Summer Training Report

On

A STUDY OF COMMODITY MARKETIn Karvy Stock Broking Limited

Submitted in partial fulfillment of the requirement for the award ofBachelor graduate degree of

BACHELOR IN BUSINESS ADMINISTRATION

Under the supervision: Submitted by: Saket Verma

Mr. Amit Verma BBA 5th SEM.

KARVY Stock Broking Ltd. Uni. Regn. No.: 08-HS-4325

SONEPAT-131001(HARYANA)

FACULTY OF BUSINESS STUDIES, HINDU COLLEGE, SONEPAT

MAHARSHI DAYANAND UNIVERSITY

ROHTAK (HARYANA)

SESSION: 2010-2011

ACKNOWLEDGEMENT

Acknowledgements are a bit like acceptance speeches; predictable but from the heart

so here is some predictable prose direct from the heart.

I take this opportunity to express my sincere gratitude to “Karvy Stock Broking Ltd.” for

providing me an opportunity to undertake the study of bachelor in business

administration.

On the onset I would like to thank Mr. Amit Verma of Karvy Stock Broking Ltd. at

Sonipat Branch, who gave me the opportunity to work on this project which helped me

with immense learning.

I am grateful to Mr. Amit Verma, Mr. Nitin and Mr. Arun Who not only guided me, but

also supported and gave me required time and advice to complete the project.

The report would have been incomplete without the cooperation & support of my faculty

members and my friend (colleagues).

And lastly I would like to thanks to the staff of Karvy Stock Broking Ltd. who during my

stay in the office have made me feel a part of them and made my stay comfortable in the

office.

Saket Verma

PREFACE

The project study has been conducted in lieu of requirement laid down by MAHARSHI

DAYANAND UNIVERSITY, ROHTAK for the degree of BBA. Under this

requirement, every student is supposed to undergo summer training or to write a report in

an industrial or commercial organization. It enables the students to understand the

practical aspect of the conceptual studies learnt by them in the commerce subject. The

purpose of providing on the training to student is to supplement their academic

knowledge with practical knowledge and acquaint them with the intricate problem.

Which are faced while practices, which are not warranted under the law. On the training

enables the student to draw a via Media through which law can be implemented by

twisting the same in favour of the circumstances, without of course, violating the basis

spirit of law. Thus, the importance of providing on the training is immense and can’t be

under scared by any stretch of imagination.

DECLARATION

I, Saket Verma class BBA 5th SEM. of the HINDU COLLEGE, SONEPAT hereby

declare that the project entitled “A Study of Commodity Market” is an original work

and same has not been submitted to any other institute for the award of any other degree.

The feasible suggestion has been duly incorporate in consultation with the supervision.

Signature of the candidate

TABLE OF CONTENTS

1. OBJECTIVE OF THE STUDY

2. ABOUT COMPANY

- Background

- Where Karvy stand in the market

- Karvy Group

- Board of Directors

- Karvy Comtrade Ltd.

3. INRODUCTION TO COMMODITY MARKET

- A new investment avenue

- History of evolution of Commodity Market

- India and the Commodity Market

- Structure of Commodity Market

- Legal framework for regulating Commodity Futures in India

- List of Exchanges in India

- MCX (Multi Commodity Exchange of India Ltd.)

- MCX Commodity index

- NMCEIL (National Multi Commodity Exchange of India Ltd.)

- International Commodity Exchange

4. How to invest in Commodity Market?

5. Client Registration Form of Karvy Comtrade Ltd.

6. How Commodity Market works?

- Online trading “Odin Diet Client” by Karvy user

- Types

7. Broker

- How to become a Broker of Commodity Exchange?

8. Analysis

- Questionnaire for Investor

- Quantitative analysis

- Qualitative analysis

- Questionnaire for Broker

9. Annexure

10. Summary

11. Conclusion

12. Bibliography

Objective of the study

The main objective is to analyze the market potential of financial services and services

provided by “Karvy Stock Broking Ltd.” at sonipat branch.

To achieve the overall objective, various sub-objectives have been established.

These are:

- To study the features of various commodities and services provided by Karvy Stock

Broking Ltd.

- To analyze the market potential of the Commodity market & financial services.

- To know about the future prospective of the Commodity market & Karvy Stock

Broking Ltd.

- To know more and more about the commodity market.

Totally I can say that I want to know more and more about the financial services like

online trading in Commodity Market, branch trading, and self trading by online user in

Commodity market. So, I choose the Karvy Stock Broking Ltd. for my summer training.

ABOUT THE COMPANY

Background

Karvy Consultants Limited was established in 1982 at Hyderabad. It was established by a

group of Hyderabad-based practicing Chartered Accountants. At initial stage it was very

small in size. It was started with a capital of Rs. 1, 50,000.

In starting it was only offering auditing and taxation services. Later, it acts into the

Registrar and Share transfer activities and subsequently into financial services and other

services like Financial Product Distribution, Investment Advisory Services, Demate

Services, Corporate Finance, Insurance etc.

All along, Karvy’s strong work ethics and professional background leveraged with

Information Technology enabled it to deliver quality to the individual. A decade of

commitment, professional integrity and vision helped Karvy achieving a leadership

position in its field when it handled largest number of corporate and retail that proved to

be a sound business synergy.

Today, Karvy has access to millions of Indian shareholders, besides companies, banks,

financial institutions and regulatory agencies. Over the past one and half decades, Karvy

has evolved as a veritable link between industry, finance and people.

In January 1998, Karvy became first Depository Participant in Andhra Pradesh. An ISO

9002 Company, Karvy’s commitment to quality and retail reach has made it an Integrated

Financial Services Company.

Today, company has 230 branch offices in 164 cities all over the India. The company

adds 5 new offices every month to the company’s ever growing national network in every

nook and corner of the country. The company service over 16 million individual

investors, 180 corporate and handle corporate disbursements that exceed Rs.2500 Crores.

WHERE KARVY STAND IN THE MARKET?

KARVY is a legendary name in financial services, Karvy’s credit is defined by its

mission to succeed, passion for professionalism, excellent work ethics and customer

centric values.

Today KARVY is well known as a premier financial services enterprise, offering a broad

spectrum of customized services to its clients, both corporate and retail. Services that

KARVY constantly upgrade and improve are because of company’s skill in leveraging

technology. Being one of the most techno-savvy organizations around helps company to

deliver even more cost effective financial solutions in the shortest possible time.

What bears sample testimony to Karvy’s success is the faith reposed in company by

valued investors and customers, all across the country. Indeed, with Karvy’s wide

network touching every corner of the country, even the most remote investor can easily

access Karvy’s services and benefit from company’s expert advice.

KARVY GROUP

Karvy Consultants Limited

Karvy Securities Limited

Karvy Investor Services Limited 

Karvy Stock broking Limited 

Karvy Computer Shares Pvt. Ltd. 

Karvy Comtrade Ltd.

Board of Directors

Karvy Consultants Limited 

Parthasarathy C

Yugandhar M

Ramakrishna M S

Prasad V Potluri

Robert Gibson

Sanjay Kumar Dhir

R Shyamsunder

Karvy Investor Services Limited 

Parthasarathy C

Yugandhar M

Ramakrishna M S

Karvy Securities Limited 

Parthasarathy C

Yugandhar M

Ramakrishna M S

Ajay Kumar K

William Samuel

Nicholas Tully

Karvy Stock Broking Limited 

Parthasarathy C 

Yugandhar  M 

Ramakrishna M S

Ajay Kumar K

Kutumba Rao V

William Samuel

Nicholas Tully

.

C Parthasarathy , Chairman & Managing Director Mr. C Parthasarathy, a leader in the financial services

industry in India is responsible for building KARVY as

one of India's truly integrated Financial Services

Provider; he is a fellow member of the Institute of

Company Secretaries of India, a Fellow Member of the

Institute of Chartered Accountants of India and a

graduate in law. As Chairman and Managing Director, he

oversees the group's operations and renders vision and

business direction.

His passion and vision for achieving leadership in the business made KARVY a

leading financial intermediary ranking them as number one in the registrar, Share

Transfer and IPO Distribution businesses. He also holds directorship in KARVY

Securities Limited, KARVY Stock Broking Limited, KARVY Investor Services

Limited, KARVY Computershare Private Limited, KARVY Commodities Broking

Private Limited, EPR Pharmaceuticals Private Limited and Ocean Sparkles Limited.

M Yugandhar , Managing Director Mr. M Yugandhar, Managing Director, founder member of

KARVY Consultants Limited, has varied experience in the

field of financial services spanning over 20 years. He is a

Fellow Member of the Institute of Chartered Accountants of

India and was involved in the statutory and branch audit of

banks for 26 years.

Mr. Yugandhar holds directorships in KARVY Securities Limited, KARVY Stock

Broking Limited, KARVY Investor Services Limited, KARVY Computershare

Private Limited, KARVY Commodities Broking Private Limited, Bizpro

Technologies India Limited, Pokarna Limited, Ravindranath G E Medical Associates

Private Limited, Everest Power Private Limited and Green Infrastructure Private

Limited.

M S Ramakrishna, Executive Director

Mr. M S Ramakrishna, Director, founder member of

KARVY Consultants Limited is the orchestrator of

technology initiatives such as the call center in the service

of the customer.

Mr. Ramakrishna is a member of the Hyderabad Stock Exchange and is the director

of KARVY Securities Limited, KARVY Stock Broking Limited, KARVY Investor

Services Limited, KARVY Computershare Private Limited, KARVY Commodities

Broking Private Limited, Nitya Labs Limited and SAB Nife Power Systems Limited.

He has helped KARVY diversify into the field of medical transcription leveraging on

the company's core competency of transaction processing. He has more than 20 years

of experience in the financial services arena.

KARVY COMTRADE LTD.

At Karvy Commodities, we are focused on taking commodities trading to new

dimensions of reliability and profitability. We have made commodities trading, an

essentially age-old practice, into a sophisticated and scientific investment option.

Here we enable trade in all goods and products of agricultural and mineral origin that

include lucrative commodities like gold and silver and popular items like oil, pulses and

cotton through a well-systematized trading platform.

Our technological and infrastructural strengths and especially our street-smart skills make

us an ideal broker. Our service matrix is holistic with a gamut of advantages, the first and

foremost being our legacy of human resources, technology and infrastructure that comes

from being part of the Karvy Group

Our wide national network, spanning the length and breadth of India, further supports

these advantages. Regular trading workshops and seminars are conducted to one trading

strategies to perfection. Every move made is a calculated one, based on reliable research

that is converted into valuable information through daily, weekly and monthly

newsletters, calls and intraday alerts. Further, personalized service is provided here by a

dedicated team committed to giving hassle-free service while the brokerage rates offered

are extremely competitive

Official site of Karvy Comtrade limited

Commodity Market: A new investment avenue

The Beginning…………

Our first objective was to explore the project and plan it periodically. As the topic given

to us was quite new and very less study had so far been done, it was really a difficult task

to go ahead with our project…

The literature survey : Phase I

The next few days were of understanding, reading and studying the commodity market

and all its facets. We went through all the materials, journals, websites and literature,

whatever was available and could be assessed. Building up the basics in commodity

market and understanding its dynamics was the foremost important thing for us. We

studied thoroughly

and were able to understand the elementary things of the market after much effort.

Merely understanding and knowing the basics and even the intermediary things were not

going to help us. So our next endeavor was to understand the subtle complexities of

commodity markets. We would rather like to use here the more appropriate word of

commodity future because the commodity market is entirely future market up to now.

Hence we tried to track the daily price movements of various commodities. We also

learnt fundamental and technical analysis tools to be able to understand interpret and use

those data, news and trends. We got help from our technical and fundamental experts in

KARVY in the office.

Commodity Exchange Terminal

Introduction to Commodity Market

What is “Commodity”? Any product that can be used for commerce or an article of commerce which is traded

on an authorized commodity exchange is known as commodity. The article should be

movable of value, something which is bought or sold and which is produced or used as

the subject or barter or sale. In short commodity includes all kinds of goods. Indian

Forward Contracts Regulation Act (FCRA), 1952 defines “goods” as “every kind of

movable property other than actionable claims, money and securities”.

In current situation, all goods and products of agricultural (including

plantation), mineral and fossil origin are allowed for commodity trading recognized

under the FCRA. The national commodity exchanges, recognized by the Central

Government, permits commodities which include precious (gold and silver) and non-

ferrous metals, cereals and pulses, ginned and un-ginned cotton, oil seeds, oils and oil

cakes, raw jute and jute goods, sugar and guar, potatoes and onions, coffee and tea,

rubber and spices. Etc.

What is a commodity exchange? A commodity exchange is an association or a company or any other body corporate

organizing futures trading in commodities for which license has been granted by

regulating authority.

What is Commodity Futures? A Commodity futures is an agreement between two parties to buy or sell a specified and

standardized quantity of a commodity at a certain time in future at a price agreed upon at

the time of entering into the contract on the commodity futures exchange.

The need for a futures market arises mainly due to the hedging function that it

can perform. Commodity markets, like any other financial instrument, involve risk

associated with frequent price volatility. The loss due to price volatility can be attributed

to the following reasons:

Consumer Preferences: - In the short-term, their influence on price volatility is small

since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their

inventory in advance.

Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations

in prices. This can especially noticed in agricultural commodities where the weather

plays a major role in affecting the fortunes of people involved in this industry. The

futures market has evolved to neutralize such risks through a mechanism; namely

hedging.

The objectives of Commodity futures:-

Hedging with the objective of transferring risk related to the possession of

physical assets through any adverse moments in price. Liquidity and Price discovery to

ensure base minimum volume in trading of a commodity through market information and

demand supply factors that facilitates a regular and authentic price discovery mechanism.

Maintaining buffer stock and better allocation of resources as it augments

reduction in inventory requirement and thus the exposure to risks related with price

fluctuation declines. Resources can thus be diversified for investments.

Price stabilization along with balancing demand and supply position. Futures

trading leads to predictability in assessing the domestic prices, which maintains stability,

thus safeguarding against any short term adverse price movements. Liquidity in Contracts

of the commodities traded also ensures in maintaining the equilibrium between demand

and supply.

Flexibility, certainty and transparency in purchasing commodities facilitate bank

financing. Predictability in prices of commodity would lead to stability, which in turn

would eliminate the risks associated with running the business of trading commodities.

This would make funding easier and less stringent for banks to commodity market

players.

Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic price discovery and

an efficient price risk management. The beneficiaries include those who trade in the

commodities being offered in the exchange as well as those who have nothing to do with

futures trading. It is because of price discovery and risk management through the

existence of futures exchanges that a lot of businesses and services are able to function

smoothly.

1. Price Discovery: - Based on inputs regarding specific market information, the

demand and supply equilibrium, weather forecasts, expert views and comments, inflation

rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct

trading at futures exchanges. This transforms in to continuous price discovery

mechanism. The execution of trade between buyers and sellers leads to assessment of fair

value of a particular commodity that is immediately disseminated on the trading terminal.

2. Price Risk Management: - Hedging is the most common method of price risk

management. It is strategy of offering price risk that is inherent in spot market by taking

an equal but opposite position in the futures market. Futures markets are used as a mode

by hedgers to protect their business from adverse price change. This could dent the

profitability of their business. Hedging benefits who are involved in trading of

commodities like farmers, processors, merchandisers, manufacturers, exporters, importers

etc.

3. Import-Export competitiveness: - The exporters can hedge their price risk and

improve their competitiveness by making use of futures market. A majority of traders

which are involved in physical trade internationally intend to buy forwards. The

purchases made from the physical market might expose them to the risk of price risk

resulting to losses. The existence of futures market would allow the exporters to hedge

their proposed purchase by temporarily substituting for actual purchase till the time is

ripe to buy in physical market. In the absence of futures market it will be meticulous,

time consuming and costly physical transactions.

4. Predictable Pricing: - The demand for certain commodities is highly price elastic.

The manufacturers have to ensure that the prices should be stable in order to protect their

market share with the free entry of imports. Futures contracts will enable predictability in

domestic prices. The manufacturers can, as a result, smooth out the influence of changes

in their input prices very easily. With no futures market, the manufacturer can be caught

between severe short-term price movements of oils and necessity to maintain price

stability, which could only be possible through sufficient financial reserves that could

otherwise be utilized for making other profitable investments.

5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on

farmers in the absence of futures market. There would be no need to have large reserves

to cover against unfavorable price fluctuations. This would reduce the risk premiums

associated with the marketing or processing margins enabling more returns on produce.

Storing more and being more active in the markets. The price information accessible to

the farmers determines the extent to which traders/processors increase price to them.

Since one of the objectives of futures exchange is to make available these prices as far as

possible, it is very likely to benefit the farmers. Also, due to the time lag between

planning and production, the market-determined price information disseminated by

futures exchanges would be crucial for their production decisions.

6. Credit accessibility: - The absence of proper risk management tools would attract

the marketing and processing of commodities to high-risk exposure making it risky

business activity to fund. Even a small movement in prices can eat up a huge proportion

of capital owned by traders, at times making it virtually impossible to payback the loan.

There is a high degree of reluctance among banks to fund commodity traders, especially

those who do not manage price risks. If in case they do, the interest rate is likely to be

high and terms and conditions very stringent. This posses a huge obstacle in the smooth

functioning and competition of commodities market. Hedging, which is possible through

futures markets, would cut down the discount rate in commodity lending.

7. Improved product quality: - The existence of warehouses for facilitating delivery

with grading facilities along with other related benefits provides a very strong reason to

upgrade and enhance the quality of the commodity to grade that is acceptable by the

exchange. It ensures uniform standardization of commodity trade, including the terms of

quality standard: the quality certificates that are issued by the exchange-certified

warehouses have the potential to become the norm for physical trade.

History of Evolution of commodity markets Commodities future trading was evolved from need of assured continuous

supply of seasonal agricultural crops. The concept of organized trading in commodities

evolved in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants

used to store Rice in warehouses for future use. To raise cash warehouse holders sold

receipts against the stored rice. These were known as “rice tickets”. Eventually, these rice

tickets become accepted as a kind of commercial currency. Latter on rules came in to

being, to standardize the trading in rice tickets. In 19th century Chicago in United States

had emerged as a major commercial hub. So that wheat producers from Mid-west

attracted here to sell their produce to dealers & distributors. Due to lack of organized

storage facilities, absence of uniform weighing & grading mechanisms producers often

confined to the mercy of dealers discretion. These situations lead to need of establishing a

common meeting place for farmers and dealers to transact in spot grain to deliver wheat

and receive cash in return.

Gradually sellers & buyers started making commitments to exchange the produce for

cash in future and thus contract for “futures trading” evolved. Whereby the producer

would agreed to sell his product to the buyer at a future delivery date on an agreed upon

price. In this way producer was aware of what price he would fetch for his produce and

dealer would know about his cost involved, in advance. This kind of agreement proved

beneficial to both of them. As if dealer is not interested in taking delivery of the produce,

he could sell his contract to someone who needs the same. Similarly producer who not

intended to deliver his produce to dealer could pass on the same responsibility to

someone else. The price of such contract would dependent on the price movements in

the wheat market. Latter on by making some modifications these contracts transformed in

to an instrument to protect involved parties against adverse factors such as unexpected

price movements and unfavorable climatic factors.

Trading of wheat in futures became very profitable which encouraged the entry of other

commodities in futures market. This created a platform for establishment of a body to

regulate and supervise these contracts. That’s why Chicago Board of Trade (CBOT) was

established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce

Exchanges were born. Agricultural commodities were mostly traded but as long as there

are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy

merchants got together to bring chaotic condition in New York market to a system in

terms of storage, pricing, and transfer of agricultural products. In 1933, during the Great

Depression, the Commodity Exchange, Inc. was established in New York through the

merger of four small exchanges – the National Metal Exchange, the Rubber Exchange of

New York, the National Raw Silk Exchange, and the New York Hide Exchange.

The largest commodity exchange in USA is Chicago Board of Trade, The Chicago

Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity

Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major

futures trading exchanges in over twenty countries including Canada, England, India,

France, Singapore, Japan, Australia and New Zealand.

India and the commodity market History of Commodity Market in India:-

The history of organized commodity derivatives in India goes back to the

nineteenth century when Cotton Trade Association started futures trading in 1875, about

a decade after they started in Chicago. Over the time datives market developed in several

commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay

(1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in

Bombay (1920).

However many feared that derivatives fuelled unnecessary speculation and

were detrimental to the healthy functioning of the market for the underlying

commodities, resulting in to banning of commodity options trading and cash settlement

of commodities futures after independence in 1952. The parliament passed the Forward

Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the

India. The act prohibited options trading in Goods along with cash settlement of forward

trades, rendering a crushing blow to the commodity derivatives market. Under the act

only those associations/exchanges, which are granted reorganization from the

Government, are allowed to organize forward trading in regulated commodities. The act

envisages three tire regulations: (i) Exchange which organizes forward trading in

commodities can regulate trading on day-to-day basis; (ii) Forward Markets Commission

provides regulatory oversight under the powers delegated to it by the central

Government. (iii) The Central Government- Department of Consumer Affairs, Ministry

of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority.

The commodities future market remained dismantled and remained dormant

for about four decades until the new millennium when the Government, in a complete

change in a policy, started actively encouraging commodity market. After Liberalization

and Globalization in 1990, the Government set up a committee (1993) to examine the

role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended

allowing futures trading in 17 commodity groups. It also recommended strengthening

Forward Markets Commission, and certain amendments to Forward Contracts

(Regulation) Act 1952, particularly allowing option trading in goods and registration of

brokers with Forward Markets Commission. The Government accepted most of these

recommendations and futures’ trading was permitted in all recommended commodities. It

is timely decision since internationally the commodity cycle is on upswing and the next

decade being touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices of any

commodity are not fixed, in an organized way. Earlier only the buyer of produce and its

seller in the market judged upon the prices. Others never had a say.

Today, commodity exchanges are purely speculative in nature. Before

discovering the price, they reach to the producers, end-users, and even the retail

investors, at a grassroots level. It brings a price transparency and risk management in the

vital market. A big difference between a typical auction, where a single auctioneer

announces the bids and the Exchange is that people are not only competing to buy but

also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one

can offer to sell higher than someone else’s lower offer. That keeps the market as

efficient as possible, and keeps the traders on their toes to make sure no one gets the

purchase or sale before they do. Since 2002, the commodities future market in India has

experienced an unexpected boom in terms of modern exchanges, number of commodities

allowed for derivatives trading as well as the value of futures trading in commodities,

which crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market

was virtually non- existent, except some negligible activities on OTC basis.

In India there are 25 recognized future exchanges, of which there are three

national level multi-commodity exchanges. After a gap of almost three decades,

Government of India has allowed forward transactions in commodities through Online

Commodity Exchanges, a modification of traditional business known as Adhat and

Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three

exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX)

Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National

Multi-Commodity Exchange of India Limited (NMCEIL) Ahmadabad. There are other

regional commodity exchanges situated in different parts of India.

STRUCTURE OF COMMODITY MARKET

Ministry ofConsumer

Affairs

FMC (Forwards Market Commission)

Commodity Exchange

National Exchange Regional Exchange

NCDEX MCX NMCE NBOT 20 other regional exchanges

Commodities

Ecosystem MCX

Quality Certification Agencies

Hedger (Exporters / Millers Industry)

Producers (Farmers/Co-operatives/Institutional)

Traders (speculators) arbitrageurs/ client)

Consumers(Retail/ Institutional)

Transporters/ Support agencies

Clearing Bank

Warehouses

GLOBAL COMMODITIES MARKET

SPOT MARKET

Legal framework for regulating commodity futures in India:-

The commodity futures traded in commodity exchanges are regulated by the

Government under the Forward Contracts Regulations Act, 1952 and the Rules framed

there under. The regulator for the commodities trading is the Forward Markets

Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs

Food and Public Distribution

Forward Markets Commission (FMC):-

It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act,

1952. Commission consists of minimum two and maximum four members appointed by Central

Govt. Out of these members there is one nominated chairman. All the exchanges have been set up

under overall control of Forward Market Commission (FMC) of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX) promoted by

ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of

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

(NSC). Punjab National Bank (PNB), Credit Ratting Information Service of India Limited

(CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman

Sachs by subscribing to the equity shares have joined the promoters as a share holder of

exchange. NCDEX is the only Commodity Exchange in the country promoted by national level

institutions.

NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a

national level technology driven on line Commodity Exchange with an independent Board of

Directors and professionals not having any vested interest in Commodity Markets.

It is committed to provide a world class commodity exchange platform for market participants to

trade in a wide spectrum of commodity derivatives driven by best global practices,

professionalism and transparency.

NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also

subjected to the various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward

Contracts Regulation Act and various other legislations.

NCDEX is located in Mumbai and offers facilities to its members in more than 550

centers through out India. NCDEX currently facilitates trading of 57 commodities.

List of Exchanges in India

1. Bhatinda Om & Oil Exchange Ltd., Bhatinda.

2. The Bombay Commodity Exchange Ltd., Mumbai

3. The Rajkot Seeds oil & Bullion Merchants Association Ltd

4. The Kanpur Commodity Exchange Ltd., Kanpur

5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut

6. The Spices and Oilseeds Exchange Ltd.

7. Ahmadabad Commodity Exchange Ltd.

8. Vijay Beopar Chamber Ltd., Muzaffarnagar

9. India Pepper & Spice Trade Association, Kochi

10. Rajdhani Oils and Oilseeds Exchange Ltd., Delhi

11. National Board of Trade, Indore

12. The Chamber Of Commerce, Hapur

13. The East India Cotton Association, Mumbai

14. The Central India Commercial Exchange Ltd., Gwalior

15. The East India Jute & Hessian Exchange Ltd.

16. First Commodity Exchange of India Ltd, Kochi

17. Bikaner Commodity Exchange Ltd., Bikaner

18. The Coffee Futures Exchange India Ltd, Bangalore

19. Esugar India Limited

20. National Multi Commodity Exchange of India Limited

21. Surendranagar Cotton oil & Oilseeds Association Ltd

22. Multi Commodity Exchange of India Ltd

23. National Commodity & Derivatives Exchange Ltd

24. Haryana Commodities Ltd., Hissar

25. e-Commodities Ltd

Of these 25 commodities exchanges the MCX, NCDEX and NMCEIL are the major

Commodity Exchanges.

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange of India Limited (MCX) is an independent and de-

mutualised exchange with permanent reorganization from Government of India, having

Head Quarter in Mumbai. Key share holders of MCX are Financial Technologies (India)

Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of

India and Canara Bank. MCX facilitates online trading, clearing and settlement

operations for commodity futures market across the country.

MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion

Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses

Importers Association and Shetkari Sanghatana.

MCX deals with about 100 commodities.

National Multi Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-

mutualised Electronic Multi Commodity Exchange in India. On 25 th July 2001 it was

granted approval by Government to organize trading in edible oil complex. It is being

supported by Central warehousing Corporation Limited, Gujarat State Agricultural

Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002.

NMCEIL Head Quarter is at Ahmadabad.

Category wise Multi Stock Exchange (MCX) Commodities Index:

Category Commodities

Metals Aluminum, Copper, Lead, Nickel, Sponge iron, Steel Long and Steel flat, Tin, Zinc

Bullion Gold, silver

Fiber Long, medium and short staple cotton, Cotton yarn etc

Energy Crude oil, Furnace oil, Natural gas etc

Spices Cardamom, Jeera, Pepper, Red Chilly

Pulses Chana , Masoor and yellow peas

Plantation Arecanut, Cashew kernel, Coffee, Rubber

Petro chemicals HDPE, Polypropylene, PVC

Oil and Oil Seeds

Castor, Coconut, Cotton Seed, Palmoline, ground nut, Mustard, Soya, Sunflower, Sesame and Rice Bran

Cereals Maize

Others Mentha oil, Potato, Sugar

Multi Stock Exchange (MCX) Commodities Index in detail:

ALMOND ELECTWK  MAIZE  SILVERHNI 

ALUMINIUM FURNACEOIL MASUR  SILVERM 

ARECAJHAJI GASOLINE MENTHAOIL  SOYABEAN 

ARECARASHI GNUTOILEXP MESCRUDOIL  SOYMEAL 

ATF GOLD MGGURCHAKU  SOYSEED 

BRCRUDEOIL GOLDGUINEA MUSTARDJPR  SPONGEIRON 

BSMATIRICE GOLDHNI MUSTARDOIL  SRBATIRICE 

CARDAMOM GOLDM MUSTRDSEED  STEELFLAT 

CASHEWKERN GRSD  NATURALGAS  STEELGZB 

CASTOROIL GUARGUM  NICKEL  STEELIGTMG 

CER GUARSEED  PEPPER  STEELLGBVN 

CFI HDPEHM  PLATINUM  STEELLONG 

CHANA HEATINGOIL  POTATO  SUGARM 

CHANADEL IGOLDAHM  POTATOTRWR  SUGARMDEL 

COCONUTCAK IGOLDDEL  PPTQ  SUGARSKLP 

COCONUTOIL IGOLDKOL  PVC  SUPARIRASI 

COFROB IGOLDMAHM  RBDPMOLEIN  TCOAL 

COPPER IGOLDMDEL  REDCHILLI  TIN 

CORIANDER IGOLDMKOL  REFSNFLOIL  TURDESI 

COTTONLONG IGOLDMMUM  REFSOYOIL  TURMERIC 

COTTONMED IGOLDMUM  RICE URAD 

COTTONSEED JEERA  RJKCASSEED  WHEAT 

CPO JUTE  RSOLAPRJUN  YELLOWPEAS 

CRDO  KAPAS  RSOLAPRMAY  ZINC 

CRUDEOIL  KAPASKHALI  RUBBER 

DRB  LEAD  SESAMESEED   

ELECTMTH  LONGCOTTON  SILVER 

INTERNATIONAL COMMODITY EXCHANGES A future trading is a result of solution to a problem related to the maintenance

of a year round supply of commodities/ products that are seasonal as is the case of

agricultural produce. The United States, Japan, United Kingdom, Brazil, Australia,

Singapore are homes to leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX):- The New York Mercantile Exchange is the world’s biggest exchange for trading in

physical commodity futures. It is a primary trading forum for energy products and

precious metals. The exchange is in existence since last 132 years and performs trades

trough two divisions, the NYMEX division, which deals in energy and platinum and the

COMEX division, which trades in all the other metals.

Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline, RBOB

Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.

London Metal Exchange:- The London Metal Exchange (LME) is the world’s premier non-ferrous market, with

highly liquid contracts. The exchange was formed in 1877 as a direct consequence of the

industrial revolution witnessed in the 19th century. The primary focus of LME is in

providing a market for participants from non-ferrous based metals related industry to

safeguard against risk due to movement in base metal prices and also arrive at a price that

sets the benchmark globally. The exchange trades 24 hours a day through an inter office

telephone market and also through a electronic trading platform. It is famous for its open-

outcry trading between ring dealing members that takes place on the market floor.

Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy,

North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low

Density Polyethylene, etc.

The Chicago Board of Trade:- The first commodity exchange established in the world was the Chicago Board of Trade

(CBOT) during 1848 by group of Chicago merchants who were keen to establish a

central market place for trade. Presently, the Chicago Board of Trade is one of the

leading exchanges in the world for trading futures and options. More than 50 contracts on

futures and options are being offered by CBOT currently through open outcry and/or

electronically. CBOT initially dealt only in Agricultural commodities like corn, wheat,

non storable agricultural commodities and non-agricultural products like gold and silver.

Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol, Rough

Rice, Gold, and Silver etc.

Tokyo Commodity Exchange (TOCOM):- The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures

exchange in the world. It trades in to metals and energy contracts. It has made rapid

advancement in commodity trading globally since its inception 20 years back. One of the

biggest reasons for that is the initiative TOCOM took towards establishing Asia as the

benchmark for price discovery and risk management in commodities like the Middle East

Crude Oil. TOCOM’s recent tie up with the MCX to explore cooperation and business

opportunities is seen as one of the steps towards providing platform for futures price

discovery in Asia for Asian players in Crude Oil since the demand-supply situation in

U.S. that drives NYMEX is different from demand-supply situation in Asia. In Jan 2003,

in a major overhaul of its computerized trading system, TOCOM fortified its clearing

system in June by being first commodity exchange in Japan to introduce an in-house

clearing system. TOCOM launched options on gold futures, the first option contract in

Japanese market, in May 2004.

Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum,

Aluminum, Rubber, etc

Chicago Mercantile Exchange:- The Chicago Mercantile Exchange (CME) is the largest futures exchange in the US and

the largest futures clearing house in the world for futures and options trading. Formed in

1898 primarily to trade in Agricultural commodities, the CME introduced the world’s

first financial futures more than 30 years ago. Today it trades heavily in interest rates

futures, stock indices and foreign exchange futures. Its products often serves as a

financial benchmark and witnesses the largest open interest in futures profile of CME

consists of livestock, dairy and forest products and enables small family farms to large

Agri-business to manage their price risks. Trading in CME can be done either through pit

trading or electronically.

Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen pork

bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc

How to invest in a Commodity Market?

With whom investor can transact a business?

An investor can transact a business with the approved clearing member of previously

mentioned Commodity Exchanges. The investor can ask for the details from the

Commodity Exchanges about the list of approved members.

What is Identity Proof?

When investor approaches Clearing Member, the member will ask for identity proof. For

which Xerox copy of any one of the following can be given

a) PAN card Number

b) Driving License

c) Vote ID

d) Passport

What statements should be given for Bank Proof?

The front page of Bank Pass Book and a canceled cheque of a concerned bank. Otherwise

the Bank Statement containing details can be given.

What are the particulars to be given for address proof?

In order to ascertain the address of investor, the clearing member will insist on Xerox

copy of Ration card or the Pass Book/ Bank Statement where the address of investor is

given.

What are the other forms to be signed by the investor?

The clearing member will ask the client to sign

a) Know your client form

b) Risk Discloser Document

The above things are only procedure in character and the risk involved and only after

understanding the business, he wants to transact business.

What aspects should be considered while selecting a commodity broker?

While selecting a commodity broker investor should ideally keep certain aspects in mind

to ensure that they are not being missed in any which way. These factors include

Net worth of the broker of brokerage firm.

The clientele.

The number of franchises/branches.

The market credibility.

The references.

The kind of service provided- back office functioning being most important.

Credit facility.

The research team.

These are amongst the most important factors to calculate the credibility of commodity

broker.

How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade, in which

one pays cash and carries away the goods. The second is futures trade. The underpinning

for futures is the warehouse receipt. A person deposits certain amount of say, good X in a

ware house and gets a warehouse receipt. This allows him to ask for physical delivery of

the good from the warehouse. But some one trading in commodity futures need not

necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity

future on an exchange based on his expectation of where the price will go. Futures have

something called an expiry date, by when the buyer or seller either closes (square off) his

account or give/take delivery of the commodity. The broker maintains an account of all

dealing parties in which the daily profit or loss due to changes in the futures price is

recorded. Squiring off is done by taking an opposite contract so that the net outstanding is

nil.

For commodity futures to work, the seller should be able to deposit the

commodity at warehouse nearest to him and collect the warehouse receipt. The buyer

should be able to take physical delivery at a location of his choice on presenting the

warehouse receipt. But at present in India very few warehouses provide delivery for

specific commodities.

Following diagram gives a fair idea about working of the Commodity market.

Today Commodity trading system is fully computerized. Traders need not visit a

commodity market to speculate. With online commodity trading they could sit in the

confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages

as follows:

I. Trading: - At this stage the following is the system implemented-

- Order receiving

- Execution

- Matching

- Reporting

- Surveillance

- Price limits

- Position limits

II. Clearing: - This stage has following system in place-

- Matching

- Registration

- Clearing

- Clearing limits

- Notation

- Margining

- Price limits

- Position limits

- Clearing house.

III. Settlement: - This stage has following system followed as follows-

- Marking to market

- Receipts and payments

- Reporting

- Delivery upon expiration or maturity.

Online Trading on Commodity Market by Odin Diet Client of KARVY

Broker

The Broker is essentially a person of firm that liaisons between individual traders and the

commodity exchange. In other words the Commodity Broker is the member of

Commodity Exchange, having direct connection with the exchange to carry out all trades

legally. He is also known as the authorized dealer.

How to become a Commodity Trader/Broker of Commodity Exchange?

To become a commodity trader one needs to complete certain legal and binding

obligations. There is routine process followed, which is stated by a unit of Government

that lays down the laws and acts with regards to commodity trading. A broker of

Commodities is also required to meet certain obligations to gain such a membership in

exchange.

To become a member of Commodity Exchange the broker of brokerage firm should have

net worth amounting to Rs. 50 Lakhs. This sum has been determined by Multi

Commodity Exchange.

How to become a Member of Commodity Exchange?

To become member of Commodity Exchange the person should comply with the

following Eligibility Criteria.

1. He should be Citizen of India.

2. He should have completed 21 years of his age.

3. He should be Graduate or having equivalent qualification.

4. He should not be bankrupt.

5. He has not been debarred from trading in Commodities by statutory/regulatory

authority,

There are following three types of Memberships of Commodity Exchanges.

Trading-cum-Clearing Member (TCM):- A TCM is entitled to trade on his own account as well as on account of his clients, and

clear and settle trades himself. A sole proprietor, Partnership firm, a joint Hindu

Undivided Family (HUF), a corporate entity, a cooperative society, a public sector

organization or any other Government or non-Government entity can become a TCM.

There are two types of TCM, TCM-1 and TCM-2. TCM-1 refers to

transferable non-deposit based membership and TCM-2 refers to non-transferable deposit

based membership.

A person desired to register as TCM is required to submit an application as per

the format prescribed under the business rules, along with all enclosures, fee and other

documents specified therein. He is required to go through interview by Membership

Admission Committee and committee is also empowered to frame rules or criteria

relating to selection or rejection of a member.

Institutional Trading-cum-clearing Member (ITCM):- Only an Institution/ Corporate can be admitted by the Exchange as a member, conferring

upon them the right to trade and clear through the clearing house of exchange as an

Institutional Trading-cum-clearing Member (ITCM). The member may be allowed to

make deals for himself as well as on behalf of his clients and clear and settle such deals.

ITCMs can also appoint sub-brokers, authorized persons and Trading Members who

would be registered as trading members.

Professional Clearing Member (PCM):- A PCM entitled to clear and settle trades executed by other members of the exchange. A

corporate entity and an institution only can apply for PCM. The member would be

allowed to clear and settle trades of such members of the Exchange who choose to clear

and settle their trades through such PCM.

ANALYSIS

Survey was conducted across Sonipat City to judge the awareness of peoples regarding

investment in Commodity Market.

Sample size: 30 peoples

COMMODITY MARKET

Questionnaire for Investors

1. Name: _____________

2. Gender?

(a.) Male ( ) (b.) Female ( )

3. Age Group?

(a.) Below 21 Years ( ) (b.) 21 years – 30 years ( )

(c.) 31 years – 40 year ( ) (d.) 41 years – 50 years ( )

(e.) Above 50 years ( )

4. Occupation?

(a.) Govt. Job ( ) (b.) Private Job ( )

(c.) Business ( ) (d.) Other (specify) ( )

5. Income Group (Per month)

(a.) Nil ( ) (b.) Below 10,000/- ( )

(c.) 10,000 – 20,000/- ( ) (d.) 20,000 – 30,000/- ( )

(e.) Above 30,000/- ( )

6. Do you have any investment plan?

(a.) YES ( ) (b.) NO ( )

(If no move to question no. 9)

7. If, yes, where you would like to invest your money?

(a.) Bank F.D. ( ) (b.) Share Market ( )

(c.) Commodity Market ( ) (d.) Other (specify) ___________

8. Why you prefer specific investment?

________________________________________________________________________

________________________________________________________________________

9. If no, why?

(a.) Not aware about invest avenues ( ) (b.) Insufficient income ( )

(c.) Other (specify) ___________

10. Do you aware about Commodity Market?

(a.) YES ( ) (b.) NO ( )

(If no move to question no. 12)

11. Are you willing to invest in Commodity Market?

(If answer in Q.7 is Commodity Market, skip this question)

(a.) If YES, why? ______________________________________

(b.) If NO, why? _______________________________________

12. If yes, which Commodity Exchange you will prefer for investment?

(a.) MCX ( ) (b.) NCDEX ( )

(c.) NMCE ( ) (d.) Other (specify) ___________

(f.) Can’t Say ( )

13. Why you prefer specific Commodity Exchange for investment?

(If answer to Q.12 is f, skip this question)

________________________________________________________________________

________________________________________________________________________

14. In which Commodities you will prefer to Invest? And why?

(a.) Bullion ( ) (b.) Agricultural ( )

(c.) Metals ( ) (d.) Fossils/Energy ( )

________________________________________________________________________

________________________________________________________________________

15. What is your perception about Commodity Market?

(a.) Less Risky ( ) (b.) Risky ( )

(c.) Very Risky ( )

16. What you think Commodity Market Advertisements (hoardings, prints etc) are

explanatory enough to give needed useful information?

(a.) YES ( ) (b.) NO ( )

Quantitative Analysis

1. Investor’s preferences: -

Analysis of data revels that majority of people prefer investment in Real Estate (28.81%

of total sample) which specified in other category investment and it is greater than share

market investment preference.

2. People’s knowledge about Commodity Market: -

Very few people heard of commodity market. Vast majority of people are unaware about

Commodity Market.

3. Investor’s interested to invest in Commodity Market: - (Out of those, who know Commodity Market)

Though some people heard of commodity market due to lack of complete knowledge

about it half of then are not interested in investing in Commodity Market.

Above data revels that majority of commodity investors like to invest in Bullion (Gold &

Silver).

5. Perception about Commodity Market: -

Analysis of data shows that majority of people who are aware about commodity market;

feel that investment in commodity market is very risky. So efforts should be done to

minimize the risk in commodity investment and make peoples about minimum risk in

commodity investment.

6. Opinion about Commodity Market Advertisements:- (Expressed by those who know commodity market)

There is no second opinion amongst commodity investors, that commodity market

advertisements do not give all the necessary information.

Qualitative Analysis

1. Investment preferences: - Most of the investors prefer least risky investment which gives higher returns.

That is why majority (70% of sample) of people interested in investments other than

Share and commodity market.

Very less number of people (only 7%) showed their interest in investment in

commodity market. Main reason for this is lack of awareness and complete information

about commodity market.

2. Commodity Exchanges: - People who are interested in commodity investment showed more concern

towards NCDEX; for its brand name and people think there might be surety of

transaction at NCDEX.

3. Commodities: -

Bullion is most preferred commodity for investment. Because one can expect

maximum returns from such investment due to rapidly increasing prices of bullion in

market.

4. Advertisements: - Commodity market Advertisements should be more informative. And it is the failure

of commodity market’s advertisement campaign to attract people’s attention; as majority

of people are not aware about commodity market.

Questionnaire for Brokers

1. Since how many years you are working as a broker?

________________________________________________________________________

________________________________________________________________________

2. How does one become broker?

________________________________________________________________________

________________________________________________________________________

3. Which Commodity Exchange you prefer to work?

(a.) MCX ( ) (b.) NCDEX ( )

(c.) NMCE ( ) (d.) Other (specify) ___________

4. In which commodities do you deal?

________________________________________________________________________

________________________________________________________________________

5. Why do you prefer those commodities?

________________________________________________________________________

________________________________________________________________________

6. If one wants to invest in Commodity Market, how to go about it?

________________________________________________________________________

________________________________________________________________________

7. What is your perception about Commodity Market?

(a.) Less Risky ( ) (b.) Risky ( )

(c.) Very Risky ( )

8. Any suggestion for commodity market?

________________________________________________________________________

________________________________________________________________________

ANNEXURE

Terms and Definitions related to Commodity Market: -

Accruals:- Commodities on hand ready for shipment, storage and manufacture

Arbitragers: - Arbitragers are interested in making purchase and sale in different

markets at the same time to profit from price discrepancy between the two markets.

At the Market: - An order to buy or sell at the best price possible at the time an order

reaches the trading pit.

Basis: - Basis is the difference between the cash price of an asset and futures price of

the underlying asset. Basis can be negative or positive depending on the prices prevailing

in the cash and futures.

Basis grade: - Specific grade or grades named in the exchanges future contract. The

other grades deliverable are subject to price of underlying futures

Bear: - A person who expects prices to go lower.

Bid: - A bid subject to immediate acceptance made on the floor of exchange to buy a

definite number of futures contracts at a specific price.

Breaking: - A quick decline in price.

Bulging: - A quick increase in price.

Bull: - A person who expects prices to go higher.

Buy on Close: - To buy at the end of trading session at the price within the closing

range.

Buy on opening: - To buy at the beginning of trading session at a price within the

opening range.

Call: - An option that gives the buyer the right to a long position in the underlying

futures at a specific price, the call writer (seller) may be assigned a short position in the

underlying futures if the buyer exercises the call.

Cash commodity: - The actual physical product on which a futures contract is based.

This product can include agricultural commodities, financial instruments and the cash

equivalent of index futures.

Close: - The period at the end of trading session officially designated by exchange

during which all transactions are considered made “at the close”.

Closing price: - The price (or price range) recorded during the period designated by the

exchange as the official close.

Commission house: - A concern that buys and sells actual commodities or futures

contract for the accounts of customers.

Consumption Commodity: - Consumption commodities are held mainly for

consumption purpose. E.g. Oil, steel

Cover: - The cancellation of the short position in any futures contract buys the

purchase of an equal quantity of the same futures contract.

Cross hedge: - When a cash commodity is hedged by using futures contract of other

commodity.

Day orders: - Orders at a limited price which are understood to be good for the day

unless expressly designated as an open order or “good till canceled” order.

Delivery: - The tender and receipt of actual commodity, or in case of agriculture

commodities, warehouse receipts covering such commodity, in settlement of futures

contract. Some contracts settle in cash (cash delivery). In which case open positions are

marked to market on last day of contract based on cash market close.

Delivery month: - Specified month within which delivery may be made under the

terms of futures contract.

Delivery notice: - A notice for a clearing member’s intention to deliver a stated

quantity of commodity in settlement of a short futures position.

Derivatives: - These are financial contracts, which derive their value from an

underlying asset. (Underlying assets can be equity, commodity, foreign exchange, interest

rates, real estate or any other asset.) Four types of derivatives are trades forward, futures,

options and swaps. Derivatives can be traded either in an exchange or over the counter.

Differentials: - The premium paid for grades batter than the basis grade and the

discounts allowed for the grades. These differentials are fixed by the contract terms on

most exchanges.

Exchange: - Central market place for buyers and sellers. Standardized contracts ensure

that the prices mean the same to everyone in the market. The prices in an exchange are

determined in the form of a continuous auction by members who are acting on behalf of

their clients, companies or themselves.

Forward contract: - It is an agreement between two parties to buy or sell an asset at a

future date for price agreed upon while signing agreement. Forward contract is not traded

on an exchange. This is oldest form of derivative contract. It is traded in OTC Market.

Not on an exchange. Size of forward contract is customized as per the terms of agreement

between buyer and seller. The contract price of forward contract is not transparent, as it is

not publicly disclosed. Here valuation of open position is not calculated on a daily basis

and there is no requirement of MTM. Liquidity is the measure of frequency of trades that

occur in a particular commodity forward contract is less liquid due to its customized

nature. In forward contracts, counter- party risk is high due to customized & bilateral

nature of the transaction. Forward contract is not regulated by any exchange. Forward

contract is generally settled by physical delivery. In this case delivery is carried out at

delivery center specified in the customized bilateral agreement.

Futures Contract:- It is an agreement between two parties to buy or sell a specified

and standardized quantity and quality of an asset at certain time in the future at price

agreed upon at the time of entering in to contract on the futures exchange. It is entered on

centralized trading platform of exchange. It is standardized in terms of quantity as

specified by exchange. Contract price of futures contract is transparent as it is available

on centralized trading screen of the exchange. Here valuation of Mark-to-Mark position

is calculated as per the official closing price on daily basis and MTM margin requirement

exists. Futures contract is more liquid as it is traded on the exchange. In futures contracts

the clearing-house becomes the counter party to each transaction, which is called

novation. Therefore, counter party risk is almost eliminated. A regulatory authority and

the exchange regulate futures contract. Futures contract is generally cash settled but

option of physical settlement is available. Delivery tendered in case of futures contract

should be of standard quantity and quality as specified by the exchange.

Futures commission merchant: - A broker who is permitted to accept the orders to

buy and sale futures contracts for the consumers.

Futures Funds: - Usually limited partnerships for investors who prefer to participate in

the futures market by buying shares in a fund managed by professional traders or

commodity trading advisors.

Futures Market:-It facilitates buying and selling of standardized contractual

agreements (for future delivery) of underlying asset as the specific commodity and not

the physical commodity itself. The formulation of futures contract is very specific

regarding the quality of the commodity, the quantity to be delivered and date for delivery.

However it does not involve immediate transfer of ownership of commodity, unless

resulting in delivery. Thus, in futures markets, commodities can be bought or sold

irrespective of whether one has possession of the underlying commodity or not. The

futures market trade in futures contracts primarily for the purpose of risk management

that is hedging on commodity stocks or forward buyers and sellers. Most of these

contracts are squared off before maturity and rarely end in deliveries.

Hedging: - Means taking a position in futures market that is opposite to position in the

physical market with the objective of reducing or limiting risk associated with price.

In the money: - In call options when strike price is below the price of underlying

futures. In put options, when the strike price is above the underlying futures. In-the-

money options are the most expensive options because the premium includes intrinsic

value.

Index Futures: - Futures contracts based on indexes such as the S & P 500 or Value

Line Index. These are the cash settlement contracts.

Investment Commodities: - An investment commodity is generally held for

investment purpose. e.g. Gold, Silver

Limit: - The maximum daily price change above or below the price close in a specific

futures market. Trading limits may be changed during periods of unusually high market

activity.

Limit order: - An order given to a broker by a customer who has some restrictions

upon its execution, such as price or time.

Liquidation: - A transaction made in reducing or closing out a long or short position,

but more often used by the trade to mean a reduction or closing out of long position.

Local: - Independent trader who trades his/her own money on the floor of the

exchanges. Some local act as a brokers as well, but are subject to certain rules that protect

customer orders.

Long: - (1) The buying side of an open futures contract or futures option; (2) a trader

whose net position in the futures or options market shows an excess of open purchases

over open sales.

Margin: - Cash or equivalent posted as guarantee of fulfillment of a futures contract

(not a down payment).

Margin call: - Demand for additional funds or equivalent because of adverse price

movement or some other contingency.

Market to Market: - The practice of crediting or debating a trader’s account based on

daily closing prices of the futures contracts he is long or short.

Market order: - An order for immediate execution at the best available price.

Nearby: - The futures contract closest to expiration.

Net position: - The difference between the open contracts long and the open contracts

short held in any commodity by any individual or group.

Offer: - An offer indicating willingness to sell at a given price (opposite of bid).

On opening: - A term used to specify execution of an order during the opening.

Open contracts: - Contracts which have been brought or sold without the transaction

having been completed by subsequent sale, repurchase or actual delivery or receipt of

commodity.

Open interest: - The number of “open contracts”. It refers to unliquidated purchases or

sales and never to their combined total.

Option: - It gives right but not the obligation to the option owner, to buy an underlying

asset at specific price at specific time in the future.

Out-of-the money: - Option calls with the strike prices above the price of the

underlying futures, and puts with strike prices below the price of the underlying futures.

Over the counter: - It is alternative trading platform, linked to network of dealers who

do not physically meet but instead communicates through a network of phones &

computers.

Pit: - An octagonal platform on the trading floor of an exchange, consisting of steps

upon which traders and brokers stand while trading (if circular called ring).

Point: - The minimum unit in which changes in futures prices may be expressed

(minimum price fluctuation may be in multiples of points).

Position: - An interest in the market in the form of open commodities.

Premium: - The amount by which a given futures contract’s price or commodity’s

quality exceeds that of another contract or commodity (opposite of discount). In options,

the price of a call or put, which the buyer initially pays to the option writer (seller).

Price limit: - The maximum fluctuation in price of futures contract permitted during

one trading session, as fixed by the rules of a contract market.

Purchase and sales statement: - A statement sent by FMC to a customer when his

futures option has been reduced or closed out (also called ‘P and S”)

Put: - In options the buyer of a put has the right to continue a short position in an

underlying futures contract at the strike price until the option expires; the seller (writer)

of the put obligates himself to take a long position in the futures at the strike price if the

buyer exercises his put.

Range: - The difference between high and low price of the futures contract during a

given period.

Ratio hedging: - Hedging a cash position with futures on a less or more than one-for-

one basis.

Reaction: - The downward tendency of a commodity after an advance.

Round turn: - The execution of the same customer of a purchase transaction and a

sales transaction which offset each other.

Round turn commission: - The cost to the customer for executing a futures contract

which is charged only when the position is liquidated.

Scalping: - For floor traders, the practice of trading in and out of contracts through out

the trading day in a hopes for making a series of small profits.

Settlement price: - The official daily closing price of futures contract, set by the

exchange for the purpose of setting margins accounts.

Short: - (1) The selling of an option futures contract. (2) A trader whose net position in

the futures market shows an excess of open sales over open purchases.

Speculator: - Speculator is an additional buyer of the commodities whenever it seems

that market prices are lower than they should be.

Spot Markets:-Here commodities are physically brought or sold on a negotiated basis.

Spot price: - The price at which the spot or cash commodity is selling on the cash or

spot market.

Spread: - Spread is the difference in prices of two futures contracts.

Striking price: - In options, the price at which a futures position will be established if

the buyer exercises (also called strike or exercise price).

Swap: - It is an agreement between two parties to exchange different streams of cash

flows in future according to predetermined terms.

Technical analysis (charting): - In price forecasting, the use of charts and other

devices to analyze price-change patters and changes in volume and open interest to

predict future market trends (opposite of fundamental analysis).

Time value: - In options the value of premium is based on the amount of time left

before the contract expires and the volatility of the underlying futures contract. Time

value represents the portion of the premium in excess of intrinsic value. Time value

diminishes as the expiration of the options draws near and/or if the underlying futures

become less volatile.

Volume of trading (or sales): - A simple addition of successive futures transactions (a

transaction consists of a purchase and matching sale).

Writer: - A sealer of an option who collects the premium payment from the buyer.

Summary

This decade is termed as Decade of Commodities. Prices of all commodities are heading

northwards due to rapid increase in demand for commodities. Developing countries like

China are voraciously consuming the commodities. That’s why globally commodity

market is bigger than the stock market.

India is one of the top producers of large number of commodities and also has a long

history of trading in commodities and related derivatives. The Commodities Derivatives

market has seen ups and downs, but seems to have finally arrived now. The market has

made enormous progress in terms of Technology, transparency and trading activity.

Interestingly, this has happened only after the Government protection was removed from

a number of Commodities, and market force was allowed to play their role. This should

act as a major lesson for policy makers in developing countries, that pricing and price risk

management should be left to the market forces rather than trying to achieve these

through administered price mechanisms. The management of price risk is going to

assume even greater importance in future with the promotion of free trade and removal of

trade barriers in the world.

As majority of Indian investors are not aware of organized commodity market; their

perception about is of risky to very risky investment. Many of them have wrong

impression about commodity market in their minds. It makes them specious towards

commodity market. Concerned authorities have to take initiative to make commodity

trading process easy and simple. Along with Government efforts NGO’s should come

forward to educate the people about commodity markets and to encourage them to invest

in to it. There is no doubt that in near future commodity market will become Hot spot for

Indian farmers rather than spot market. And producers, traders as well as consumers will

be benefited from it. But for this to happen one has to take initiative to standardize and

popularize the Commodity Market.

CONCLUSION

After almost two years that commodity trading is finding favour with Indian investors

and has been seen as a separate asset class with good growth opportunities. For

diversification of portfolio beyond shares, fixed deposits and mutual funds, commodity

trading offers a good option for long-term investors and arbitrageurs and speculators.

And, now, with daily global volumes in commodity trading touching three times that of

equities, trading in commodities cannot be ignored by Indian investors.

Online commodity exchanges need to revamp certain laws governing futures in

commodities to make the markets more attractive. The national multi-commodity

exchanges have untidily proposed to the government that in view of the growth of the

commodities market, foreign institutional investors should be given the go-ahead to

invest in commodity futures in India. Their entry will deepen and broad base the

commodity futures market. As a matter of fact, derivative instruments, such as futures,

can help India become a global trading hub for select commodities.

Commodity trading in India is poised for a big take-off in India on the back of factors

like global economic recovery and increasing demand from China for commodities.

Considering the huge volatility witnessed in the equity markets recently with the Sensex

touching 21000 level commodities could add the required zing to investors' portfolio.

Therefore, it won't be long before the market sees the emergence of a completely

redefined set of retail investors.

BIBLIOGRAPHY

http://commodities.in /

http://finance.indiamart.com/markets/commodity/

http://www.commoditiescontrol.com /

http://www.mcxindia.com /

http://www.ncdex.com /

http://www.karvycomtrade.com/

http://www.commodityindia.com/

MCX Certified Commodity Professional Reference Material

Bhalla V. K. Capital Market

Khan & Jain Indian Financial System

S. S. S. Kumar Financial Derivates

Prassana Chandra Security Analysis & Portfolio Management