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INTRODUCTION:

COMMODITY:

A commodity is some good for which there is demand, but which is supplied

without qualitative differentiation across a market. It is fungible, i.e. the same no matter

who produces it. Examples are petroleum, notebook paper, milk or copper.

In contrast, one of the characteristics of a commodity good is that its price is

determined as a function of its market as a whole. Well-established physical commodities

have actively traded spot and derivative markets. Generally, these are basic resources and

agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans,

soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft

commodities are goods that are grown, while hard commodities are the ones that are

extracted through mining.

DEFINITION:

A physical substance, such as food, grains, and metals, which is

interchangeable with another product of the same type, and which investors buy or sell,

usually through futures contracts. The price of the commodity is subject to supply and

demand. Risk is actually the reason exchange trading of the basic agricultural products

began. For example, a farmer risks the cost of producing a product ready for market at

sometime in the future because he doesn't know what the selling.

COMMODITY MARKET:

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Indian markets have recently thrown open a new avenue for retail investors

and traders to participate commodity derivatives. For those who want to diversify their

portfolios beyond shares, commodities bonds and real estate are the best options.

The retail investor could have done very little to actually invest in commodities such as

gold and silver or oilseeds in the future market. This was nearly impossible in

commodities except for gold and silver as there was practically no retail avenue for

pumping in commodities. However, with the setting up of three multi-commodity

exchanges in the country, retail investors can now trade in commodity futures without

having physical stocks.

Commodities actually offer immense potential to become a separate asset class

for market investors, arbitragers and speculators. Retail investors, who claim to

understand the equity markets, may find commodities an unfathomable market. But

commodities are easy to understand as far as fundamentals of demand and supply are

concerned. Retail investors should understand the risks and advantages of trading in

commodities futures before taking a leap. Historically, pricing in commodity futures has

been less volatile compared with equity and bonds, thus providing an efficient portfolio

diversification option. In fact, the size of the commodities in India is also quite

significant. Of the countrys GDP of Rs.13,20,730 crore (Rs.13,207.3 billion),

commodities related ( and dependent) industries constitute about 58%.Currently, the

various commodities across the country clock an annual turnover of Rs.1,40,000 crore

( Rs.1,400 billion). With the introduction of futures trading, the size of the commodities

market grow many folds here on.

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NEED OF THE STUDY

As crude oil is the largest traded commodity in the global market.

In India also the commodity futures trading are gaining importance in the

markets.

Lack of awareness and understanding of future trading could be one of the reason

for the failure of commodity futures. So, there is need to bridge this knowledge

gap among the traders community..

Indian commodity market set for paradigm shift

Four licenses recently issued by Govt. of India to set-up National Online Multi

Commodity Exchanges to ensure a transparent price discovery and risk

management mechanism

List of commodities for futures trade increased from 11 in 1990 to over 100 in

2003

Reforms with regard to sale, storage and movement of commodities initiated

Shift from administered pricing to free market pricing WTO regime

Overseas hedging has been allowed in metals

Petro-products marketing companies have been allowed to hedge prices

Institutionalization of agriculture

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OBJECTIVES OF THE STUDY

A new energy is coursing through a very old industry. The century old commodities

market has been bitten by the futures bug and its throbbing opportunity of professionals

in research, business development and analysis.

At this juncture one can easily exploit a very good opportunity in this market

within short period.

To understand the basics of commodity market and to discover the emerging

prospects in the Indian commodity market

To empathize trading and settlement mechanism for commodities in Indian stock

exchange.

To know how exactly the commodities are traded through the trading desks and

what happens in the market.

To identify the working procedures in the commodity trading practices in India.

Study aims at understanding the governance and regulatory framework for

commodity derivatives exchanges, traders, investors and other participant

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SCOPE OF THE STUDY

Petroleum (L. petroleum, from Greek , literally "rock oil") or crude oil is a

naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of

various molecular weights, and other organic compounds, that are found in geologic

formations beneath the earth's surface.

In its strictest sense, petroleum includes only crude

oil, but in common usage it includes both crude oil and natural gas. Both crude oil and

natural gas are predominantly a mixture of hydrocarbons. Under surface pressure and

temperature conditions, the lighter hydrocarbonsmethane, ethane, propane and butane

occur as gases, while the heavier ones from pentane and up are in the form of liquids or

solids. However, in the underground oil reservoir the proportion which is gas or liquid

varies depending on the subsurface conditions.

An oil well produces predominantly crude oil, with some natural gas dissolved in It. The

hydrocarbons in crude oil are mostly alkanes, cycloalkanes and various aromatic

hydrocarbons while the other organic compounds containnitrogen, oxygen and sulfur, and

trace amounts of metals such as iron, nickel, copper and vanadium. The exact molecular

composition varies widely from formation to formation but the proportion of chemical

elements vary over fairly narrow limits as follws.

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RESEARCH METHODOLOGY

Most of the study is theoretical to understand the nuances of the commodity

market in past and present in India. The study is more applied in vital areas like pricing &

payoffs for the commodity derivatives and illustrations are provided to understand the

situations.

The language used in project report is more simplified & the lucid explanations are

provided where they are necessary.

The projects analytical approach is based on the solid understanding of market of

institutions. It applied models of exchanges price transmission, margin determination,

typical products like gold, cotton & silver. The analysis relied on statistical data

published by government and non-government institutions and results of articles and case

studies.

The first phase of the project report is mainly focused nitty-gritty of the commodity

markets, the second phase concentrated on the technical aspects of the commodity trading

and the final phase of the study is extended to legislature relating to commodity market in

India.

Source of data:

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Primary data:

The primary data for this study is collected from interviewing members of

Indiabulls.

Secondary data:

The data used in the project is secondary in nature and is collected from various web

Sites.

The data is collected from various news papers.

NCFM (NSE Study material).

www.mcxindia.com

Tools adopted:

Payoffs are used as a tool to make analyze.

REVIEW OF LITERATURE:

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ARTICLES:

FACTS AND FANTACIES ABOUT COMMODITY FUTURES:

GARY GORTON & K.GEERT ROUWENHORST, MARCH/APRIL 2006

Abstract:

For this study of the simple properties of commodity futures as an asset class, an equally

weighted index of monthly returns of commodity futures was constructed for the July

1959 through December 2004 period. Fully collateralized commodity futures historically

have offered the same return and Sharpe ratio as U.S. equities. Although the risk

premium on commodity futures is essentially the same as that on equities for the study

period, commodity futures returns are negatively correlated with equity returns and bondreturns. The negative correlation is the result, primarily, of commodity futures' different

behavior over a business cycle. Commodity futures are positively correlated with

inflation, unexpected inflation, and changes in expected inflation.

http://www.jstor.org/pss/4480744

Commodity Index Investing and Commodity Futures Prices

Hans R. Stoll

Vanderbilt University - Finance

Robert E. Whaley

Vanderbilt University - Owen Graduate School of Management

September 10, 2009

Abstract:

Recently, commodity index investing has come under attack. A Staff Report by the U.S.

Senate Permanent Subcommittee on Investigation (hereafter, the "subcommittee report")

"finds that there is significant and persuasive evidence to conclude that these

commodity index traders, in the aggregate, were one of the major causes of 'unwarranted

changes' - here increases - in the price of wheat futures contracts relative to the price of

wheat in the cash market". The purpose of this study is to provide a comprehensive

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evaluation of whether commodity index investing is a disruptive force not only in the

wheat futures market in particular but in the commodity futures market in general. We

conclude that: (a) commodity index investing is not speculation; (b) commodity index

rolls have little futures price impact, and inflows and outflows from commodity index

investment do not cause futures prices to change; and, (c) the failure of the wheat futures

price to converge to the cash price at the contracts expiration has not undermined the

futures contracts effectiveness as a risk management tool.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478195

3. FUTURES TRADING AND INVESTOR RETURNS: An Investigation ofCommodity Market Risk Premiums, by Katherine Dusak 1973 The University ofChicago Press.

Abstract:

The long-standing controversy over whether speculators in a futures market earn a risk

premium is analyzed within the context of the capital asset pricing model recently

developed by Sharpe, Lintner, and others. Under that approach the risk premium required

on a futures contract should depend not on the variability of prices but on the extent to

which the variations in prices are systematically related to variations in the return on total

wealth. The systematic risk was estimated for a sample of wheat, corn, and soybean

futures contracts over the period 1952 to 1967 and found to be close to zero in all three

cases. Average realized holding period returns on the contracts over the same period wereclose to zero.

The Optimal Approach to Futures Contract Roll in Commodity Portfolios

Tammam Mouakhar, Mathieu Roberge

To order reprints of this article, please contact Dewey Palmieriat dpalmieri@iijournals.com or 212-224-3675.

This article discusses the necessity of managing the futures contract roll andargues that most commodity index providers set futures rollover rules in an inefficientmanner. Generally, most index providers roll futures by replacing the next futurescontract to reach maturity with the subsequent futures contract to do so. Depending onthe curvature of the commodity futures term structure, such a practice might beacceptable or might lead to automatic losses. This article presents an optimal approachthat maximizes gains with a term structure in backwardation and minimizes losses with aterm structure in contango. The proposed approach is independent of the position held by

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the investor, i.e., it dictates the optimal way to roll a short or a long position. The benefitsof this approach are illustrated by comparing the performance using this approach to thatof the standard approach to rollover. The comparison is done both at the individualcommodity level and at the portfolio level. Results confirm the crucial importance ofhandling roll operations in commodity futures investing and show that an optimized

approach to roll could improve performance.

http://www.iijournals.com/doi/abs/10.3905/JAI.2010.12.3.051?journalCode=jai

What Can Be Said About the Rise and Fall in Oil Prices?

Victoria Saporta

Bank of England

Merxe Tudela

Bank of England - Market Infrastructure Division

Matt Trott

affiliation not provided to SSRN

Bank of England Quarterly Bulletin 2009 Q3 , SEP 28 ,2009.

Abstract:

The price of oil rose steadily between the middle of 2003 and the end of 2007, rose

further and more rapidly until mid-2008 and fell sharply until the end of that year.

Commentators agree that a significant part of the increase in the oil price over that period

was due to rapid demand growth from emerging markets, but there are substantialdifferences of view about the relative importance of other factors, and limited work thus

far in explaining the large fall in oil prices in the second half of 2008. The purpose of this

article is to analyse the main explanations for the rise and fall in oil prices in the five

years until the end of 2008. It argues that shocks to oil demand and supply, coupled with

the institutional factors of the oil market, are qualitatively consistent with the

direction of price movements, although the magnitude of the rise and subsequent fall

during 2008 is more difficult to justify. The available empirical evidence suggests that

financial flows into oil markets have not been an important factor over the period as a

whole. Nonetheless, one cannot rule out the possibility that some part of the sharp rise

and fall in the oil price in 2008 might have had some of the characteristics of an asset

price bubble.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1479503

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INDUSTRY PROFILE:

Indian markets have recently thrown open a new avenue for retail investors and

traders to participate commodity derivatives. For those who want to diversify their

portfolios beyond shares, commodities bonds and real estate are the best options.

The retail investors could have done very little to actually invest in commodities such as

gold and silver or oilseeds in the futures market. This was nearly impossible in

commodities except for gold and silver as there was practically no retail avenue for

pumping in commodities.

However, with the setting up of three multi-commodity exchanges in the country, retail

investors can now trade in commodity futures without having physical stocks!

Commodities actually offer immense potential to become a separate asset

class for market survey investors, arbitrageurs and speculators. Retail investors, who

claim to understand the equity markets, may find commodities an unfathomable market.

But commodities are easy to understand as far as fundamentals of demand and supply are

concerned. Retail investors should understand the risks and advantages of trading in

commodities futures before taking a leap. Historically, pricing in commodities futures

has been less volatile compared with equity and bonds, thus providing an efficient

portfolio diversification option.

In fact, the size of the commodities markets in India is also quite significant. Of

the countrys GDP of Rs.13,20,730 crore( Rs.13,207.3 billion), commodities related ( and

dependent) industries constitute about 58 per cent.

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Currently, the various commodities across the country clock an annual turnover of

Rs.1,40,000 crore ( Rs.1,400 billion). With the introduction of futures trading, the sizes

of the commodities market grow many folds here on.

Like any other market, the one for commodity futures plays a valuable role in

information pooling and risk sharing. The market mediates between buyers and sellers of

commodities, and facilitates decisions related to storage and consumption of

commodities. In the process, they make the underlying market more liquid.

NEED OF COMMODITY MARKET IN INDIA:

Achieving hedging efficiency is the main reason to opt for futures contracts. For

instance, in February, 2007, India had to pay $ 52 per barrel more for importing oil than

what they had to pay a week ago. The utility of a futures contact for hedging or risk

management purpose parallel or near-parallel relationship between the spot and futures

prices over time. In other words, the efficiency of a futures contract for hedging

essentially envisages that the prices in the physical and futures markets move in close

union not only in the same direction, but also by almost the same magnitude, so that

losses in one market are offset by gains in the other.

Theoretically ( and ideally), in a perfectly competitive market with surplus supplies

and abundant stocks round the year, the futures price will exceed the spot price by the

cost of storage till the maturity of the futures contract. But such storage cost declines as

the contract approaches maturity, thereby reducing the premium or contango commanded

by the futures contract over the spot delivery over its life and eventually becomes zero

during the delivery month when the spot and futures prices virtually converge. The

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efficiency of a futures contract for hedging depends on the prevalence of such an ideal

price relationship between the spot and futures markets.

ABOUT THE COMMODITIES EXCHANGES:

A brief description of commodity exchanges are those which trade in particular

commodities, neglecting the trade of securities, stock index futures and options etc.,

In the middle of 19th century in the United States, businessmen began organizing

market forums to make the buying and selling of commodities easier. These central

market places provided a place for buyers and sellers to meet, set quality and quantity

standards, and establish rules of business.

The major commodity markets are in the United Kingdom and in the USA. In

India there are 25 recognized future exchanges, of which there are three national level

multi-commodity exchanges. After a gap of almost three decades, Government of India

has allowed forward transactions in commodities through Online Commodity Exchanges,

a modification of traditional business known as Adhat and Vayda Vyapar to facilitate

better risk coverage and delivery of commodities.

THE THREE EXCHANGES ARE:

National Commodity & Derivatives Exchange Limited ( NCDEX)

Multi Commodity Exchange of India Limited ( MCX)

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National Multi-Commodity Exchange of India Limited ( NMCEIL)

All the exchanges have been set up under overall control of Forward Market

Commission (FMC) of Government of India.

National Commodity & Derivatives Exchanges Limited ( NCOEX):

National Commodity & Derivatives Exchanges Limited (NCDEX) located in

Mumbai is a public limited company incorporated on April 23, 2003 under the

Companies Act, 1956 and had commenced its operations on December 15, 2003. This is

the only commodity exchange in the country promoted by national level institutions. It is

promoted by ICICI Bank Limited, Life Insurance Corporation and National Bank for

Agriculture and Rural Development (NABARD) and National Stock Exchange of India

Limited (NSE). It is a professionally managed online multi commodity exchange.

NCDEX is regulated by Forward Market Commission and is subjected to various laws of

the land like the Companies Act, Stamp Act, Contracts Act., Forward Commission

( Regulation) Act and * various other legislations.

Multi Commodity Exchange of India Limited ( MCX):

Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX),

is an independent and de-mutualised exchange with a permanent recognition from

Government of India. Key shareholders of MCX are Financial Technologies ( India)

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London international financial futures exchange (life) 1979

Tokyo commodity exchange (tocom) 1984

Shanghai metal exchange (shme)

Dahlian commodity exchange (dce) 1993

EMERGING TRENDS IN COMMODITY MARKET IN INDIA:

Commodity markets have existed in India for a long time, below Table gives the

list of registered commodities exchanges in India. Above Table gives the total

annualized volumes on various exchanges.

While the implementation of the Kara committee recommendations were rather

slow, today, the commodity derivative market in India seems poised for a transformation.

National level commodity derivatives exchanges seem to be the new phenomenon. The

Forward Markets Commission accorded in principle approval for the following national

level multi commodity exchanges. The increasing volumes on these exchanges suggest

that commodity markets in India seem to be a promising game.

National Board of Trade:

Multi Commodity Exchange of India

National Commodity & Derivatives Exchanges of India Ltd.,

Commodity Exchange Products

National board of trade, Indore Soya, mustard

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National multi commodity exchange, Ahmedabad Multiple

Ahmedabad commodity exchange Castor, cotton

Rajadhani Oil & Oil seeds Mustard

Vijai Beopar Chamber Ltd., Muzzaffarnagar Gur

Rajkot seeds, Oil & bullion exchange Castor, groundnut

IPSTA, Cochin Pepper

Chamber of commerce, Hapur Gur, mustard

Bhatinda Om and Oil Exchange Gur

Other ( mostly inactive)

Commodity Exchanges Registered in India:

Commodity Exchange Products Traded

Bhatinda Om & Oil Exchange Ltd., Gur

Sunflower Oil

Cotton ( Seed and Oil)

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The Bombay commodity Exchange

Ltd

Safflower ( Seed , Oil and Oil Cake)

Groundnut ( Nut and Oil)

Castor Oil, Castor seed

Sesamum ( Oil and Oilcake)

Rice bran, rice bran oil and oil cake

Crude palm oil

The Rajkot Seeds Oil & Bullion

Merchants Association Ltd.

Groundnut Oil, Castro Seed

The Kanpur Commodity Exchange

Ltd.,

Rapeseed / Mustard seed oil and cake.

Te Meeerut Agro commodities

Exchange Co., Ltd.

Gur

The Spices and Oilseeds exchange

Ltd., Sangli

Turmeric

Ahmedabad Commodities

Exchange Ltd

Cottonseed, castor seed

Vijay Beopar Chamber Ltd.,

Muzaffarnagr

Gur

India Pepper & Spice Trade

Association, Kochi

Pepper

Rajadhani Oils and Oil seeds

Exchange Ltd.,Delhi

Gur, Rapeseed / Mustard Seed Sugar Grade M

National Board of Trade, Indore

Rapeseed / Mustard Seed / Oil / Cake

Soyabean / Meal / Oil / Crude Palm Oil

The Chamber of Commerce, Hapur Gur, Rapeseed / Mustard seed

The East India Cotton Association,

Mumbai

Cotton

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The central India Commercial

Exchange Ltd Gwaliar

Gur

The east India Jute & Hessain

Exchange Ltd., Kolkata

Hessain, Sacking

First Commodity Exchange of India

Ltd., Kochi

Copra, Coconut Oil & Copra Cake

The Coffee Futures Exchange India

Ltd Bangalore

Coffee

National Multi Commodity

Exchange of India Ltd., /

Ahmedabad

Gur RBD Pamolien

Crude Palm Oil, Copra

Rapeseed / Mustard Seed, Soy Bean

Cotton ( Seed, Oil, Oil Cake)

Safflower ( Seed, Oil, and Oil cake)

Ground nut ( Seed, Oil, and Oil cake)

Sugar, Sacking, Gram

Coconut ( Oil and Oilcake)

Castor ( Oil and Oilcake)

Sesamum ( Seed, Oil, and Oil cake)

Linseed ( Seed, Oil, and Oil cake)

Rice Bran Oil, Pepper, Guar seed Aluminum

ingots, Nickel, tin Vanaspati, Rubber, Copper,

Zinc, Lead

National commodity & DerivativesExchange Limited

Soy Bean, Refined Soy oil, Mustard Seed

Expeller Mustard Oil

RBD Palmolein Crude Palm Oil

Medium staple cotton

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Long Staple Cotton

Gold, Silver

PARTICIPANTS IN COMMODITY MARKET:

For a market to succeed/ it must have all three kinds of participants hedgers,

speculators and arbitragers. The confluence of these participants ensures liquidity and

efficient price discovery on the market. Commodity markets give opportunity for all three

kinds of participants.

PARTICIPANS:

The following three board categories of participants in the derivatives market.

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HEDGERS:

Hedgers face risk associated with the price of an asset. They use futures or option market

to reduce or eliminate this risk.

SPECULATORS:

Speculators wish to bet on future movements in the of an asset. Futures and options

contracts can give them an extra leverage; that is, they can increase both potential gains

and potential losses in a speculative venture.

ARBITRAGERS:

Arbitragers are in business to take of a discrepancy between prices in two different

market, if, for instant, they see the futures price of an asset getting out of line with the

cash price, they will take offsetting position in thetwo markets to lock in a profit.

HEDGING:

Many participants in the commodity futures market are hedgers. The use the

futures market to reduce a particular risk that they face. This risk might relate to the price

of wheat or oil or any other 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.

What it does however is that it makes the outcome more certain. Hedgers could be

government institutions, private corporations like financial institutions, trading

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companies and even other participants in the value chain, for instance farmers, extractors,

ginners, processors etc., who are influenced by the commodity prices.

BASIC PRINCIPLES OF HEDGING:

When an individual or a company decides to use the futures markets to hedge a risk, the

objective is to take a position that neutralizes the risk as much as possible. Take the case

of a company that knows that it will gain Rs.1,00,000 for each 1 rupee increase in the

price of a commodity over the next three months and will lose Rs.1,00,000 for each 1

rupee decrease in the price of a commodity ovez the same period. The hedge, the

company should take a short futures position that is designed to offset this risk.

TheFutures position should lead to a loss of Rs.1,00,000a for each 1 rupees increase in

the price of the commodity over the next three months and a gain of Rs.1,00,000 for each

1 rupee decrease in the price during this period. If the price of the commodity goes down,

the gain on the futures position offsets the loss on the commodity.

HEDGE RATIO:

Hedge ratio is the ratio of the size of position taken in the futures contracts to the

size of the exposure in the underlying asset. So far in the examples we used, we assumed

that the hedger would take exactly the same amount of exposure in there futures contract

as in the underlying asset. For example, if the hedgers exposure in the underlying was to

the extent of 11 bales of cotton, the futures contracts entered into were exactly for this

amount of cotton. We were assuming here that the optimal hedge ratio is one. In

situations where the underlying asset in which the hedger has an exposure is exactly the

same as the asset underlying the futures contract he uses, and the spot and futures market

are perfectly correlated, a hedge ratio of one could be assumed. In all other cases, a

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hedge ratio of one may not be optimal. Below equation gives the optimal hedge ratio,

one that minimizes the variance of the hedgers position.

Where:

A C*. = Change in spot price, S, during a period of time equal to the life of the

hedge

AF = Change in futures price, F, during a period of time equal to the life of the hedge

deviation of AS aF: = Standard deviation of AF

Coefficient of correlation between as and AF h = hedge ratio

ADVANTAGES OF HEDGING :

Besides the basic advantage of risk management/hedging also has other

advantages:

1. Hedging stretches the marketing period. For example, a livestock feeder does

not have to wait until his cattle are ready to market before he can self them.

Them futures market permits him to sell futures contracts to establish the

approximate sale price at any time between the time he buys his calves for

feeding and the time the fed cattle are ready to market, some four to six

months later. He can take advantage of good prices even though the cattle

are not ready for market.

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2. Hedging protects inventory values. For example, a merchandiser with a

large, unsold inventory can sell futures contracts that will protect the value of

the inventory, even if the price of the commodity drops.

Hedging permits forward pricing of products. For example, a jewelry manufacturer can

determine the cost for gold, silver or platinum by buying a futures contract, translate that

to a price for the finished products, and make forward sales to stores at firm prices.

Having made the forward sales, the manufacturer can use his capital to acquire only as

much gold, silver, or platinum as may be needed to make the products that will fill its

orders.

SPECULATION :

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.

The commodities futures markets provide speculators with an easy mechanism to

speculate on the price of underlying commodities.

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To trade commodity futures on the NCDEX, a customer must open a futures

trading account with a commodity derivatives broker. Buying futures simply involves

putting in the margin money. This enables futures traders to take a position in the

underlying commodity without having to actually hold that commodity. With the

purchase of futures contract on a commodity, the holder essentially makes a legally

binding promise or obligation to buy the underlying security at some point in the future

(the expiration date of the contract). We look here at how the commodity futures markets

can be used for speculation.

Today a speculator can take exactly the same position on gold by using gold futures

contracts. Let us see how this works. Gold trades at Rs.6000 per 10 gms and three-

months gold futures trades at Rs.6150. Tables 7.3 gives the contract specifications for

gold futures. The unit of trading is 100 gms and the delivery unit for the gold futures

contract on the NCDEX is 1 kg. He buys one kg of gold futures which have a value of

Rs.6,15,000. Buying an asset in the futures markets only require making margin

payments. To take this position, he pays a margin of Rs.1,20,000. Three months later

gold trades at Rs.6400 per10 gms. As we know, on the day of expiration, the futures

price converges to the spot Price (else there would be a risk-free arbitrage opportunity).

He closes his long futures position at Rs.64,000 in the process making a profit of

Rs.25,000 on an initial margin investment of Rs.1,20,000. This works out to an annual

return of 83 percent. Because of the leverage they provide, commodity futures form an

attractive tool for speculators.

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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, involves the

simultaneous purchase and sale of the same or essentially similar security in two different

markets for advantageously different prices. The buying cheap and swelling expensive

continues till prices in the two markets reach equilibrium. Hence, arbitrage helps to

equalize prices and restore market efficiency.

F = (S+U)eeT

Where:

Cost of financing (annualized)

T = Time till expiration

U = present value of all storage costs.

REGULATORY FRAMEWORK FOR COMMODITY TRADING IN INDIA:

At present there are three tiers of regulations of forward/futures trading system in

India, namely, government of India, Forward Markets Commission (FMC) and

commodity exchanges. The need for regulation arises on account of the fact that the

benefits of futures markets accrue in competitive conditions.

Proper regulation is needed to create competitive conditions. In the absence of

regulation, unscrupulous participants could use these leveraged contracts for

manipulating prices. This could have undesirable influence on the spot prices, thereby

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affecting interests of society at large. Regulation is also needed to ensure that the market

has appropriate risk management system. In the absence of such a system, a major

default could create a chain reaction.

The resultant financial crisis in a futures market could create systematic risk.

Regulation is also needed to ensure fairness and transparency in trading, clearing,

settlement and management of the exchange so as to protect and promote the interest of

various stakeholders, particularly non-member users of the market.

BRIEF ABOUT THE DERIVATIVES:

The emergence of the market for derivatives products, most notably forward, futures and

options, can be tracked back to the willingness of risk-averse economic to guard

themselves against uncertainties arising out of fluctuations in asset prices. By their very

nature, the financial markets are market by a very high degree of volatility. Through the

use of derivative products, it is possible to partially or fully transfer price risk by locking-

in asset prices. As instruments of risk management, these generally do not influence the

fluctuations in the underlying asset price. However, by locking-in asset prices, derivative

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product minimizes the impact of fluctuations in asset prices on the profitability and cash

flow situated of risk-averse investors.

Derivatives are risk management instrument instruments, which derive their value from

an underlying asset. The underlying asset can be bullion, index, share, interest, etc..

Banks, securities firms, companies andinvestors to hedge risk, to gain access to cheaper

money and to make profit, use derivatives. Derivatives are likely to grow even at a faster

rate in future.

FUNCTION OF DERIVATIVES MARKETS:

The following are the various functions that are performed by the derivatives markets.

They are:

Prices in an organized derivatives market reflect the perception of market

participants about the future and lead the price of underlying to the perceived future level.

Derivatives market helps to transfer risks from those who have them but

may not like them to those who have an appetite for them.

Derivatives trading acts as a catalyst for new entrepreneurial activity.

Derivatives markets help increase saving and investment in long run.

TYPES OF DERIVATIVES:

The following are the various types of derivatives. They are:

FORWARDS:

A forward contract is a customized contract between two entities, where settlement takes place

on a specific date in the future at todays pre-agreed price.

FUTURES:

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A futures contract is an agreement between two parties to buy or sell an asset in a certain time

at a certain price, they are standardized and traded on exchange.

OPTIONS:

Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to

buy a given quantity of the underlying asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying

asset at a given price on or before a given date.

WARRANTS:

Options generally have lives of up to one year; the majority of options traded on options

exchanges having a maximum maturity of nine months. Longer-dated options are called

warrants and are generally traded over-the counter.

LEAPS:

The acronym LEAPS means long-term Equity Anticipation securities. These are options

having a maturity of up to three years.

BASKETS:

Basket options are options on portfolios of underlying assets. The underlying asset is usually a

moving average of a basket of assets. Equity index options are a form of basket options.

SWAPS:

Swaps are private agreements between two parties to exchange cash floes in the future

according to a prearranged formula. They can be regarded as portfolios of forward contracts.

The two commonly used Swaps are:

INTRODUCTION TO FUTURES AND OPTIONS

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In recent years, derivatives have become increasingly important in the field of finance.

While futures and options are now actively traded on many exchanges, forward contracts

are popular on the OTC market. In this chapter we shall study in detail these three

derivative contracts.

FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One 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.

The other party assumes a short position and agrees to sell the asset on the same date for

the same price. Other contract details like delivery date, price and quantity are negotiated

bilaterally by the parties to the contract. The forward contracts are normally traded

outside the exchanges.

LIMITATIONS OF FORWARD MARKETS:

Forward markets world-wide are afflicted by several problems:

Lack of centralization of trading,

Liquidity, and

Counter party risk

INTRODUCTION TO FUTURES

Futures markets were designed to solve the problems that exist in forward markets. A

futures contract is an agreement between two parties to buy or sell an asset at a certain

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time in the future at a certain price. But unlike forward contracts, the futures contracts are

standardized and exchange traded. To facilitate liquidity in the futures contracts, the

exchange specifies certain standard features of the contract. A futures contract may be

offset prior to maturity by entering into an equal and opposite transaction. More than

99% of futures transactions are offset this way.

DISTINCTION BETWEEN FUTURES AND FORWARDS

Forward contracts are often confused with futures contracts. The confusion is primarily because

both serve essentially the same economic functions of allocating risk in the presence of future

price uncertainty. However futures are a significant improvement over the forward contracts as

they eliminate counterparty risk and offer more liquidity. Table 3.1 lists the distinction between

the two

DEFINITION: A Futures contract is an agreement between two parties to buy or sell an asset a

certain time in the future at a certain price. To facilitate liquidity in the futures contract, the

exchange specifies certain standard features of the contract.

Quantity and Quality of the underlying of the underlying.

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The date and the month of delivery

The units of price quotations and minimum price change

Location of settlement

FEATURES OF FUTURES:

Futures are highly standardized.

The contracting parties need not pay any down payments.

Hedging of price risks.

They have secondary markets to.

TYPES OF FUTURES:

On the basis of the underlying asset they derive, the futures are divided into two types:

1. Stock futures:

2. Index futures:

PARTIES IN THE FUTURES CONTRACT:

There are two parties in a future contract, the buyer and the seller. The buyer of the futures

contract is one who is LONG on the futures contract and the seller of the futures contract is who

is SHORT on the futures contract.

DEFINITION:

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Derivative is a product whose value is derived from the value of an underlying asset in a

contractual manner. The underlying asset can be equity, forex, commodity or any other asset.

1) Securities Contracts (Regulation) Act, 1956 (SCR Act) defines

derivative to secured or unsecured, risk instrument or contract for differences or any other

form of security.

2) A contract which derives its value from the prices, or index of prices, of

underlying securities.

Emergence of financial derivative products

Derivative products initially emerged as hedging devices against fluctuations in commodity

prices, financial derivatives came into spotlight in the post-1970 period due to growing

instability in the financial markets. However, since their emergence, these products have

become very popular and by 1990s, they accounted for about two-thirds of total transactions in

derivative products. In recent years, the market for financial derivatives has grown

tremendously in terms of variety of instruments available, their complexity and also turnover.

Even small investors find these useful due to high correlation of the popular indexes with

various portfolios and ease of use.

RULES GOVERNING COMMODITY DERIVATIVES EXCHANGES:

The trading of commodity derivatives on the NCDEX is regulated by Forward

Markets Commission (FMC). Under the Forward Contracts (Regulation) Act, 1952,

forward trading in commodities notified under section 15 of the Act can be conducted

only on the exchanges, which are granted recognition by the central government

(Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public

Distribution). All the exchanges, which deal with forward contracts, are required to

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obtain certificate of registration from the FMC Besides, they are subjected to various

laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission

(Regulation) Act and various other legislations, which impinge on their working.

Forward Markets Commission provides regulatory oversight in order to ensure

financial integrity (i.e. to prevent systematic risk of default by one major operator or

group of operators), market integrity (i.e. to ensure that futures prices are truly aligned

with the prospective demand and supply conditions) and to protect and promote interest

of customers/ nonmembers. It prescribes the following regulatory measures:

1. Limit on net open position as on close of the trading houses. Some times

limit is also imposed on intra-day net open position. The limit is imposed

operator-wise/ and in some cases, also member wise.

2. Circuit filters or limit on price fluctuations to allow cooling of market in

the event of abrupt upswing or downswing in prices.

3. Special margin deposit to be collected on outstanding purchases or sales

when price moves up or down sharply above or below the previous day

closing price. By making further purchases/sales relatively costly, the

price rise or fall is sobered down. This measure is imposed only on the

request of the exchange.

4. Circuit breakers or minimum/maximum prices. These are prescribed to

prevent futures prices from failing below as rising above not warranted by

prospective supply and demand factors. This measure is also imposed on

the request of the exchange.

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5. Skipping trading in certain derivatives of the contract closing the market

for a specified period and even closing out the contract. These extreme

are taken only in emergency situations.

Besides these regulatory measures, the F.C) R) Act provides that a clients position

cannot be appropriated by the member of the exchange, except when a written consent is

taken within three days time. The FMC is persuading increasing number of exchanges to

switch over to electronic trading, clearing and settlement which is more

customer/friendly. The FMC has also prescribed simultaneous reporting system for the

exchanges following open out cry system.

These steps facilitate audit trail and make it difficult for the members to indulge in

malpractice like trading ahead of clients, etc. The FMC has also mandated all the

exchanges following open outcry system to display at a prominent place in exchange

premises, the name, address, telephone number of the officer of the commission who can

be contacted for any grievance. The website of the commission also has a provision for

the customers to make complaint and send comments and suggestions to the FMC.

Officers of the FMC have been instructed to meet the members and clients on a random

basis, whenever they visit exchanges, to ascertain the situation on the ground, instead of

merely attending meetings of the board of directors and holding discussions with the

office bearers.

RULES GOVERNING INTERMEDIARIES:

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In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and

rules framed there under, exchanges are governed by its own rules and bye

laws(approved by the FMC). In this section we have brief look at the important

regulations that govern NCDEX. For the sake of convenience/these have been divided

into two main divisions pertaining to trading and clearing. The NCDEX provides an

automated trading facility in all the commodities admitted for dealings on the spot market

and derivative market. Trading on the exchange is allowed only through approved

workstation(s) located at locations for the office(s) of a trading member as approved by

the exchange. If LAN or any other way to other workstationsat any place connects an

approved workstation of a trading Member it shall require an approval of the exchange.

Each trading member is required to have a unique identification number which is

provided by the exchange and which will be used to log on (sign on) to the trading

system. A trading member has a non-exclusive permission to use the trading system as

provided by the exchange in the ordinary course of business as trading member. He does

not have any title rights or interest whatsoever with respect to trading system/its facilities/

software and the information provided by the trading system.

For the purpose of accessing the trading system/the member will install and use

equipment and software as specified by the exchange at his own cost. The exchange has

the right to inspect equipment and software used for the purposes of accessing the trading

system at any time. The cost of the equipment and software supplied by the

exchange/installation and maintenance of the equipment is borne by the trading member

and users Trading members are entitled to appoint, (subject to such terms and

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conditions/as may be specified by the relevant authority) from time to time Authorized

persons and Approved users.

Trading members have to pass a petrifaction program/which has been prescribed

by the exchange. In case of trading members/other than individuals or sole

proprietorships/such certification program has to be passed by at least one of their

directors/employees/partners/members of governing body.

Each trading member is permitted to appoint a certain number of approved users

as notified from time to time by the exchange. The appointment of approved users is

subject to the terms and conditions prescribed by the exchange. Each approved user is

given a unique identification number through which he will have access to the trading

system. An approved user can access the trading system through a password and can

change the password from time to time.

The trading member or its approved users are required to maintain complete

secrecy of its password. Any trade or transaction done by use of password of any

approved user of the trading member, will be binding on such trading member.

Approved user shall be required to change his password at the end of the password expiry

period.

INDIA IN WORLD CRUDE OIL INDUSTRY:

Petroleum and Natural Gas; the recent exploration and production activities in the

country have led to a dramatic increase in the output of oil. The country currently

produces 35 million tones of crude oil, two-thirds of which is from offshore areas, and

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imports another 27 million tones. Refinery production in terms of crude throughput of

the existing refineries is about 54 million tones.

Natural gas production has also increased substantially in recent years, with the

country producing over 22,000 million cubic meters. Natural gas is rapidly becoming an

important source of energy and feedstock for major industries. By the end of the Eighth

Five-Year Plan, production was likely to reach 30 billion cubic metres.

FACTORS INFLUENCING CRUDE OIL MARKETS:

shortage of oil supplies

Taxation When oil taxes are raised, end consumers often mistakenly blame, the oil

producers, but it is really their own governments that are responsible.

Balance of demand and supply in the short term

Rate of investment in the longer term

Accidents

Bad weather

Increasing demand

Halting transport of oil from producers

Labour disputes.

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If traders in the oil market believe there will be a Jffirtage of oil supplies, they may

raise prices before a shortage occurs.

CAUSES OF LOW OIL PRICES:

Imbalance between supply and demand. If oil production rises faster than demand.

If the oil industry is unprofitable and discourages investors.

CAUSES OF HIGH OIL PRICES:

Shortage of oil supplies

Balance of demand and supply in the short term

Rate of investment in the longer term

If traders in the oil market believe there will be a shortage of oil supplies, they may

raise prices before a shortage occurs.

War, Natural disasters

CRUDE OIL RESERVES:

World crude oil reserves are estimated at more than one trillion barrels/of which

the 11 OPEC Member Countries hold more than 75 percent. OPECs Members currently

produce around 27 million to 28 million barrels per day of oil, or some 40 per cent of the

world total output, which stands at about 75 million barrels per day.

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Is the world running out of oil? Oil is a limited resource, so it may eventually run out,

although not for many years to come, OPECs oil reserves are sufficient to last

another 80 years at the current rate of production, while non-OPEC oil producers

reserves might last less than 20 years. The worldwide demand for oil is rising and

OPEC is expected to be an increasingly important source of that oil.

If we manage our resources well, use the oil efficiently and develop new fields,

then our oil reserves should last for many more generations to come.

USES OF CRUDE OIL:

Gasoline, petrol liquefied, petroleum gas (LPG), naphtha, kerosene, gas oil, fuel

oil, lubricants, asphalt(used in paving roads), naphtha, gas oil, ethane, ethylene,

propylene, butadiene, benzene, ammonia, methanol, plastics, synthetic fibers, synthetic

rubbers, detergents, chemical fertilizers.

EXCHANGES DEALING IN CRUDE FUTURES APART FROM MCX:

The New York Mercantile Exchange (NYMEX)

The International Petroleum Exchange of London (IPE)

The Tokyo Commodity Exchange (TOCOM)

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TRADING DAYS:

Theexchange operates on all days except Saturday and Sunday and on holidays

that it declares from time to time. Other than the regular trading hours, trading members

are provided a facility to place orders offline i.e. outside trading hours. These are stored

by the system but get traded only once the market opens for trading on the following

working day.

The types of order books, trade books, price limits, matching rules and other

parameters pertaining to each or all of these sessions is specified by the exchange to the

members via its circulars or notices issued from time to time. Members can place orders

on the trading system during these sessions, within the regulations prescribed by the

exchange as per these bye laws, rules and regulations, from time to time.

TRADING HOURS AND TRADING CYCLE:

The exchange announces the normal trading hours/open period in advance from

time to time. In case necessary, the exchange can extend or reduce the trading hours by

notifying the members. Trading cycle for each commodity/derivative contract has a

standard period, during which it will be available for trading.

CONTRACT EXPIRATION:

Derivatives contracts expire on a pre-determined date and time up to which the

contract is available for trading. This is notified by the exchange in advance. The

contract expiration period will not exceed twelve months or as the exchange may specify

from time to time.

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TRADING PARAMETERS:

The exchange from time to time specifies various trading parameters relating to

the trading system. Every trading member is required to specify the buy or sell orders as

either an open order or a close order for derivatives contracts. The exchange also

prescribes different order books that shall be maintained on the trading system and also

specifies various conditions on the order that will make it eligible to place it in those

books.

The exchange specifies the minimum disclosed quantity for orders that will be

allowed for each commodity/derivatives contract. It also prescribed the number of days

after which Good Till Cancelled orders will be cancelled by the system. It specifies

parameters like lot size in which orders can be placed, price steps in which shall be

entered on the trading system, position limits in respect of each commodity etc.

FAILURE OF TRADING MEMBER TERMINAL:

In the event of failure of trading members workstation and/ or the loss of access to

the trading system, the exchange can at its discretion undertake to carry out on behalf of

the trading member the necessary functions which the trading member is eligible for.

Only requests made in writing in a clear and precise manner by the trading member

would be considered. The trading member is accountable for the functions executed by

the exchange on its behalf and has to indemnity the exchange against any losses or costs

incurred by the exchange.

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TRADE OPERATIONS :

Trading members have to ensure that appropriate confirmed order instructions are

obtained from the constituents before placement of an order on the system. They have to

keep relevant records or documents concerning the order and trading system order

number and copies of the order confirmation slip/modification slip must be made

available to the constituents.

The trading member has to disclose to the exchange at the time of order entry

whether the order is on his own account or on behalf of constituents and also specify

orders for buy or sell as open or close orders. Trading members are solely responsible for

the accuracy of details of orders entered into the trading system including orders entered

on behalf of their constituents. Traders generated on the system are irrevocable and

blocked in 1. The exchange specifies from time to time the market types and the manner

if any, in which trade cancellation can be effected.

MARGIN REQUIREMENTS:

Subject to the provisions as contained in the exchange bye-laws and such other

regulations as may be in force, every clearing member/in respect of the trades in which he

is party to, has to deposit a margin with exchange authorities.The exchange prescribes

from time to time the commodities/derivatives contracts, the settlement periods and trade

types for which margin would be attracted.

The exchange levies initial margin on derivatives contracts using the concept of

Value at Risk (VaR) or any other concept as the exchange may decide from time to time.

The margin is charged so as to cover one-day loss that can be countered on the position

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on 99% of the days. Additional margins may be levied for deliverable positions, on the

basis of VaR from the expiry of the contract till the actual settlement date plus a mark-up

for default.

The margin has to be deposited with the exchange within the time notified by the

exchange. The exchange also prescribes categories of securities that would be eligible for

a margin deposit, as well as the method of valuation and amount of securities that would

be required to be deposited against the margin amount.

The procedure for refund/adjustment of margins is also specified by the exchange

from time to time. The exchange can impose upon any particular trading member or

category of trading member any special or other margin requirement. On failure to

deposit margin/s as required under this clause, the exchange/clearing house can withdraw

the trading facility of the trading member. After the pay-out, the clearing house releases

all margins.

UNFAIR TRADING PRACTICES:

No trading member should buy, sell, deal in derivatives contracts in a fraudulent manner,

or indulge in any unfair trade practices including market manipulation. This includes the

following; fi Effect, take part either directly or indirectly in transactions, which are likely

to have effect of artificially, raising or depressing the prices of spot/derivatives contracts.

Indulge in any act, which is calculated to create a false or misleading appearance

of trading, resulting in reflection of prices, which are not genuine.

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Buy, sell commodities/contract on his own behalf or on behalf of a person associated

with him pending the execution of the order of his constituent or of his company or

director for the same contract.

Delay the transfer of commodities in the name of the transferee. Indulge in

falsification of his books, accounts and records for the purpose of market

manipulation.

When acting as an agent, execute a transaction with a constituent at a price other than

the price at which it was executed on the exchange.

Either take opposite position to an order of a constituent or execute opposite orders

which he is holding in respect of two constituents except in the manner laid down by

the exchange.

CLEARING:

As mentioned earlier, National Securities Clearing Corporation Limited (NSCCL)

undertakes clearing of trades executed on the NCDEX, All deals executed on the

Exchange are cleared and settled by the trading members on the settlement date by the

trading members themselves as clearing members or through other professional clearing

members in accordance with these regulations/bye laws and rules of the exchange.

LAST DAY OF TRADING:

Last trading day for a derivative contract in any commodity is the date as

specified in the respective commodity contract. If the last trading day as specified in the

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respective commodity contract is a holiday, the last trading day is taken to be the

previous working day of exchange. On the expiry date of contracts, the trading members/

clearing members have to give delivery information as prescribed by the exchange from

time to time. If a trading member/clearing member fails to submit such information

during the trading hours on the expiry date for the contract/the deals have to be settled as

per the settlement calendar applicable for such deals, in cash-together with penalty as

stipulated by the exchange deals entered into through the exchange. The clearing

member cannot operate the clearing account for any other purpose.

RULES GOVERNING INVESTOR GRIEVANCES, ARBITRATION:

In matters where the exchange is a party to the dispute, the civil courts at Mumbai

have exclusive jurisdiction and in all other matters, proper courts within the area covered

under the respective regional arbitration center have jurisdiction in respect of the

arbitration proceedings falling/conducted in that regional arbitration center.

INFORMATION ABOUT COMMODITIES TRADING:

If you're looking to get into commodities trading, you should first understand what itmeans. Commodities are products that are bought, sold and usually not processed. Someexamples of commodities are financial investments and agricultural products. Foreign

currenciesAre also in that group.

A lot of products that used to trade locally have now expanded into the global market.

Thanks to technology, more money can be made by the global expansion. Many

countries, including the United States, have become one big melting pot for global

trading.

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When commodities first evolved, not a lot of people were using them. When people

found out that it was better to take a risk on this as opposed to stocks and bonds, more

people jumped on board. Now anyone can get involved in commodities trading.

When you're involved in a commodity transaction, it is set up through futures contracts.

Futures contracts are purchased and/or sold on the date specified for the future. A price is

put in place and the transaction is completed at a later time.

There are also contracts called spot contracts. These are contracts that are used for

transferred commodities. They get shifted when a contract is created then instead of a

future date. This type of contract can be used for a future contract after a specific time

period. The type of commodities investing can vary.

When you invest in commodities, you don't have to endure a lot of risks. That's whypeople like to invest in them. When you get an increase in commodities, it can offset any

losses you may have. The risks in commodities are minimal because you're investing in

different things. When you have contracts for later dates, you don't encounter a lot of

risks.

There is not a problem when you're watching how your commodities work out. Even

when stocks and other stuff aren't going so good, you can at least count on your

commodities to hang tough. Unlike stocks, you can tell how well commodities are going

to do. You should never compare stocks and bond with commodities because they are

two different entities. Plus, stocks and bonds are more volatile because of theiruncertainty in the daily market.

If you're not familiar with investing in commodities, you should find someone who is

knowledgeable in it. Commodity trading advisors can assist you on what to do in the

market. They will also let you know when it's time to get rid of that commodity.

When choosing an advisor, look at what you what to accomplish. After you've done that,

find someone who would be able to help you with your goals. You don't necessarily have

to go to a brick and mortar facility. Since people are so busy these days, it might be better

if you contact them by phone or e-mail first. Then you can set up a time to meet, if

necessary.

You can do other things besides trading in commodities. You can also make investments

using a diverse package of funds.

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With commodities, you are less likely to lose money than you would if you were strictly

investing in stocks and bonds. That's why it's important to diversify your money if you're

planning on creating a nice financial portfolio.

COMPANY PROFILE

Company History

India Infoline was originally incorporated on October 18, 1995 as Probity Research and

Services private limited at Mumbai under the Companies Act, 1956 with Registration No.

11 93797. It commenced operations as an independent provider of information, analysis

and research covering Indian businesses, financial markets and economy, to institutional

customers. It became a public limited company on April 28, 2000 and the name of the

Company was changed to Probity Research and Services Limited. The name of the

Company was changed to India Infoline.com Limited on May 23, 2000 and later to India

Infoline Limited on March 23, 2001.In 1999, it identified the potential of the Internet to

cater to a mass retail segment and transformed its business model from providing

information services to institutional customers to retail customers. Hence it launched its

Internet portal, www.indiainfoline.com in May 1999 and started providing news and

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market information, independent research, interviews with business leaders and other

specialized features. In May 2000, the name of the Company was changed to India

Infoline.com.Limited to reflect the transformation of business. Over a period of time, it

has emerged as one of the leading business and financial information services provider in

India. In the year 2000, it leveraged its position as a provider of financial information and

analysis by diversifying into transactional services, primarily for online trading in shares

and securities and online as well as offline distribution of personal financial products, like

mutual funds and RBI Bonds. These activities were carried on by its wholly owned

subsidiaries. Its broking services was launched under the brand name of 5paisa.com

through their subsidiary, India Infoline Securities Private Limited and www.5paisa.com,

the e-broking portal, was launched for online trading in July 2000. It combined

competitive brokerage rates and research, supported by Internet technology. Besides

investment advice from an experienced team of research analysts, they also offer real

time stock quotes, market news and price charts with multiple tools for technical analysis.

Acquisition of Agri Marketing Services Limited (Agri)

In March 2000, it acquired 100% of the equity shares of Agri Marketing Services

Limited, from their owners in exchange for the issuance 508,482 of its equity shares.

Agri was a direct selling agent of personal financial products including mutual funds,

fixed deposits, corporate bonds and post-office instruments. At the time of its acquisition,

Agri operated 32 branches in South and West India serving more than 30,000 customers

with a staff of, approximately 180 employees. After the acquisition, they changed the

company name to India Infoline.com Distribution Company Limited.

Management- India Infoline

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Mr. Nirmal Jain, Chairman& Managing Director, India Infoline Ltd.

Nirmal Jain, MBA (IIM, Ahmedabad) and a Chartered and Cost Accountant, founded

Indias leading financial services company India Infoline Ltd. in 1995, providing globally

acclaimed financial services in equities and commodities broking, life insurance and

mutual funds distribution, among others. Mr. Jain began his career in 1989 with

Hindustan Levers commodity export business, contributing tremendously to its growth.

He was also associated with Inquire-Indian Equity Research, which he co-founded in

1994 to set new standards in equity research in India.

Mr. R Venkataraman, Executive Director, India Infoline Ltd.

R Venkataraman, co-promoter and Executive Director of India Infoline Ltd., is a B. Tech

(Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA

(IIM Bangalore). He joined the India Infoline board in July 1999. He previously held

senior managerial positions in ICICI Limited, including ICICI Securities Limited, their

investment banking joint venture with J P Morgan of USA and with BZW and Taib

Capital Corporation Limited. He was also Assistant Vice President with G E Capital

Services India Limited in their private equity division, possessing a varied experience of

more than 16 years in the financial services sector.

The Board of Directors

Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline

Ltd. comprises:

Mr. Nilesh Vikamsey, Independent Director, India Infoline Ltd.

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Mr. Vikamsey, Board member since February 2005 - a practicing Chartered Accountant

and partner (Khimji Kunverji & Co., Chartered Accountants), a member firm of HLB

International, headed the audit department till 1990 and thereafter also handles financial

services, consultancy, investigations, mergers and acquisitions, valuations etc; an ICAI

study group member for Proposed Accounting Standard 30 on Financial Instruments

Recognition and Management, Finance Committee of The Chamber of Tax

Consultants (CTC), Law Review, Reforms and Rationalization Committee and

Infotainment and Media Committee of Indian Merchants Chamber (IMC) and Insurance

Committee and Legal Affairs Committee of Bombay Chamber of Commerce and

Industry (BCCI). Mr. Vikamsey is a director of Miloni Consultants Private Limited, HLB

Technologies (Mumbai) Private Limited and Chairman of HLB India.

Mr. Sat Pal Khattar, Non Executive Director, India Infoline Ltd.

Mr. Sat Pal Khattar, - Board member since April 2001 - Presidential Council of Minority

Rights member, Chairman of the Board of Trustee of Singapore Business Federation, is

also a life trustee of SINDA, a non profit body, helping the under-privileged Indians in

Singapore. He joined the India Infoline board in April 2001. Mr. Khattar is a Director of

public and private companies in Singapore, India and Hong Kong; Chairman of

Guocoland Limited listed in Singapore and its parent Guoco Group Ltd listed in Hong

Kong, a leading property company.

Mr. Kranti Sinha, Independent Director, India Infoline Ltd.

Mr. Kranti Sinha Board member since January 2005 completed his masters from

the Agra University and started his career as a Class I officer with Life Insurance

Corporation of India. He served as the Director and Chief Executive of LIC Housing

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Finance Limited from August 1998 to December 2002 and concurrently as the Managing

Director of LICHFL Care Homes (a wholly owned subsidiary of LIC Housing Finance

Limited). He retired from the permanent cadre of the Executive Director of LIC; served

as the Deputy President of the Governing Council of Insurance Institute of India and as a

member of the Governing Council of National Insurance Academy, Pune apart from

various other such bodies. Mr. Sinha is also on the Board of Directors of Hindustan

Motors Limited, Larsen & Toubro Limited, LICHFL Care Homes Limited, Gremach

Infrastructure Equipments and Projects Limited and Cinemax (India) Limited.

Mr. Arun K. Purvar, Independent Director, India Infoline Ltd.

Mr. A.K. Purvar Board member since March 2008 completed his Masters degree in

commerce from Allahabad University in 1966 and a diploma in Business Administration

in 1967. Mr. Purwar joined the State Bank of India as a probationary officer in 1968,

where he held several important and critical positions in retail, corporate and

international banking, covering almost the entire range of commercial banking operations

in his illustrious career. He also played a key role in co-coordinating the work for the

Bank's entry into the field of insurance. After retiring from the Bank at end May 2006,

Mr. Purwar is now working as Member of Board of Governors of IIM-Lucknow, joined

IIMIndore as a visiting professor, joined as a Hon.-Professor in NMIMS and he is also a

member of Advisory Board for Institute of Indian Economic Studies (IIES), Waseda

University, Tokyo, Japan. He has now taken over as Chairman of IndiaVenture Advisors

Pvt. Ltd., as well as IL & FS Renewable Energy Limited. He is also working as

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Independent Director in leading companies in Telecom, Steel, Textiles, Auto parts,

Engineering and Consultancy.

About Us

We are a one-stop financial services shop, most respected for quality of its advice,

personalized service and cutting-edge technology.

Vision

Our vision is to be the most respected company in the financial services space.

India Infoline Group

The India Infoline group, comprising the holding company, India Infoline Limited and its

wholly-owned subsidiaries, straddle the entire financial services space with offerings

ranging from Equity research, Equities and derivatives trading, Commodities trading,

Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI

bonds and other small savings instruments to loan products and Investment banking.

India Infoline also owns and manages the websites www.indiainfoline.com and

www.5paisa.com

The company has a network of 976 business locations (branches and sub-brokers) spread

across 365 cities and towns. It has more than 800,000 customers.

India Infoline Ltd

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the

Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a

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member of both the exchanges. It is engaged in the businesses of Equities broking,

Wealth Advisory Services and Portfolio Management Services. It offers broking services

in the Cash and Derivatives segments of the NSE as well as the Cash segment of the

BSE. It is registered with NSDL as well as CDSL as a depository participant, providing a

one-stop solution for clients trading in the equities market. It has recently launched its

Investment banking and Institutional Broking business.

India Infoline Media and Research Services Ltd.

The content services represent a strong support that drives the broking, commodities,

mutual fund and portfolio management services.

It undertakes equities research which is acknowledged by none other than Forbes as 'Best

of the Web' and 'a must read for investors in Asia'. India Infoline's research is available

not just over the internet but also on international wire services like Bloomberg (Code:

IILL), Thomson First Call and Internet Securities where India Infoline is amongst the

most read Indian brokers.

India Infoline Commodities Ltd.

India Infoline Commodities Pvt Limited is engaged in the business of commodities

broking. Our experience in securities broking empowered us with the requisite skills and

technologies to allow us offer commodities broking as a contra-cyclical alternative to

equities broking. We enjoy memberships with the MCX and NCDEX, two leading Indian

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commodities exchanges, and recently acquired membership of DGCX. We have a multi-

channel delivery model, making it among the select few to offer online as well as offline

trading facilities.

India Infoline Marketing & Services

India Infoline Marketing and Services Limited is the holding company of India Infoline

Insurance Services Limited and India Infoline Insurance Brokers Limited.

a) India Infoline Insurance Services Limited is a registered Corporate Agent with the

Insurance Regulatory and Development Authority (IRDA). It is the largest

Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is India's

largest private Life Insurance Company. India Infoline was the first corporate

agent to get licensed by IRDA in early 2001.

b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers

Limited is a newly formed subsidiary which will carry out the business of

Insurance broking. We have applied to IRDA for the insurance broking licence

and the clearance for the same is awaited. Post the grant of license, we propose to

also commence the general insurance distribution business.

India Infoline Investment Services Ltd.

Consolidated shareholdings of all the subsidiary companies engaged in loans and

financing activities under one subsidiary. Recently, Orient Global, a Singapore-based

investment institution invested USD 76.7 million for a 22.5% stake in India Infoline

Investment Services. This will help focused expansion and capital raising in the said

subsidiaries for various lending businesses like loans against securities, SME financing,

distribution of retail loan products, consumer finance business and housing finance

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business. India Infoline Investment Services Private Limited consists of the following

step-down subsidiaries.

(a) India Infoline Distribution Company Limited (distribution of retail loan products)

(b) Moneyline Credit Limited (consumer finance)

(c) India Infoline Housing Finance Limited (housing finance)

IIFL (Asia) Pte Ltd.

IIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated in

Singapore to pursue financial sector activities in other Asian markets. Further to

obtaining the necessary regulatory approvals, the company has been initially capitalized

at 1 million Singapore dollars.

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DATA ANALYSIS :

Crude Oil:

General Characteristics

Crude oil is a mixture of hydrocarbons that exists in a liquid phase in naturalunderground reservoirs. Oil and gas account for about 60 per cent of the totalworld's primary energy consumption.

Almost all industries including agriculture are dependent on oil in one way orother. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides,paints, perfumes, etc. are largely and directly affected by the oil prices.

Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil,residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleumcoke, asphalt and other products are obtained from the processing of crude and

other hydrocarbon compounds. The prices of crude are highly volatile. High oil prices lead to inflation that in turn

increases input costs; reduces non-oil demand and lower investment in net oilimporting countries.

Categories of Crude oil:

West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is39.6 degrees (making it a "light" crude oil), and it contains only about 0.24 percentof sulphur (making a "sweet" crude oil). WTI is generally priced at about a $2-4per-barrel premium to OPEC Basket price and about $1-2 per barrel premium to

Brent, although on a daily basis the pricing relationships between these can verygreatly.

Brent Crude Oil stands as a benchmark for Europe.

India is very much reliant on oil from the Middle East (High Sulphur). The OPEChas identified China & India as their main buyers of oil in Asia for several years tocome.

Crude Oil Units (average gravity)

1 US barrel = 42 US gallons.

1 US barrel = 158.98 liters.

1 tone = 7.33 barrels. 1 short ton = 6.65 barrels.

Note: barrels per tone vary from origin to origin.

Global Scenario

Oil accounts for 40 per cent of the world's total energy demand.

The world consumes about 76 million bbl/day of oil.58

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United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan(5.4 million bbl/d) are the top oil consuming countries.

Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002),of whichOPEC was 112 billion tones.

OPEC fact sheet:OPEC stands for 'Organization of Petroleum Exporting Countries'. It is an organization

of eleven developing countries that are heavily dependent on oil revenues as their mainsource of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait,Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

OPEC controls almost 40 percent of the world's crude oil.

It accounts for about 75 per cent of the world's proven oil reserves.

Its exports represent 55 per cent of the oil traded internationally.

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US Oil Price Controls - Bad Policy?

The rapid increase in crude prices from 1973 to 1981 would have been much less were it

not for United States energy policy during the post Embargo period. The US imposed

price controls on domestically produced oil. The obvious result of the price controls was

that U.S. consumers of crude oil paid about 50 percent mo