Commodity Derivatives

Group members:

Richa Modi 517 Devanshi Parikh 519 Zil Shah 533 Hardik Vyas 545 Aditi Warang 547

INTRODUCTION

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products like precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. Derivatives as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well. In India, trading in commodity futures has been in existence from the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875.  A commodity derivatives market (or exchange) is, in simple terms, nothing more or less than a public market place where commodities are contracted for purchase or sale at an agreed price for delivery at a specified date. These purchases and sales, which must be made through a broker who is a member of an organized exchange, are made under the terms and conditions of a standardized futures contract.

Participants in commodity Derivative Market.

Hedgers : They use the futures market to reduce a particular risk that they face. This risk might relate to the price of any commodity that the person deals in. The classic hedging example is that of wheat farmer who wants to hedge the risk of fluctuations in the price of wheat around the time that his crop is ready for harvesting. By selling his crop forward, he obtains a hedge by locking in to a predetermined price. Hedging does not necessarily improve the financial outcome ;indeed, it could make the outcome worse. Hedgers could be government institutions, private corporations like financial institutions, trading companies and even other participants for instance farmers, extractors, ginners, processors etc., who are influenced by the commodity prices.

Cont.. There are basically two kinds of hedges that can be taken. A company that wants to sell an asset at a particular time in the future can hedge by taking short futures position. This is called a short hedge. A company that knows that it is due to buy an asset in the future can hedge by taking long futures position. This is known as long hedge.

Speculators: Speculators are those who are willing to take risk. These are the people who take positions in the market & assume risks to profit from price fluctuations. In fact the speculators consume market information make forecasts about the prices & put money in these forecasts. An entity having an opinion on the price movements of a given commodity can speculate using the commodity market. While the basics of speculation apply to any market, speculating in commodities is not as simple as speculating on stocks in the financial market. For a speculator who thinks the shares of a given company will rise, it is easy to buy the shares and hold them for whatever duration he wants to. However, commodities are bulky products and come with all the costs and procedures of handling these products.

Arbitrage : A central idea in modern economics is the law of one price. This states that in a competitive market, if two assets are equivalent from the point of view of risk and return, they should sell at the same price. If the price of the same asset is different in two markets, there will be operators who will buy in the market where the asset sells cheap and sell in the market where it is costly. This activity termed as Arbitrage.

National Commodity And Derivatives Exchange Of India (NCDEX)

NCDEX is a professionally managed on-line multi commodity exchange promoted by LIC, National Bank For Agriculture And Rural Development (NABARD) and National Stock Exchange Of India (NSC). NCDEX is only the commodity exchange in the country which is promoted by national level institution.

Commodities Traded at NCDEX

Currently 57 commodities are traded at NCDEX which are classified in three categories they are as follows:-

i. Agro. Products.ii. Non-Agro Products.iii. Others.

Products & Services of NCDEX NCDEX offers future trading in 31 agricultural and

non-agricultural commodities. It also offers an information product ,that is

agricultural commodity index. NCDEX has also launched gold hedge, a

transparent price benchmark of gold to the consumer.

Clearing & Settlement of NCDEX

For settlement, all the members of the exchange require to open their accounts with ‘Clearing Banks’.

The accounts should be named as follows:-1. Member name - Settlement A/C &2. Member name – Exchange dues A/C.

The members can open their clearing accounts in the following clearing banks:-

i. Axis Bank Ltd. (formerly known as UTI Bank Ltd).ii. Bank Of India.iii. Canara Bank.iv. Development Credit Bank ltd.v. HDFC Bank Ltd.vi. ICICI Bank Ltd.

Multi Commodity Exchange Of India Ltd (MCX)

Multi Commodity Exchange Of India Ltd, with it’s headquarter in Mumbai is a demutualised nationwide electronic commodity futures exchange set up by Financial Technologies (India) Ltd, with permanent recognition from GOI for facilitating online trading, clearing and settlement operations for futures market across the country.

Commodities Traded At MCX

MCX offer futures trading in more than 40 commodities from various market segments including bullion, energy, ferrous & non-ferrous metals, oil & oil seeds, cereals, pulses, spices, plastic & fiber.

Clearing & settlement of MCX

The exchange has an in-house clearing which monitors & performs all the activities related to delivery fund settlement, margining & managing the settlement guarantee funds.

MCX has 16 clearing banks to provide banking services to trading members.

How to make minimum profits on mcx. example;:if gold price has increased by 12 rs,then

you come up with minimum profits. Trading unit=1

kilogram=1000grams ,brokerage=.03% Quotation/base value=10 grams. Lot size =1000grams/10grams=100. Bought price=18400,sold price=18412, Minimum price=12 Profit=(18412-18400) * 100)-(18400*100*.0003)+

(18412*100*.0003)=95.64

Calculation of commodity prices on mcx/ncdex. Mcx/ncdex commodities like

gold,silver,aluminum,copper etc prices are dependent on their corresponding international prices,USD to INR rate conversion and supply/demand etc.

Example: When US dollar to INR conversion is at 50INR and

crude oil price is 80$ in international market,mcx price will be 4000 INR.

THE TOKYO COMMODITY EXCHANGE

Also known as TOCOM is a non-profit organization and regulates trading of futures contracts and option products of all commodities in JAPAN .

The TOKYO Gold exchange , the tokyo rubber exchange and the tokyo textile exchange merged in 1984 to form TOCOM .

On dec 1, 2008 , TOCOM demutualized and transformed itself into a corporation and changed its name to Tokyo commodity exchange Inc.

It was one of the first commodity futures exchanges in Japan to undergo such a transformation .

Morgan Stanley became the first overseas member in 2006 from an in-house unit to the independent Japan commodity clearing house .

In early August 2010 , the exchange began allowing foreign commodity brokers to participate in the market through intermediaries .

Gold options were the single –largest product in 2006 , accounting for a third of total contract volume , with gasoline futures ranked second at 22 percent followed by platinum at 16 percent and rubber at 14 percent .

Gold Standard and Gold MiniOLD STANDARD CONTRACT : Date of ListingMarch 23, 1982 Type of TradePhysically Delivered Futures Transaction StandardGold of minimum 99.99% fineness Trading MethodComputerized Individual Auction Contract MonthsAll even months within a year. (On the day when a New Contract Month is generated, there will be 6 even months starting from the next even month after the month which the said day belongs to)

Last Trading DayDay session on the third business day preceding the Delivery Day. First Trading Day of a New Contract MonthNight session immediately following the Last Trading Day of the current contract month. Delivery Day and TimeUntil noon of the last day of each even month except December (the 28th for December). If the day falls on an Exchange holiday or the last business day of the year, Delivery Day will be the immediately preceding business day. Good DeliveryBullions matching the standard, hallmarked with a trade name, among other marks, designated by the Exchange. Acceptable Weight Range of Deliverable Goods does not apply. Delivery PointsSpecified warehouses (warehouses located in Tokyo) Method of DeliveryThe Party Making Delivery submits to the Exchange a warehouse receipt, issued by a TOCOM-designated warehouse, for the delivery good. The Party Taking Delivery submits to the Exchange the Delivery Value based on the delivery price.

Trading HoursDay Session 9:00 a.m. to 3:15 p.m. (JST)Night Session 4:30 p.m. to 4:00 a.m. (JST) Contract Unit 1 kg / contract (approximately 32.15 troy ounces)

Delivery Unit1 kg

Price IncrementJPY 1 per gram

Circuit Breaker Trigger LevelThe CB trigger level is to be set everyday at the start of a clearing period (i.e.the start of a night session at 17:00) and is based on the settlement price of the previous clearing periond (or the settlement price of the preceding contract month, in case of a new contract month)

MarginAs SPAN Margining System started from January 4, 2011, Japan Commodity Clearing House (JCCH) will set its parameters based on historical price fluctuation. 

Customer Position Limit (for each long/short position)Customers excluding commercials (*1) and investment trusts: All contract months combined: 5,000 contractsCommercials and investment trusts:Current contract month: 10,000 contractsAll contract months combined: 30,000 contracts*1: as defined by the Commodity Exchange Act and the Articles of Incorporation

Ticker SymbolTOCOM Product Code: 11Reuters Contract Detail: TCE/JAUBloomberg Ticker: JGA

Gold Mini Contract:Date of ListingJuly 17, 2007Type of TradeCash-settled Futures TransactionStandardSame as Gold Standard(limited to Cash-settled Futures Transaction)Trading MethodSame as Gold StandardContract MonthsSame as Gold StandardLast Trading DaySame as Gold Standard(Night session only: From 17:00 on the penultimate day to 4:00 on the last trading day)Final Settlement DaySame as the Last Trading Day

Final Settlement PriceOpening price at the day session of the last trading day of the standard contractFirst Trading Day of New Contract MonthSame as Gold StandardDeliveryN/A (Cash-settled Futures Transaction)Delivery DayN/ADeliverable GoodsN/ADelivery PointsN/AMethod of DeliveryN/ATrading HoursSame as Gold StandardContract Unit100 grams/contract(one-tenth of Gold Standard ; approximately 3.215 troy ounces)Price QuotationJapanese Yen per gram

Price IncrementSame as Gold StandardCircuit Breaker Trigger LevelSame as Gold StandardBase Amount of Initial Clearing Margin (per contract)As SPAN Margining System starts from January 4, 2011, Japan Commodity Clearing House (JCCH) will set its parameters based on historical price fluctuationCustomer Position Limit (for each long/short position)Customers excluding commercials (*1) and investment trusts:All contract months combined: 10,000 contractsCommercials and investment trusts:All contract months combined: 60,000 contracts

RUBBER Date of ListingDecember 12, 1952 DeliveryPhysically Delivered Futures Transaction StandardRibbed Smoked Sheet (RSS) No.3 Trading MethodComputerized Individual Auction Contract MonthsSix consecutive months (On the day when a New Contract Month is generated, there will be six consecutive months starting from the month which the said day belongs to) Last Trading DayDay session on the fourth business day preceding to the Delivery Day

First Trading Day of a New Contract Month Night session immediately following the Last Trading Day of the

current contract month. Delivery Day and Time Until noon of the last day of each month except December (the

28th for December). If the day falls on an Exchange holiday or the last business day of the year, Delivery Day will be the immediately preceding business day.

Deliverable Grades RSS No.3 or 4 of International Standard Specifications, deliverable

within a year of date of customs clearance Delivery Points Specified warehouses (warehouses located in Tokyo, Kanagawa,

Chiba, Ibaragi and Aichi)

Method of Delivery The Party Making Delivery submits to the Exchange a

warehouse receipt, issued by a TOCOM-designated warehouse, for the delivery goods. The Party Taking Delivery submits to the Exchange the Delivery Value based on the delivery price.

Trading Hours Day Session 9:00 a.m. to 3:15 p.m. (JST)

Night Session 4:30 p.m. to 7:00 p.m. (JST) Contract Unit 5,000 kg (5 tonnes) / contract

Dalian Commodities Exchange

The DCE is a self-regulated, non-profit organization, overseen by the China Securities Regulatory Commission.

A commodities exchange located in Dalian, China. The Dalian Commodities Exchange trades futures contracts on soybeans and soybean oil, corn, palm oil, soymeal, etc,. 

The Dalian Exchange was established on February 28, 1993, and has the deepest pool of liquidity of any commodities exchange in China. It is a non-profit, self-regulating entity with about 200 members and over 160,000 investors. It also has the largest volume of any commodities exchange in China.

Types of ContractsCommodity Corn

FuturesNo.1 Soyabean Futures

No.2 Soyabean Futures

Soy Meal Futures

Crude Soyabean Oil Futures

Polyethylene Futures

RBD Palm Olein Futures

PVC Futures

Settlement Physically delivered

Physically delivered

Physically delivered

Physically delivered

Physically delivered

Physically delivered

Physically delivered

Physically delivered

Contract Size

10 tons / contract

10 tons / contract

10 tons / contract

10 tons / contract

10 tons / contract

5 tons / contract

10 tons / contract

5 tons/lot

Pricing Unit 10 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

5 yuan (RMB)

10 yuan (RMB)

5 yuan (RMB)

Tick Value 10 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

20 yuan (RMB)

25 yuan (RMB)

20 yuan (RMB)

5 yuan (RMB)

Contract Month

Corn Jan, Mar, May, July, Sep, Nov

Jan, Mar, May, July, Sep, Nov

Jan, Mar, May, Jul, Aug, Sep, Nov, Dec

Jan, Mar, May, July, Aug, Sep, Nov, Dec

Commodity

Monthly contracts

Monthly contracts

Trading Hours

9 - 11:30 a.m., 1:30 - 3 p.m.

9 - 11:30 a.m., 1:30 - 3 p.m.

9 - 11:30 a.m., 1:30 - 3 p.m.

9 - 11:30 a.m., 1:30 - 3 p.m.

9 - 11:30 am.,1:30 - 3 p.m.

9 - 11:30 am.,1:30 - 3 p.m.

9 - 11:30 am.,1:30 - 3 p.m.

9 - 11:30 am.,1:30 - 3 p.m.

Shanghai Future Exchange The Shanghai Futures Exchange (SHFE) is one of the

largest commodities markets in China. The exchange lists contracts in steel, copper, aluminum, natural rubber, fuel oil, zinc and gold.

The Shanghai Futures Exchange (SHFE) was formed from the amalgamation of the Shanghai Metal Exchange, Shanghai Foodstuffs Commodity Exchange, and the Shanghai Commodity Exchange in December 1999.

It is a non-profit-seeking incorporated body regulated by the China Securities Regulatory Commission.

It currently trades futures contracts in copper, aluminium, zinc, natural rubber, fuel oil, and gold.

Types of ContractsCommodity Copper

Cathode Futures

Aluminum Futures

Natural Rubber Futures

Fuel Oil Futures

Zinc Futures

Gold Futures

Steel Wire Rod Futures

Steel Rebar Futures

Settlement Physically Delivered

Physically Delivered

Physically Delivered

Physically Delivered

Physically Delivered

Physically Delivered

Cash Settled

Cash Settled

Contract Size

5 ton/lot 5 ton/lot 5 ton/lot 10 ton/lot 5 ton/lot 1 kg/lot 10 ton/lot 10 tons/lot

Pricing Unit 5 yuan (RMB)

5 yuan (RMB)

5 yuan (RMB)

10 yuan (RMB)

5 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

Tick Value 10 yuan (RMB)

10 yuan (RMB)/ton

5 yuan (RMB)/ton

10 yuan (RMB)

5 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

10 yuan (RMB)

Contract Month

January to December

January to December

Jan, Mar, Apr, May, Jun, Jul, Aug, Sep, Oct, Nov.

Jan to Dec (Except Spring Festival)

January to December

January to December

January to December

January to December

Trading Hours

9:00 am to 11:30 am, 1:30 pm to 3:00 pm

9:00 am to 11:30 am, 1:30 pm to 3:00 pm

9:00 am to 11:30 am, 1:30 pm to 3:00 pm

9:00 am to 11:30 am, 1:30 pm to 3:00 pm

9:00 am to 11:30 am, 1:30 pm to 3:00 pm

9:00 am to 11:30 am, 1:30 pm to 3:00 pm

9:00 am to 11:30 am, 1:30 pm to 3:00 pm

9:00 am to 11:30 am, 1:30 pm to 3:00 pm

CME group.

CME Group Inc. (Chicago Mercantile Exchange) is one of the largest options and futures exchanges.

In 2014, it gained regulatory approval to open a derivatives exchange in London

it also owns the Dow Jones stock and financial indexes, and CME Clearing Services, which provides settlement and clearing of exchange trades.

The corporation was formed by the 2007 merger of theChicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT).

On March 17, 2008, CME Group announced it had acquired NYMEX Holdings, Inc., the parent company of the New York Mercantile Exchange and Commodity Exchange, Inc (COMEX). The acquisition was formally completed on August 22, 2008.

 The four exchanges now operate as designated contract markets (DCM) of the CME Group.

exchange

Asset Class Product Product Code

Start Period

End Period Initial Maintenance Initial V

ol. ScanMaint. Vol. Scan

• About This Report

NYM AGRICULTURE NYMEX COCOA CJ 09/2014

05/2016

880 USD 800 USD 0.055 0.05

Performance Bonds, also known as margins, are deposits held at CME Clearing to ensure that clearing members can meet their obligations to their customers and to CME Clearing. Performance bond requirements vary by product and market volatility

Initial margin is the margin that market participants must pay when they initiate their position with their clearing firm whereas maintenance margin is the minimum level at which market participants must keep in their account, or "maintain" in their account over time.

Coco futures contract.Product Symbol CJveaasd CME Globex, CME ClearPort

Hours(All Times are New York Time/ET)

CME Globex:

Sunday – Friday 6:00 p.m. – 5:15 p.m. (5:00 p.m. – 4:15 p.m. Chicago Time/CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT)

CME ClearPort:

Sunday – Friday 6:00 p.m. – 5:15 p.m. (5:00 p.m. – 4:15 p.m. Chicago Time/CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT)

Contract Size 10 metric tonsPrice Quotation U.S. Dollars and Cents per tonMinimum Fluctuation $1.00 per tonTermination of Trading Trading terminates on the day immediately preceding the first

notice day of the corresponding trading month of Cocoa futures at ICE Futures U.S.

Listed Contracts Trading is conducted in the March, May, July, September, and December cycle for the next 23 months.

Settlement Type FinancialSettlement Procedure;;kjjj Daily NYMEX Softs Settlement Procedure (PDF)

Final NYMEX Cocoa Futures Settlement Procedure (PDF)Position Limits NYMEX Position LimitsRulebook Chapter 930Exchange Rule These contracts are listed with, and subject

to, the rules and regulations of NYMEX.

Ticker Symbols for Futures Contracts Futures tickers are a little different from stocks.

Each futures market has a ticker symbol that is followed by symbols for the contract month and the year. For example, crude oil futures have a ticker symbol - CL. The complete ticker symbol for December 2007 Crude Oil Futures would be - CLZ7.

The “CL” stands for the underlying futures contract. The “Z” stands for a December delivery month. (F=Jan, G=Feb, H=Mar, J=Apr, K=May, M=June, N=July, Q=Aug, U=Sep, V=Oct, X=Nov, Z=Dec) The “7” stands for the year – 2007.