would be about 5s.=,=1. Aow let us consider a
three-month futures contract on gold. )e make the same assumptions the fi%ed charge is
5s.B* per deposit upto 3 kgs and the variable storage costs are 5s.33 per week. #t costs
5s.*23 to store one kg of gold for three months4*B weeks6. !ssume that the storage costs
are paid at the time of deposit. !ssume further that the spot gold price is 5s.= per *
grams and the risk-free rate is PE per annum. )hat would the price of three month gold
futures if the delivery unit is one kgZ
F J 4SO(6 e rT
J 4=OB*OP*36 e .P[.23
J =**=B3.3
)e see that the three-month futures price of a kg of gold would be 5s.=**=B3.3. The
three-month futures price for * grams of gold would be about 5s.=**=.
?ricing futures contracts on consumption commodities
)e used the arbitrage argument to price futures on investment commodities. For
commodities that are consumption commodities rather than investment assets the arbitrage
arguments used to determine futures prices need to be reviewed carefully. Suppose we
have
44
-
8/12/2019 Commodities Market - Snapshot (1)
45/73
Anil Suvarna
Commodity Market
FI4S O (6 e rT 436
To take advantage of this opportunity an arbitrager can implement the following strategy:
orrow an amount SO( at the risk-free interest rate and use it to purchase one unit of the
commodity and pay storage costs.
Short a forward contract on one unit of the commodity.
#f we regard the futures contract as a forward contract this strategy leads to a profit of F -
4S O (6 e rT at the e%piration of the futures contract. !s arbitragers e%ploit this opportunity
the spot price will increase and the futures price will decrease until >'uation 436 does not
hold well.
Suppose ne%t that
F Y 4S O (6 e rT 4=6
#n case of investment assets such as gold and silver many investors hold the commoditypurely for investment. )hen they observe the ine'uality in e'uation 4=6 they will find it
profitable to trade in the following manner:
Sell the commodity save the storage costs and invest the proceeds at the risk-free
interest rate.
Take a long position in a forward contract.
This would result in a profit at maturity of (S + U e r!" # relative to the position that the
investors would have been in had they held the underlying commodity. !s arbitragers
e%ploit this opportunity the spot price will decrease and the futures price will increase
until e'uation 4=6 does not hold well. This means that for investment assets e'uation 4,6
holds good. $owever for commodities like cotton or wheat that are held for consumption
purpose this argument cannot be used. #ndividuals and companies who keep such a
commodity in inventory do so because of its consumption value not because of its value
as an investment. They are reluctant to sell these commodities and buy forward or futures
contracts because these contracts cannot be consumed. Therefore there is unlikely to be
arbitrage when e'uation 4=6 holds good. #n short for a consumption commodity therefore
F YJ 4S O (6 e rT 4P6
That is the futures price is less than or e'ual to the spot price plus the cost of carry.
45
-
8/12/2019 Commodities Market - Snapshot (1)
46/73
Anil Suvarna
Commodity Market
"ommodities *arkets verall Perspective
%ackground
Commodities e%changes in #ndia were established in 2B with MCG commencing
operations in Aov 2B and AC9>G in 9ec 2B. The national-level online
commodity e%changes were established primarily for the purpose of 4*6 >fficient
?rice 9iscovery 426 ?rice 5isk Management
#nitially AC9>G was the leader in Commodities >%changes as volumes of agri-
commodities picked up substantially but later on MCG took the lead in
#nternational commodities which helped MCG become the largest e%change
cornering almost +3E - 1E of the total average daily business of 5s. 23
crores 4MCG K 5s.22 K 5s.2B crores 7 AC9>G K 5s.2-5s.23 crores6
per day.
The present growth in commodities markets can be attributed to the following:
4*6 &verall downturn in other asset classes especially e'uity
markets globally led investors to look at commodities markets
for returns.
426 #ncreased volatility in commodities in the past * year or so have
generated interest amongst traders globally to particip