gold trading in commodity market

8/3/2019 Gold Trading in Commodity Market

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DETERMINATION OF PRICE VOLATILITY OF THE GOLD

PRICE IN FUTURE CONTRACT

WITH REFERENCE TO GOLD TRADING IN COMMODITIY MARKET

Gobiraman.K

MBA International BusinessDepartment of International Business

Pondicherry University


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Chapter I

INTRODUCTION

INTRODUCTION


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Ever since the dawn of civilization commodities trading have become an integral

part in the lives of mankind. The very reason for this lies in the fact that commodities

represent the fundamental elements of utility for human beings. The term commodity

refers to any material, which can be bought and sold. Commodities in a markets context

refer to any movable property other than actionable claims, money and securities. Over

the years commodities markets have been experiencing tremendous progress, which is

evident from the fact that the trade in this segment is standing as the boon for the global

economy today. The promising nature of these markets has made them an attractive

investment avenue for investors.

In the early days people followed a mechanism for trading called Barter System,

which involves exchange of goods for goods. This was the first form of trade between

individuals. The absence of commonly accepted medium of exchange has initiated the

need for Barter System. People used to buy those commodities which they lack and sell

those commodities which are in excess with them. The commodities trade is believed to

have its genesis in Sumeria. The early commodity contracts were carried out using clay

tokens as medium of exchange. Animals are believed to be the first commodities, which

were traded, between individuals. The internationalization of commodities trade can be

better understood by observing the commodity market integration occurred after the

European Voyages of Discovery. The development of international commodities trade is

characterized by the increase in volumes of trade across the nations and the convergence

and price related to the identical commodities at different markets. The major thrust for

the commodities trade was provided by the changes in demand patterns, scarcity and the

supply potential both within and across the nations.


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Derivatives as a tool for managing risk first originated in the commodities

markets. They were then found useful as a hedging tool in financial markets as well. In

India, trading in commodity futures has been in existence from the nineteenth century

with 4rganized trading in cotton through the establishment of Cotton Trade Association

in 1875. Over a period of time, other commodities were permitted to be traded in futures

exchanges. Regulatory constraints in 1960s resulted in virtual dismantling of the

commodities future markets. It is only in the last decade that commodity future

exchanges have been actively encouraged. However, the markets have been thin with

poor liquidity and have not grown to any significant level.

India has a long history of commodity futures trading, extending over 125 years.

Still, such trading was interrupted suddenly since the mid-seventies in the fond hope of

ushering in an elusive socialistic pattern of society. As the country embarked on

economic liberalization policies and signed GATT agreement in the early nineties, the

government realized the need for futures trading to strengthen the competitiveness of

Indian agriculture and the commodity trade and industry. Futures trading began to be

permitted in several commodities, and the ushering in of the 21st century saw the

emergence of new National Commodity Exchanges with countrywide reach for trading in

almost all primary commodities and their products.


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Chapter - II

COMMODITIES EXCHANGE TRADING

AN OVERVIEW

2.1. COMMODITY


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Commodity includes all kinds of goods. FCRA [ Forward Contract(Regulation)

Act,1952] defines goods as every kind of movable property other than actionable

claims, money and securities. Futures trading is organized in such goods or

commodities as are permitted by the central Government. At present, all goods and

products of agricultural (including plantation), mineral and fossil origin are allowed for

futures trading under the auspices of the commodity exchange recognized under the

FCRA. The National commodity exchange have been recognized by the central

Government for organized trading in all permissible commodities which include precious

metals ( Gold & Silver ) and non-ferrous metals; cereals and pulses; ginned and un-

ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and guar;

potatoes and onions; coffee and tea; rubber and spices, etc.

2.2. COMMODITY MARKET

Commodity market is an important constituent of the financial markets of any

country. A commodity exchange or market is a common platform, where market

participants from varied spheres trade in wide spectrum of commodity derivatives.

It is the market where a wide range of products, viz., precious metals, base metals,crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important

to develop a vibrant, active and liquid commodity market. This would help investors

hedge their commodity risk, take speculative positions in commodities and exploit

arbitrage opportunities in the market.

In simpler terms, it is a place where one can determine the price of contracts on a

current date, for goods to be transacted in future.

For example,

One can determine the price of goods to be transacted in the month of October

2008 or even later in December 2008 through this mechanism, thereby helping people to

avoid fluctuations in the price of commodities.


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2.3. THE REASON WHY PEOPLE TRADE IN COMMODITIES

MARKET:

HEDGING

Hedging is a mechanism by which the participants in the physical / cash markets

can cover their price risk. Theoretically, the relationship between the futures and cash

prices is determined by cost of carry. The two prices move in tandem, enabling the

participants in the physical / cash markets to cover their price risk by taking opposite

position in the futures market.

SPECULATING

Speculating are participants who are willing to take risks in the expectation of

making profit. Nay person, who feels that the market will move in one direction, can thus

take a position in the market. The primary role of speculators is to provide liquidity to

the market.

ARBITRAGING

Arbitraging is primarily done in two different ways to make profit from the

futures market.

Simultaneously purchase and sale goods in two different markets so that the

selling price is higher than the buying price by more than the transaction cost, thereby

enabling a person to make risk-less profits.

Simultaneously purchase / sale in the spot market and sale / purchase in the

futures markets so that selling price is higher than the buying price by more than the

transaction cost & the interest cost, again resulting in risk-less profits.


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2.4. MARKET DEVELOPMENT

In the context of the development of commodities markets, integration plays a

pivotal role in surmounting the barriers of trade. The development of trading mechanisms

in the commodities market segment largely helped the integration of commodities

markets. The major thrust for the integration of commodities trading was given by the

European discoveries and the march of the world trade towards globalization. The

commodities trade among different countries was originated much before the voyages of

Columbus and Da Gama. During the first half of the second millennium India and China

had trading arrangements with Southeast Asia, Eastern Europe, the Islamic countries and

the Mediterranean. The advancements in shipping and other transport technologies had

facilitated the growth of the trade in this segment. The unification of the Eurasian

continent by the Mongols led to a wide transmission of people, ideas and goods. Later,

the Black Death of 1340s, the killer plague that reduced the population of Europe and

Middle East by one-third, has resulted in more per capita income for individuals and thus

increased the demand for Eastern luxuries like precious stones, spices, ceramics and silks.

This has augmented the supply of precious metals to the East. This entire scenario

resulted in the increased reliance on Indian Ocean trade routes and stimulated the

discovery of sea route to Asia.

The second half of the second millennium is characterized by the connectivity of

the markets related to the Old and the New worlds. In the year 1571, the city of Manila

was found, which linked the trade between America, Asia, Africa ad Europe. During the

initial stages, because of the high transportation costs, preference of trade was given to

those commodities, which had high value to weight ratio. In the aftermath of the

discoveries huge volumes of silver was pumped into world trade. With the discovery of

the Cape route, the Venetian and Egyptian dominance of spice exports was diluted. The

introduction of New world crops into China has lead to the increased demand for silver

and a growth in exports of tea and silk. Subsequently, Asia has become the prime trader

of spices and silk and Americas became the prominent exporter of silver.


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Earlier investors invested in those companies, which specialized in the production

of commodities. This accounted for the indirect investments in commodity assets. But

with the establishment of commodity exchanges, a shift in the investment patterns of

individuals has occurred as investors started recognizing commodity investments as an

alternative investment avenue. The establishment of these exchanges has benefited both

the producers and traders in terms of reaping high profits and rationalizing transaction

costs. Commodity exchanges play a vital role in ensuring transparency in transactions

and disseminating prices. The commodity exchanges ensured the standard of trading by

maintaining settlement guarantee funds and implementing stringent capital adequacy

norms for brokers. In the light of these developments, various commodity based

investment products were created to facilitate trading and risk management. The

commodity based products offer a huge array of benefits that include offering risk-return

trade-offs to investors, providing information on market trends and assisting in framing

asset allocation strategies. Commodity investments are always considered as defensive

because during the times of inflation, which adversely affects the performance of

commodities and bonds, commodities provide a defense to investors, maintaining the

performance of their portfolios.

The commodities trade in the 18th and 19th centuries was largely influenced by

the shifts in macro economic patterns, the changes in government regulations, the

advancement in technology, and other social and political transformations around the

world. The 19th century has seen the establishment of various commodities exchanges,

which paved the way for effective transportation, financing and warehousing facilities in

this arena. In a new era of trading environment, commodities exchanges offer

innumerable economic benefits by facilitating efficient price discovery mechanisms and

competent risk transfer systems.


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2.5. ROLE OF COMMODITY TRADING EXCHANGE

Earlier, all the sellers and buyers of a commodity used to come to a common

market place for the trade. Buyer could judge the amount of produce that year while the

seller could judge the amount of demand of the commodity. They could dictate their

terms and hence the counter party was left with no choice. Thus, in order to hedge from

this unfavorable price movement, need of the commodity exchange was felt.

An exchange designs a contract, which alone would be traded on the exchange.

The contract is not capable of being modified by participants, i.e., it is standardized. The

exchange also provides a trading platform, which converges the bids and offers

emanating from geographically dispersed locations, thereby creating competitive

conditions for trading. The exchange also provide facilities for clearing, settlement,

arbitration facilities, along with a financially secure environment by putting in a place

suitable risk management mechanism and guaranteeing performance of contract.

2.6. PARTICIPANTS OF 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.

Hedgers

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

futures market to reduce a particular risk that they face. This risk might relate to the priceof any commodity that the person deals in. The classic hedging example is that of wheat

farmer who wants to hedge the risk of fluctuations in the price of wheat around the time

that his crop is ready for harvesting. By selling his crop forward, he obtains a hedge by

locking in to a predetermined price.


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

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

There are basically two kinds of hedges that can be taken. A company that wants

to sell an asset at a particular time in the future can hedge by taking short futures position.

This is called a short hedge. A short hedge is a hedge that requires a short position in

futures contracts. As we said, a short hedge is appropriate when the hedger already owns

the asset, or is likely to own the asset and expects to sell it at some time in the future.

Similarly, a company that knows that it is due to buy an asset in the future can

hedge by taking long futures position. This is known as long hedge. A long hedge is

appropriate when a company knows it will have to purchase a certain asset in the future

and wants to lock in a price now.

Speculators

If hedgers are the people who wish to avoid price risk, speculators are those who

are willing to take such risk. These are the people who takes positions in the market &

assume risks to profit from price fluctuations in fact the speculators consume market

information make forecasts about the prices & put money in these forecasts. An entity

having an opinion on the price movements of a given commodity can speculate using the

commodity market. While the basics of speculation apply to any market, speculating in

commodities is not as simple as speculating on stocks in the financial market. For a

speculator who thinks the shares of a given company will rise, it is easy to buy the sharesand 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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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. The buying

cheap and selling expensive continues till prices in the two markets reach equilibrium.

Hence, arbitrage helps to equalise prices and restore market efficiency.

2.7. DERIVATIVES

Another major leap in the development of commodities markets is the growth in

commodities derivative segment. Derivatives trading has a long history. The first

recorded incident of commodities trade was traced back to the times of ancient Greece. In

the year 1688 De la Vega reported the trading in 'time bargains' which were the then

commonly used terms for options and futures. Though the first recorded futures trade was

found to have happened in Japan during the 17th century, evidences reveal that the

trading in rice futures was existent in China, 6000 years ago. Derivatives are useful for

both the producers and the traders for the mitigation of risk in their business. Trading in

futures is an outcome of the mankind's efforts towards maintaining the supply balance of

seasonal commodities throughout the year. Farmers derived the real benefits of

derivatives contracts by assuring the prices they want to procure on their products.

The volatility of prices has made the commodity derivatives not only significant

risk hedging instruments but also strategic exchange traded assets. Slowly, traders and

speculators, who never intended to take the delivery of goods, entered this segment. They

traded in these instruments and made their margins by taking the advantage of price

volatility in commodity markets.


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The dawn of the 21st century brought back the good times for commodity markets.

With the end of a 20 year bear market for commodities, following the global economic

recovery and increased demand from China and other developing nations, has revitalized

the charisma of commodities markets. According to the forecasts given by experts

commodities markets are likely to experience a bright future with the depreciation in the

value of financial assets. Furthermore, increasing global consumption, declining U.S.

Dollar value, rising factor-input costs and the recent recovery of the market from the

clutches of bear trend are considered to be the positive symptoms, which contribute to the

acceleration of growth in commodity markets segment.

Meaning of Derivatives:

A derivative is a product whose value is derived from the value of one or more

underlying variables or assets in a contractual manner. The underlying asset can be

equity, forex, commodity or any other asset.

In other words, Derivative means having no independent value. i.e. the value is

derived from the value of the underlying asset. Derivative means a forward, future,

option or any other hybrid contract of predetermine fixed duration, linked for the purpose

of contract fulfillment to the value of a specified real of financial asset or to an index

securities. Thus, a derivative contract is an enforceable agreement whose value is

derived from the value of an underlying asset. The four most common examples of

derivative instruments are forwards, futures, options and swaps / spreads.


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2.8. TYPES OF DERIVATIVE CONTRACTS

FORWARD CONTRACT

A forward contract is an agreement between two parties to buy or sell the underlying

asset at a future date at todays future price. Forward contract is very valuable in hedging

and speculation. It can help a farmer to hedge himself against any unfavorable movement

of the price of his crop by forward selling his harvest at a known price.

FUTURES CONTRACT

A futures contract is a contract traded on a futures exchange for the delivery of a

specified commodity at a specified future time. The contract specifies the item to be

delivered and the terms and conditions of delivery. Future contract is alone executed in

the commodity exchange trading.

What is the different between the futures contracts and forward contracts?Following are some of the basic differences between the futures and forward contract:

While futures contracts are traded on the exchange, forwards contracts are traded

over-the-counter market.

In case of futures contracts, the exchange specifies the standardize features of the

contract, while no predetermined standards are there in the forward contracts.

The exchange provides the mechanism that gives the two parties a guarantee that

the contract will be honored whereas there is no surety / guarantee of the trade settlement

in case of forward contract.


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2.9.DETERMINATION OF FUTURE PRICE

Futures prices evolves form the interaction of bids and offers emanating from all over the

country which converge in the trading floor or the trading engine. The bid and offer

prices are based on the expectations of prices on the maturity date.

How do professionals predict prices in futures

Futures price evolve form the interaction of bids and offers emanating from all over the

country which converge in the trading floor or the trading engine. The bid and offer

prices are based on the expectations of prices on the maturity date.

There are two methods for predicting futures prices fundamental analysis is concerned

with basic supply and demand information, such as, weather patterns, carryover supplies,

relevant policies of the government and agricultural reports.

On the other hands, technical analysis includes analysis of movement of prices in the

past. Many participants use fundamental analysis to determine the direction of the

market, and technical analysis to time their entry and exit.

2.10. ADVANTAGES AND LIMITATION OF THE FUTURES

TRADING

THE ADVANTAGES OF FUTURES TRADING

The main advantages of futures trading are:

i. Leverage

ii. Ability to go short

iii. Hedging

iv. Portfolio diversificationv. Automated, emotionless trading

vi. Flexible point of entry

vii. Predictability


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(i) Leverage

Trading a futures / commodity contract allows one to trade higher quantity with lessmoney.

(ii) Ability to go short

Most traditional stock mechanisms do not permit traders to short sell without large

account size, or large experience. With futures going short is as simple and as common

as going long. There are also no margin penalties or additional requirements for going

short.

(iii) Hedging

This is beneficial when protecting a stock portfolio by going short futures, or buying

a futures, or other various strategies. This is also very important for the world producers

of commodities such as coffee, where they can lock in their price for delivery at a price as

sometime in the future.

(iv) Portfolio diversification

Trading commodities and futures is probably a great idea for large investors who

can diversify from traditional portfolio models like bonds, stocks, and cash.

(v) Automated, Emotionless trading

Systems trading helps avoid the risky decisions an investor tends to make when a

strategy in not in place at the time the position is entered.

(vi) Flexible point of entry

Entry timing becomes irrelevant because some trades will go long, some short,

some will reverse, etc. and it really doesnt matter what market prices are or what day of

the week it is to get started.


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(vii) Predictability

Past performance of system trading is no guarantee but it is a mighty good

predictor over a long period of time. Because results arent based on price appreciation,

but rather catching appropriate long and short trades, its easy to back-test a system andsees a few years history of completed trades for that particular market.

LIMITATIONS OF FUTURES TRADING

(i) First they are impersonal contracts traded in exchange and provide little scope to

farmers to choose particular buyers. Commodity futures also play marginal role in

nurturing subsidy chains comprising farmers, processors and customers.

(ii) Commodity futures market is yet to develop fully as an efficient mechanism of risk

management and price discovery. The volume of transaction is low and the liquidity is

poor. The risk remains high indicating poor integration with the physical market and

inadequate participation by hedgers. The market are further deficient in infrastructure,

coupled with linkages with financial institutions.

FUTURES TRADING ARE EXTREMELY RISKY

Futures contracts are leveraged investments, meaning that one can control

something more valuable than the amount of money one used to trade it. With stocks, if

one wants to trade 5 shares of Infosys, one would have to pay an amount equal to 5 times

the current share price of insfosys. With futures, one is able to trade one contract of the

nifty that is worth Rs.3,00,000/- ( based on todays prices) with only Rs.50,000/- to

Rs.60,000 in his account. This type of leverage power can be very dangerous to the

amateur futures trader if used improperly. If traders were placed without setting

protective stop losses, one could lose substantial sum of money.


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COMMODITIES SUITABLE FOR FUTURES TRADING

All the commodities are not suitable for future trading and for conducting futures

trading. For being suitable for futures trading the market for commodity should be

competitive, i.e., there should be large demand for and supply of the commodity no

individual of group of persons acting in concert should be in a position to influence the

demand or supply, and consequently the price substantially. There should be free from

substantial government control. The commodity should government control. The

commodity should have long shelf-life and be capable of standardization and gradation.

THE PRINCIPLE FOR DESIGNING A FUTURES CONTRACT

The most important principle for designing a futures contract is to take into

account the systems and practices being followed in the cash market. The unit of price

quotation, unit of trading should be fixed on the basis of prevailing practices. The base

should generally be that quality or grade which has maximum production. The delivery

centers should be important production or distribution centers. While designing a futures

contract care should be taken that the contract designed is fair to both buyers and sellers

and there would be adequate supply of the deliverable commodity thus preventing any

squeezes of the market.


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2.11. MARGIN REQUIREMENTS AND SETTINGS

By collecting margins, the possibility of accumulating loss, particularly when

futures price moves only in one direction, gets substantially reduced, thereby reducing the

risk of default. Thus, margin requirement is a good faith deposit to help back the traders

position. If the positions goes against him, then he will eventually receive a margin call

requiring a deposit of funds to bring the equity back up to where he began the trade with,

known as the original margin. The respective exchange set the margin requirements

which are 15 20 percent of the total value of the commodity being traded. In certain

cases, when prices and volatility rise sharply the exchanges may raise margin

requirements to a higher percentage of the total value.

The aim of the margin money is to minimize the risk of default by either party.

The amount of initial margin is so fixed as to ensure that the probability of loss on

account of worst possible price fluctuation, which cannot be met by the amount of

ordinary / initial margin, is very low. The exchanges fix margin rates on the requirement

for balancing high security of contract and low cost of entering into contract. The daily

collection of margin funds ensure that sufficient funds are in place to receive their gains.

Therefore, while futures offers the opportunity to enter into highly leveraged transactions,

the margin system prevents losses as a result of nonperformance by the other party.

The main types of margins payable on futures contracts are:

Initial / Ordinary margin It is the amount to be deposited by the market participants in

his margin account with clearing house before they can place order to buy or sell futures

contracts. This must be maintained throughout the time their position is open and is returnable at

delivery, exercise, expiry or closing out.

Mark-to-market margins - these are payable based on closing prices at the end of each

trading day. These margins will be paid by the buyer if the price declines and by the seller if the

price rises. This margin is worked out on difference between the closing / clearing rate and the

rate of the contract or the previous days clearing rate. The exchange collects these margins

from buyers if the prices decline and pays to the seller and vice versa.


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2.12. COMMODITY EXCHANGE TRADING REGULATIONS IN

INDIA

Commodity Derivative markets started in India in cotton in 1875 and in oilseeds

in 1900 at Bombay. Forward trading in raw jute and jute goods started at Calcutta in

1912. Forward markets in wheat have been functioning at Hapur since 1913 and in

bullion at Bombay since 1920. After independence, the Constitution of India brought the

subject of stock exchanges and futures markets into the Union list. As a result, the

responsibility for regulation of commodity futures markets devolved on the Government

of India. A Bill on forward contracts was referred to an expert committee headed by Prof.

A.D.Shroff and select committees of two successive Parliaments and finally in December

1952, the Forward Contracts (Regulation) Act, 1952, was enacted. The Act provided for

three-tier regulatory system:

The Forward Markets Commission (FMC) (set up in September 1953)(http://www.fmc.gov.in)

An association recognized by the Government of India on the recommendation ofForward Markets Commission

The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central Government in July

1954. The Act divides the commodities into three categories with reference to extent of

regulation:

Commodities in which futures trading is prohibited.

Commodities in which futures trading can be organized under the auspices of arecognized association.

Commodities that have neither been regulated for being traded under the recognizedassociation nor prohibited are referred to as free commodities and the association involved in

such free commodities must obtain the Certificate of Registration from the Forward MarketsCommission.

In the seventies, most registered trade associations became inactive, as futures, as well as

forward trading in the commodities for which they were registered, were either

suspended or prohibited altogether.


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The liberalized policy now being followed by the Government of India and the

gradual withdrawal of the procurement and distribution channel necessitated setting in

place a market mechanism to perform the economic functions of price discovery and risk

management. The National Agriculture Policy announced in July 2000 and the

declarations in the 2002-2003 Budget indicated the Governments resolve to put in place

a mechanism of a futures market.

As a follow up, the government issued notifications on 1 April 2003 permitting

futures trading in all commodities. The authorities subsequently granted licenses to three

national commodity exchanges: Multi Commodity Exchange (MCX), National

Commodity & Derivatives Exchange (NCDEX) and National Multi Commodity

Exchange of India (NMCE), which began operations in 2004.

COMMODITY TRADING REGULATOR AND EXCHANGES IN INDIA


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DIFFERENT TYPES OF COMMODITIES TRADED

World-over one will find that a market exits for almost all the commodities

known to us. These commodities can be broadly classified into the following:

PRODUCTS COMMODITIES

Precious

Metals

Gold, Silver, Platinum etc

Other Metals Nickel, Aluminum, Copper etcAgro-Based

Commodities

Wheat, Corn, Cotton, Oils, Oilseeds.

Soft

Commodities

Coffee, Cocoa, Sugar etc

Live-Stock Live Cattle, Pork Bellies etc

Energy Crude Oil, Natural Gas, Gasoline etc

DIFFERENT SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the

Counter (OTC) market and the Exchange based market. Also, as in equities, there

exists the spot and the derivatives segment. The spot markets are essentially over the

counter markets and the participation is restricted to people who are involved with that

commodity say the farmer, processor, wholesaler etc. Derivative trading takes place

through exchange-based markets with standardized contracts, settlements etc.


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2.13. LEADING COMMODITY MARKETS OF WORLD

Some of the leading exchanges of the world are

New York Mercantile Exchange (NYMEX),

The London Metal Exchange (LME) and

The Chicago Board of Trade (CBOT).

2.14. LEADING COMMODITY MARKETS OF INDIA

The government has now allowed national commodity exchanges, similar to the

BSE & NSE, to come up and let them deal in commodity derivatives in an electronic

trading environment. These exchanges are expected to offer a nation-wide anonymous,

order driven, screen based trading system for trading. The Forward Markets Commission

(FMC) will regulate these exchanges.

Consequently four commodity exchanges have been approved to commence business

in this regard. They are:

Multi Commodity Exchange (MCX) located at Mumbai.

National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai.

National Board of Trade (NBOT) located at Indore.

National Multi Commodity Exchange (NMCE) located at Ahmedabad.


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Chapter - III

COMPANY PROFILE


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3.1. GEOJIT FINANCIAL SERVICES LTD-AS SERVICES

PROVIDER

Mr. C.J. George and Mr. Ranajit Kanjilal founded Geojit as a partnership firm in

the year 1987. In 1993, Mr. Ranajit Kanjilal retired from the firm and Geojit became a

proprietary concern of Mr. C. J George. In 1994, it became a Public Limited Company by

the name Geojit Securities Ltd. The kerala State Industrial Development Corporation Ltd.

(KSIDC), in 1995, became a co-promoter of Geojit by acquiring 24% stake in the

company, the only instance in India of a government entity participating in the equity of a

stock broking company. Geojit listed at The Stock Exchange, Mumbai (BSE) in the year

2000. In 2003, the company was renamed as Geojit Financial services Ltd. (GFSL). The

board of the company consists of professional directors, including a Kerala government

nominee with 2/3rd of the board members being Independent Directors. With effect from

July 2005, the company is also listed at The National Stock Exchange (NSE). Geojit is a

charter member of the Financial Planning Standards Board of India and is one of the

largest DP brokers in the country.

3.2. Overseas Joint Venture

Barjeel Geojit Securities, LLC, Dubai, is a joint venture of Geojit with Al Saud

Group belonging to Sultan bin Saud Al Qassemi having diversified interests in the area of

equity markets, real estates and trading, Barjeel Geojit is a financial intermediary and the

first licensed brokerage company in UAE. It has facilities for off-line and on-line trading

in Indian capital market and also in US, European and Far-Eastern capital markets. It also

provides Depositary services and deals in Indian and International Funds. An associate

company, Global Financial Investments S.A.O.G provides similar services in Oman.

Geojit has a tie up with Doha Bank in Qatar, which offers capital market services

from the Indian Desk.


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3.3. MILESTONE

The company crossed the following miestones to reach its present position as aleading retail broking house in India.

1986

Geojit becomes a member of the Cochin Stock Exchange.

1994

The Kerala State Industrial Development Corporation (KSIDC), an arm of theGovernment of Kerala, becomes a co-promoter of the company by acquiring 24% equitystake in Geojit Financial Services Ltd., based on the evaluation report of Ernst & Young.This is the only venture in India where a state owned development institution isparticipating in the equity of a stock broking company. Geojit becomes a corporatebroking house.

1995

Geojit comes cut with a small Initial Public Offer (IPO) of Rs.9.5 million, whichwas oversubscribed by 15 times. Geojits issued and subscribed equity capital increasedto Rs.30 million and KSIDCs equity stake comes down to 17%.

Geojit becomes a member of the National Stock Exchange (NSE) and installs itsfirst trading terminal in Cochin, Kerala.

1996

The company launches Portfolio Management Services after obtaining requiredregistration (Portfolio Management) from Securities Exchange Board of India (SEBI).

1997

Geojit becomes a Depository Participant under National Securities DepositoryLimited (NSDL) and begins providing Depository Services through its branches.

1999

Geojit becomes a member of The Stock Exchange, Mumbai (BSE) and activatesBombay Online Terminals (BOLT) in different branches.

The customer base of Geojit crosses the 50,000 mark.

2000

Geojit becomes the first broking in the country to offer online trading facility.Then, the SEBI Chairman. Mr. D.R.Mehta inaugurates the facility on 1st February 2000.

Commences Derivative Trading after obtaining registration as a Clearing andTrading Member in NSE.

2001

Becomes Indias first DP to launch depository transactions through internet.

Establishes Joint Ventures in the UAE for serving NRI clients.


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2002

Geojit ties up with MetLife for the marketing and distribution of insuranceproducts across the country.

The company becomes the first online brokerage house to launch integratedInternet trading system for both cash and derivatives segments.

Sheikh Sultan Bin Saud al Oassemi, a member of the ruling family of sharjah, WE,joins the Board of Directors of Geojit.

2003

Geojit Commodities Limited, a wholly owned subsidiary of Geojit, becomesmember of National Multi-Commodity Exchange of India Ltd., National Commodity &Derivatives Exchange Ltd., Multi Commodity Exchange and launches CommodityFutures Trading in rubber, pepper, gold. wheat and rice.

Geojit Commodities Limited launches Online Futures Trading in multiplecommodities namely, agri-commodities, precious metals like gold and silver, othermetals like steel, aluminum,etc. and energy futures namely, crude oil and furnace oil.

Geojit raises more than Rs.100 million through issue of preferential shares.

2005

Barjeel Geojit Securities LLC becomes a member of Dubai Gold CommodityExchange.

Geojit Credits, a subsidiary of Geojit Financial Services Ltd. registers with ReserveBank of India as a Non-Banking Financial Company (NBFC).

The Company gets listed on National Stock Exchange of India Limited. The Company implements Employees Stock Option Scheme.

The Company opens a first of its kind-all womens branch in cochin.

2006

Geojit relaunches Internet trading on Reuters TIB Mercury Platform.

2007

Geojit joint venture with BNP Paribas to provide Global Financial services to theircustomer and now Geojit become Geojit BNP Paribas Limited.


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3.4. Services Provided by Geojit Financial Services Ltd.

PRODUCTS

Internet Trading

Geojit, a member of NSE and BSE, has a network of over 300 branches in

India and abroad, rendering quality equity trading services. Geojit not only has a strong

offline presence but also provides automated online trading services.

Geojit also provides a Call & Trade facility to its customers wherein they can

place and track their orders through our dedicated Call Center Desk by dialing the toll

free number.

Geojits retail spread caters to the need of individual investors. Trading in

equities is made simple, safe and interesting with smart advice from the research desk

through daily SMS alerts, market pointers, periodical research reports, stock

recommendations and customer meets organized frequently.

The online trading system allows customers to track the markets by setting up

their own market watch, receiving research tips, stock alerts, real-time charts and news

and many more features enable the customer to take informed decisions.

The brokerage structure makes Geojits Online Trading all the more attractive:


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Types of trading platform

We can choose the trading platform that suits you best. Geojit offers three versions to

meet customer needs:

Gold

Silver

Platinum

Silver

Gold and Silver platforms are quite similar as they are both web-based. In Silver version

the feeds are updated every minute and not real-time as in the Gold platform. However,

one can click the refresh button as many times to view the latest stock prices. There are

no minimum brokerage charges for this platform. A normal investor who does not engage

in speculative transactions may find the Silver version most suited to his needs.

Gold

This platform is a web-based solution and the customer can login to the trading platform

from anywhere in the world. During Market hours the stock prices are refreshed

seamlessly and the delay in transmission would be a few seconds, which is mostly

dependant on the bandwidth connectivity used by the customer. In this, the trader will

receive live quotes as the rates are refreshed every second.

Platinum

The Platnium version acts as a virtual dealers terminal providing live updates and

confirmation. The executable program is downloaded on the customers computer so that

he can trade from the comfort of his home / office. Stock prices are real-time and

continuously updated once logged in.


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Depository

A depository can be compared to a bank. It holds securities such as shares,

denentures, bonds, government securities, units etc. of investors in electronic form. There

are two depositories in India, The National Securities Depository Limited (NSDL) and

Central Depository Services Limited (CDSL). An individual who desires avail the

depository services can approach a Depository Participant (DP).

Banks,financial institutions, custodians, brokers or any other entity eligible as per

SEBI (Depositories and Participants) Regulations,1996 can apply to the Depository to

become a Depository Participants. As on 31st December 2005 there were 221 Depository

Participants in India.

Geojit is a Depository participant of NSDL. Investors can open demat accounts

with NSDL through Geojit. One can approach the nearest branch of Geojit for opening

holdings, reports, and ledger and will have free access to our research reports at any time.

Commodity

Geojit Commodities, a subsidiary of Geojit Financial Services Limited, is mainly

engaged in the business of Commodity Futures Trding. Geojit Commodities is a member

of:

National Multi-Commodity Exchange of India Limited (NMCE)

National Commodity & Derivatives Exchange Limited (NCDEX)

Multi-Commodity Exchange (MCX)

India Pepper and Spice Trade Association (IPSTA)

Singapore Commodity Exchange (SICOM)

Dubai Gold Commodity Exchange (DGCX).


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Geojit provides information on commodity futures, along with technical and

fundamental analysis online at its website and also through the companys large branch

network. The company conducts Seminars, distributes free-in-house literature and holds

interactive sessions that help raise awareness on the futures market. The number of

participants is continuously on the rise thus leading to increased volumes and market

efficiency.

Geojit Commodity offers futures trading through multiple exchanges in varied

commodities such as:

Agri commodities: oilseeds, soya, groundnut, pulses, rice, wheat, sugar, spices,

rubber, guar, pepper, cardamom, coffee,etc

Precious metals: gold and silver,

Base metals: steel, aluminum, nickel, zinc, copper, etc

Energy products: crude oil and furnace oil

Geojit clientele in commodities rage from investors, co-operative socities, state

and national institutions to dealers, traders, manufacturers, financiers, speculators,

arbitragers, etc.

Geojit does not have proprietary interest in any commodity and therefore is price neutral.

Transaction costs are highly affordable attracting a spectrum of investors. Membership in

multiple exchanges gives clients the added advantage of arbitrage. Geojit has specialized

staff that provide the required guidance, help and enable clients to enter at the appropriate

price.


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3.5. TRADING IN COMMODITIES @ GEOJIT

Open a trading account and maintain initial margin with Geojit.

When an order request is entered for buying/selling for a match with the existingorders in the Exchange system. If the order matches another order in the system it results

in a trade.

Contract note is issued in the exchange specified format containing details such as

transaction, quantity, price etc. Contract note is a legal document enforceable in the court

of law.

Mark to market margin is levied on the contract.

The open purchase/sale positions can be squared off at any time during the contract

period.

NMCE however does not allow members to enhance their position during the

settlement month. Existing positions can be squared off.

On the first (tenth in case of gold & silver) day of settlement month, margins on

existing position are increased by 20%

From 1st to 15th of the contract month (10th to 15th in case of gold & silver), seller

can tender warehouse receipt for settlement.

This means that the seller has the right to make delivery of the sold position any

time between the 1st to 15th (10th to 15th in case of gold & silver) of the contract month.

The first buyer (as per the exchange records) shall have to necessarily take delivery of the

same. The seller shall receive payment from the exchange on T+3 day while the buyer

has to make payment on T+1 day. (T is the transaction day)

The seller who places his commodity with Central Warehousing Corporation

(CWC) is issued a CWC receipt against this delivery. This receipt is accepted by Geojit

and sent to the exchange that gives it to the buyer. The buyer presents it at CWC and

takes delivery of his commodity.


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Commodity Depository

1. The commodity Depository account can be opened by individuals, partnerships

firms, companies, etc. unlike in the capital market segment where Partnership firms

cannot open the demat account in the firm name.

2. The content of the Agreements shall differ for each category

3. Depository charges differ for each category

4. Only warehouse electronic receipts are considered for the purpose debiting /

crediting depository account

5. Commodities depository account can be availed at both the Depositories i.e. NSDL

and CDSL6. The Commodities Identification number i.e.INC is akin to the ISIN

The commodities Depository account may be credited in the following situations:

1. Demat2. Revalidation

3. Actual purchase from market.

Demat:

If the customer has some commodities with him, he may unload it in the

warehouse and take the warehouse receipt after due verification of the Assayer appointed

by NCDEX AND MCX. To convert the warehouse receipt in demat form, he has to fill

up necessary details in the Commodity Deposit Form available in the Warehouse. The

Warehouse shall inform the Registrar and Transfer Agents (RTA) with the required

details who shall then arrange to credit the depository account of the customer through

NSDL/CDSL. Currently, there is only one RTA for commodities i.e. Karvy.


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Revalidation:

If the client doesnt wish to open the DP account then he may trade directly in

the market with the physical warehouse receipts (in MCX AND NMC) Normally the

Warehouse receipt (whether demat or physical) is for duration of 3 months. After the

expiry of 3 months the owner of the receipt needs to revalidate it. He will request ther

Warehouse to revalidate the receipt. The assayer will examine the commodity and take

into account the wear and tear (normal as well as abnormal) for revalidating the

warehouse receipt

Portfolio Management Services

Geojit, a SEBI registered Portfolio Manager (Reg. No.INP000000316) offers

discretionary portfolio management services. Geojit has a team of experts who carefully

take investment decisions based on the clients objectives. The portfolio Management

team has a successful track record of more than 10 years in the capital market. The team

has access to Geojits strong Equity Research, and Fundamental & Technical-analysis.


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Chapter - IV

GOLD


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4.1. INTRODUCTION

Gold is a unique asset based on few basic characteristics. First, it is primarily a

monetary asset, and partly a commodity. As much as two thirds of golds total

accumulated holdings relate to store of value considerations. Holdings in this category

include the central bank reserves, private investments, and high-cartage jewelry bought

primarily in developing countries as a vehicle for savings. Thus, gold is primarily a

monetary asset. Less than one third of golds total accumulated holdings can be

considered a commodity, the jewelry bought in Western markets for adornment, and gold

used in industry.

The distinction between gold and commodities is important. Gold has maintained

its value in after-inflation terms over the long run, while commodities have declined.

Some analysts like to think of gold as a currency without a country. It is an

internationally recognized asset that is not dependent upon any governments promise to

pay. This is an important feature when comparing gold to conventional diversifiers like

T-bills or bonds, which unlike gold, do have counter-party risk.

Gold is a monetary metal whose price is determined by inflation, by fluctuations

in the dollar and U.S. stocks, by currency-related crises, interest rate volatility and

international tensions, and by increases or decreases in the prices of other commodities.

The price of gold reacts to supply and demand changes and can be influenced by

consumer spending and overall levels of affluence.

Gold is different from other precious metals such as platinum, palladium and

silver because the demand for these precious metals arises principally from their

industrial applications. Gold is produced primarily for accumulation; other commodities

are produced primarily for consumption. Golds value does not arise from its usefulness


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in industrial or consumable applications. It arises from its use and worldwide acceptance

as a store of value. Gold is money.

4.2. WHAT MAKES GOLD SPECIAL?

Timeless and Very Timely Investment:

For thousands of years, gold has been prized for its rarity, its beauty, and above all, for its

unique characteristics as a store of value. Nations may rise and fall, currencies come and

go, but gold endures. In todays uncertain climate, many investors turn to gold because it

is an important and secure asset that can be tapped at any time, under virtually any

circumstances. But there is another side to gold that is equally important, and that is its

day-to-day performance as a stabilizing influence for investment portfolios. These

advantages are currently attracting considerable attention from financial professionals

and sophisticated investors worldwide.

Gold is an effective diversifier:

Diversification helps protect your portfolio against fluctuations in the value of any one-

asset class. Gold is an ideal diversifier, because the economic forces that determine the

price of gold are different from, and in many cases opposed to, the forces that influence

most financial assets.

Gold is the ideal gift:

In many cultures, gold serves as a family treasure or a wealth transfer vehicle that is

passed on from generation to generation. Gold bullion coins make excellent gifts forbirthdays, graduations, weddings, holidays and other occasions. They are appreciated as

much for their intrinsic value as for their mystical appeal and beauty. And because gold is

available in a wide range of sizes and denominations, you dont need to be wealthy to

give the gift of gold.


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Gold is highly liquid:

Gold can be readily bought or sold 24 hours a day, in large denominations and at narrow

spreads. This cannot be said of most other investments, including stocks of the worlds

largest corporations. Gold is also more liquid than many alternative assets such as venture

capital, real estate, and timberland. Gold proved to be the most effective means of raising

cash during the 1987 stock market crash, and again during the 1997/98 Asian debt crisis.

So holding a portion of your portfolio in gold can be invaluable in moments when cash is

essential, whether for margin calls or other needs.

Gold responds when you need it most:

Recent independent studies have revealed that traditional diversifiers often fall during

times of market stress or instability. On these occasions, most asset classes (including

traditional diversifiers such as bonds and alternative assets) all move together in the same

direction. There is no cushioning effect of a diversified portfolio leaving investors

disappointed. However, a small allocation of gold has been proven to significantly

improve the consistency of portfolio performance, during both stable and unstable

financial periods. Greater consistency of performance leads to a desirable outcome an

investor whose expectations are met.

4.3. THE REASON WHY INVESTORS OWN GOLD

There are six primary reasons why investors own gold: They may never be more

relevant than they are today.

1. As a hedge against inflation.

2. As a hedge against a declining dollar.

3. As a safe haven in times of geopolitical and financial market instability.

4. As a commodity, based on golds supply and demand fundamentals.
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5. As a store of value.

6. As a portfolio diversifier.

1. HEDGE AGAINST INFLATION

Gold is renowned as a hedge against inflation. The most consistent factor

determining the price of gold has been inflation - as inflation goes up, the price of gold

goes up along with it. Since the end of World War II, the five years in which U.S.

inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five

years, the average real return on stocks, as measured by the Dow, was -12.33%; the

average real return on gold was 130.4%.

Today, a number of factors are conspiring to create the perfect inflationary storm:

extremely simulative monetary policy, a major tax cut, a long term decline in the dollar, a

spike in oil prices, a huge trade deficit, and Americas status as the worlds biggest debtor

nation. Almost across the board, commodity prices are up despite the short-term absence

of a weakening dollar which is often viewed as the principal reason for stronger

commodity prices.

Oil, Inflation and Gold

Although the prices of gold and oil don't exactly mirror one another, there is no

question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can

expect a corresponding reaction in gold prices, often with a lag.

There have been two major upward moves in the price of gold since it was freed to

float in 1968. The first occurred between 1972 and 1974 when oil prices climbed 325%,

from $2.44 to $10.36. During the same period, gold prices rose 268% (on a quarterly

average basis) from $47.45 to $174.76.
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The second major price move occurred between 1978 and 1980, when oil prices

increased 105%, from $12.70 to $26.00. Over the same period, quarterly average gold

prices rose 254% from $178.33 to $631.40.

2. GOLD - HEDGE AGAINST A DECLINING DOLLAR

Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar

causes the price of gold to rise. The U.S. dollar is the world's reserve currency - the

primary medium for international transactions, the principal store of value for savings,

the currency in which the worth of commodities and equities are calculated, and the

currency primarily held as reserves by the world's central banks. However, now that it

has been stripped of its gold backing, the dollar is nothing more than a fancy piece of

paper.

3. GOLD AS A SAFE HAVEN

Despite the fact that the United States is the worlds only remaining superpower,

there are many problems festering around the world, any one of which could explode

with little warning. Gold has often been called the "crisis commodity" because it tends to

outperform other investments during periods of world tensions. The very same factors

that cause other investments to suffer cause the price of gold to rise. A bad economy can

sink poorly run banks. Bad banks can sink an entire economy. And, perhaps most

importantly to the rest of the world, the integration of the global economy has made it

possible for banking and economic failures to destabilize the world economy.

As banking crises occur, the public begins to distrust paper assets and turns to

gold for a safe haven.

When all else fails, governments rescue themselves with the printing press,

making their currency worth less and gold worth more. Gold has always risen the most

when confidence in government is at its lowest.


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4. GOLD - SUPPLY AND DEMAND

First, demand is outpacing supply across the board. Gold production is declining;

copper production is declining; the production of lead and other metals is declining. It is

very difficult to open new mines when the whole process takes about seven years on

average, making it hard to address the supply issue quickly. Gold output in South Africa,

the world's largest gold producer, fell to its lowest level since 1931 this past year as the

rand's gains prompted Harmony Gold Mining Co. and rivals to close mines despite 16

year highs in the gold price.

Growing Demand - China, India and Gold

India is the largest gold-consuming nation in the world. China, on the other hand,

has the fastest-growing economy in modern history. Both India and China are in the

process of liberalizing laws relating to the import and sale of gold in ways that will

facilitate gold purchases on a huge scale.

China is teaching the West something new. Its economy, growing at 9 percent per

year, is expected to become the second largest in the world by 2020, behind only the

United States. Last year Americans spent $162 billion more on Chinese goods than the

Chinese spent on U.S. products. That gap has been growing by more than 25 percent per

year. China's consumer class, meanwhile, is spending on everything from bagels to

Bentleys and will soon outnumber the entire U.S. population. China's explosive growth

"could be the dominant event of this century," says Stapleton Roy, former U.S.

ambassador to China. "Never before has a country risen as fast as China is doing."

China recently passed legislation that will allow the country's four major commercial

banks to sell gold bars to their customers in the near future. Currently, individuals in


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China are only allowed to buy gold-backed certificates from the Bank of China and the

Industrial and Commercial Bank of China.

5. GOLD STORE OF VALUE

One major reason investors look to gold as an asset class is because it will always

maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market

collapse. Economist Stephen Harmston of Bannock Consulting had this to say in a 1998

report for the World Gold Council,

although the gold price may fluctuate, over the very long run gold has consistently

reverted to its historic purchasing power parity against other commodities and

intermediate products.

Historically, gold has proved to be an effective preserver of wealth. It has also

proved to be a safe haven in times of economic and social instability. In a period of a

long bull run in equities, with low inflation and relative stability in foreign exchange

markets, it is tempting for investors to expect continual high rates of return on

investments. It sometimes takes a period of falling stock prices and market turmoil to

focus the mind on the fact that it may be important to invest part of ones portfolio in an

asset that will, at least, hold its value.

Today is the scenario that the World Gold Council report was referring to in 1998.

6. GOLD - PORTFOLIO DIVERSIFIER

The most effective way to diversify your portfolio and protect the wealth created

in the stock and financial markets is to invest in assets that are negatively correlated with


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those markets. Gold is the ideal diversifier for a stock portfolio, simply because it is

among the most negatively correlated assets to stocks.

Investment advisors recognize that diversification of investments can improve

overall portfolio performance. The key to diversification is finding investments that are

not closely correlated to one another. Because most stocks are relatively closely

correlated and most bonds are relatively closely correlated with each other and with

stocks, many investors combine tangible assets such as gold with their stock and bond

portfolios in order to reduce risk. Gold and other tangible assets have historically had a

very low correlation to stocks and bonds.

Although the price of gold can be volatile in the short-term, gold has maintained

its value over the long-term, serving as a hedge against the erosion of the purchasing

power of paper money. Gold is an important part of a diversified investment portfolio

because its price increases in response to events that erode the value of traditional paper

investments like stocks and bonds.


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4.4. TRADING PARAMETERS FOR GOLD IN

COMMODITY EXCHANGE MARKET

Authority

Trading of Gold futures may be conducted under such terms and conditions as specifiedin the Rules, Byelaws & Regulations and directions of the Exchange issued from time totime.

Unit of Trading

The unit of trading of Gold shall be 1 Kg and 100gm mini lot. Bids and offers may beaccepted in lots of Gold shall be 1 Kg or multiples thereof.

Months Traded In

Trading in Gold futures may be conducted in the months as specified by the Exchangefrom time to time.

Tick Size

The tick size of the price of Gold shall be Re. 1.00.

Basis Price

The basis price of Gold shall be Ex-Mumbai inclusive of Customs Duty and Octroi,excluding Sales Tax.

Unit for Price Quotation

The unit of price quotation for Gold shall be in Rupees per 10 gms of Gold with 995Fineness.

Hours of Trading

The hours of trading for futures in Gold shall be as follows: Mondays through Fridays 10.00 AM to 11.30 PM Saturdays 10.00 AM to 02.00 PMOr as determined by the Exchange from time to time. All timings are as per Indian


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Standard Timings (IST)

Last Day of Trading

Last day of trading for Gold shall be 20th calendar day of contract month, if 20 th happens

to be a holiday or a Saturday or a Sunday, then the previous working day, which is otherthan a Saturday.Mark to Market

The outstanding positions in futures contract in Gold would be marked to market dailybased on the Daily Settlement Price (DSP) as determined by the Exchange.

Position limits

At the commodity level, the member-wise position limit will be a maximum of 6 MT or15% of market-wide open position whichever is higher. The Client-wise position limitwill be a maximum of 2 MT. Both position limits will be subject to NCDEX Regulationsand directions from time to time. The above position limits will not apply to bona fidehedgers as determined by the Exchange.

Margin Requirements

NCDEX will use Value at Risk (VaR) based margin calculated at 99% confidenceinterval for one day time horizon. NCDEX reserves the right to change, reduce or levyany additional margins including any mark up margin.

Special Margin

In case of additional volatility, a special margin of at such other percentage, as deemedfit, will be imposed immediately on both buy and sell side in respect of all outstandingpositions, which will remain in force for next 2 days, after which the special margin willbe relaxed.

Pre-Expiry Additional Margin

There will be an additional margin imposed for the last 2 trading days, including theexpiry date of the Gold contract. The additional margin will be added to the normalexposure margin and will be increased by 5% everyday for the last 2 trading days of the

contract.

Delivery Margins

In case of open positions materializing into physical delivery, delivery margins as may bedetermined by the Exchange from time to time will be charged. The delivery margins willbe calculated based on the number of days required for completing the physical deliverysettlement (the look-ahead period and the risks arising thereof).


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Arbitration

Disputes between the members of the Exchange inter-se and between members andconstituents, arising out of or pertaining to trades done on NCDEX shall be settled

through arbitration. The arbitration proceedings and appointment of arbitrators shall beas governed by the Bye-laws and Regulations of the Exchange.

4.5. DELIVERY PROCEDURES

Unit of Delivery

The unit of delivery for Gold shall be 1 kg.

Delivery Size

Delivery is to be offered and accepted in lots of 1 kg Net only or multiples thereof. No

quantity variation is permitted as per contract specification.

Delivery Requests

The procedure for Gold delivery is based on the contract specifications as perExhibitIA and Exhibit IB. All the open positions shall have to be compulsorily delivered eitherby giving delivery or taking delivery as the case may be. That is, upon expiry of thecontracts, any seller with open position shall give delivery of the commodity. The

corresponding buyer with open position as matched by the process put in place by

the Exchange shall be bound to settle by taking physical delivery. In the event of

default by seller or buyer to give delivery or take delivery, as the case may be, such

defaulting seller or buyer will be liable to penalty as may be prescribed by theExchange from time to time.

The Buyers and the Sellers need to give their location preference through the front end ofthe trading terminal. If the Sellers fail to give the location preference then the allocationto the extent of his open position will be allocated to the base location.

Delivery Allocation

The Exchange would then compile delivery requests received from members on the lasttrading day, as specified in Chapter 1 above. The buyers / sellers who have to receive /give delivery would be notified on the same day after the close of trading hours. Deliveryof Gold is to be accepted by Buyers at the accredited warehouse/s where the Seller effectsdelivery in accordance with the contract specifications.

Gold Delivery

Where Gold is sold for delivery in a specified month, the seller must have requisiteelectronic credit of such Gold holding in his Clearing Members Pool Account before the


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scheduled date of pay in. On settlement the buyers Clearing Members Pool Accountwould be credited with the said delivery quantity on pay out. The Clearing Member isexpected to transfer the same to the buyers depository account.

Quality Standards

The contract quality for delivery of Gold futures contracts made under NCDEXRegulations shall be Gold conforming to the quality specification indicated in thecontract. No lower grade/quality shall be accepted in satisfaction of futures contracts fordelivery except as and to the extent provided in the contract specifications. Delivery ofhigher grade would be accepted with premium.

Packaging

The gold bars to be accepted at the designated vault shall be directly imported andhallmarked from the approved list of refiners through the approved logistic agency i.e.Brinks Arya India (Pvt.) Ltd. or their affiliates / associates. The Gold bars delivered at theExchange designated vault, indicated in Exhibit 4, should bear the refinery serial no. andaccompanied with the Refinery certificate. Gold held at the NCDEX approved vaults willbe on un -allocated basis i.e. it will be co mingled with those gold bars pertaining to theparticipants of NCDEX. These bars will be of 1 Kg only.

Standard Allowances

No standard allowance is allowed on account of sample testing.

Weight

The quantity of Gold received and or delivered at the NCDEX designated vault would bedetermined / calculated by the weight together with serial number as indicated in theenclosed Refinery certificate submitted at the time of delivery into the designated vaultand would be binding on all parties.

Good / Bad delivery Norms

Gold delivery into NCDEX designated Warehouse would constitute good delivery or baddelivery based on the good / bad delivery norms as perExhibit 3. The list contained inExhibit 3 is only illustrative and not exhaustive. NCDEX would from time to time reviewand update the good / bad delivery norms retaining the trade / industry practices.


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Accredited Assayer

NCDEX has approved the Assayer for quality testing and certification of Gold receivedat the designated warehouse. The quality testing and certification of Gold will beundertaken only by the approved Assayer. The assayer details are given in the Exhibit 2

alongside the warehouses.

Quality Testing Report

Gold delivered into the NCDEX designated vault. This must be accompanied with thecertificate from the LBMA approved Refinery. A specimen of the certificate issued byLBMA approved refinery is posted under Exhibit 6.

Assayer Certificate

Testing and quality certificate issued by NCDEX approved Assayer for Gold delivered atdesignated warehouse in Mumbai, Ahmedabad and at such other locations announcedby the Exchange from time to time shall be acceptable and binding on all parties. Eachdelivery of Gold at the warehouse must be accompanied by a certificate from NCDEXapproved Assayer in the format as perExhibit 4.

Validity period

The validity period of the Assayers Certificate for Gold is till the withdrawal from thewarehouse.

Electronic transfer

Any buyer or seller receiving and or effecting Gold would have to open a depositoryaccount with an NCDEX empanelled Depository Participant (DP) to hold the Gold inelectronic form. On settlement, the buyers account with the DP would be credited withthe quantity of Gold received and the corresponding sellers account would be debited.The Buyer wanting to take physical delivery of the Gold holding has to make a request inprescribed form to his DP with whom depository account has been opened. The DPwould route the request to the warehouse for issue of the physical commodity i.e. Gold tothe buyer and debit his account, thus reducing the electronic balance to the extent of Goldso rematerialized.

Charges

All charges and costs payable at the designated warehouse towards delivery of Goldincluding sampling, grading, weighing, handling charges, storage etc. from the date ofreceipt into designated warehouse upto date of pay in & settlement shall be paid by theseller.


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No refund for warehouse charges paid by the seller for full validity period shall be givento the seller or buyer for delivery earlier than the validity period. All charges and costsassociated & including storage, handling etc. after the pay out shall be borne by thebuyer. Warehouse storage charges will be charged to the member / client by therespective Depository Participant. The Assayer charges for testing and quality

certification should be paid to the Assayer directly at the delivery location either by cash /cheque / demand draft.

Duties & levies

All duties, levies etc. up to the point of sale will have to be fully borne by the seller andshall be paid to the concerned authority. All related documentation should be completedbefore delivery of Gold into the NCDEX accredited warehouse.

Stamp Duty

Stamp duty is payable on all contract notes issued as may be applicable in the Statefrom where the contract note is issued or State in which such contract note is receivedby the client.

Taxes

Service tax

Service tax will be payable by the members of Commodity Exchanges on the grossamount charged by them from their clients on account of dealing in commodities.

Sales Tax / VATLocal taxes/ VAT wherever applicable is to be paid by the seller to the sales tax/VATauthorities on all contracts resulting in delivery. Accordingly the buyer will have to paythe taxes/VAT to the seller at the time of settlement. Members and / or their constituentsrequiring to receive or deliver Gold should register with the relevant tax/VAT authoritiesof the place where the delivery is proposed to be received / given. In the event of salestax exemption, such exemption certificate should be submitted before settlement of theobligation. There will be no exemptions on account of resale or second sale in VATregime.

Premium / Discount

Premium & Discount on the Gold delivered will be provided by the Exchange on thebasis of quality specifications:

The Exchange will communicate the premium / discounts amount applicable. Suchamount will be adjusted to the members account through the supplementary settlement.

Grade Premium / (Discount) %


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9999 0.499990 0.409950 0.00

Formula used = 100 - (Delivery Grade / Standard Grade) * 100, e.g. 100-(0.995/0.9999)*100

4.6. CLEARING AND SETTLEMENT

Daily Settlement

All open positions of a futures contract would be settled daily based on the DailySettlement Price (DSP).

Daily Settlement Prices

The Daily Settlement Price (DSP) will be as disseminated by the Exchange at the end ofevery trading day. The DSP will be reckoned for marking to market all open positions.

Final Settlement Prices

The Final Settlement Price (FSP) will be determined by the Exchange upon maturity ofthe contract. The open positions for which information have been provided for and havebeen matched by the Exchange, would result in physical delivery.

Spot Prices

NCDEX will announce / disseminate spot prices for Gold relating to the designateddelivery center and specified grade/ quality parameters determined through the processof polling a set of market participants representing different segments of the value chainsuch as traders, importers / exporters, processors etc. The polled prices shall be input to anormalizing algorithm (like bootstrapping technique) to arrive at a representative,unbiased and clean benchmark spot price for Gold. The security of data and randomnessof polling process will ensure transparency and correctness of prices. The Exchange hasabsolute right to modify the process of determination of spot prices at any time withoutnotice.

Dissemination of Spot Prices

Spot prices for Gold will be disseminated on daily basis.

Pay in and Pay out for Daily Settlement / Final Settlement

The table below illustrates timings for pay in and pay out in case of daily settlement as


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well as cash settled positions for final settlement. The buyer clients would have to depositrequisite funds with their respective Clearing Member before pay in.All fund debits and credits for the Member would be done in the Members SettlementAccount with the Clearing bank.

Time (E+1) Activity

On or before 11.00 hrs - PAYIN - Debit paying member a/c forfunds

After 13.00 hrs - PAYOUT Credit receiving membera/c for funds

Pay in and Pay out for final physical settlement

The table below illustrates timings for pay in and pay out in case of positions marked forphysical settlement. The buyers / sellers would have to deposit requisite funds / Goldwith their respective Clearing member before pay in.

Pay in and Pay out for Final Settlement in case of physical deliveries

Time (E+2) Activity

On or before 11.00 hrs

PAYIN

- Debit Buyer Member Settlement a/c

for funds- Debit Seller Members CM Pool

Account for Gold

After 13.00 hrs

PAYOUT

- Credit Seller Member Settlement a/cfor funds

- Credit Buyer Members CM PoolAccount for Gold

Additionally the supplemental settlement for Gold futures contracts for premium /discount adjustments relating to quality of Gold delivered, actual quantity delivered andclose out for shortages, will also be conducted on the same day. Clearing Members arerequired to maintain adequate fund balances in their respective accounts.

Pay in and Pay out for supplemental settlement

Time (E + 2) Activity


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On or before 16.00 hours - PAY IN - Debit Member Settlement a/cfor funds

After 18.00 hours - PAY OUT Credit Member Settlementa/c for funds

Supplementary Settlement for Taxes

The Exchange will conduct a separate supplementary settlement, as illustrated below,two days after normal pay out for completion of tax transactions.In order to facilitate issue of invoice to right parties, the buyer Clearing Members arerequired to give the buyer client details to the Exchange latest by 15.00 noon on E+3 day.

The amounts due to the above differences will be debited / credited to Members clearingbank account similar to normal settlement.

Pay in and Pay out for Taxes

Time (E + 4) Activity

On or before 15.00 hours - PAY IN: Debit Buyer Member Settlement a/cfor funds.

After 17.00 hours - PAY OUT: Credit Seller Member Settlementa/c for funds


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Chapter - V


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ANALYSIS

5.1. DETERMINATION OF PRICE VOLATILITY OF THE GOLD

PRICE IN FUTURE CONTRACT:

To find the price movement fluctuation and volatility of the Gold price, six month

future contract of Gold is taken and their respective price is used for the purpose of

analsis. The six month period starts from January 2008 future contract to June 2008

future contract.

Line graph shows movements of the future prices of Gold. The X-axis represents

the period of the future contract and , the Y-axis represents the price of the

commodity(Gold100MUM).

For each months contract, descriptive statistics is calculated, this descriptive

statistics shows the Mean, Median, Standard Deviation (S.D), and Skewness. I have also

showed the maximum price movement and the minimum price movement in the

descriptive statistics.

Standard Deviation(volatility):

A statistical term that provides a good indication ofvolatility. It measures how

widely values (closing prices for instance) are dispersed from the average. The larger the

difference between the closing prices and the average prices, the higher the standard

deviation will be and the higher the volatility. The closer the closing prices are to the

average price, the lower the standard deviation and the lower the volatility.

A complementary description of the data includes skewness and kurtosis.

Skewness:

Skewness is a measure of symmetry. A data set, or distribution, is symmetric if it

has a similar shape to the left and right of a centre point. The skewness of a normal
http://stockcharts.com/school/doku.php?id=chart_school:glossary_s#standarddeviationvolatility%23standarddeviationvolatilityhttp://stockcharts.com/school/doku.php?id=chart_school:glossary_s#standarddeviationvolatility%23standarddeviationvolatilityhttp://stockcharts.com/school/doku.php?id=chart_school:glossary_v#volatilityhttp://stockcharts.com/school/doku.php?id=chart_school:glossary_s#standarddeviationvolatility%23standarddeviationvolatilityhttp://stockcharts.com/school/doku.php?id=chart_school:glossary_v#volatility


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distribution is zero. Negative values for the skewness indicate that observations are

skewed leftwards, or that the left tail is heavier than the right tail. Positive skewness, on

the other hand, indicates more upward spikes (episodes of rising prices) than negati

gold trading in commodity market

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