sugar & coffee commodity

8/2/2019 Sugar & Coffee Commodity

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Introduction

Links between Commodity Prices and Inflation

Introduction of Indian Economy

Recent Growth Trends in Indian Economy

Economic benefits of the Commodity Futures Trading

CHAPTER - 1

INTRODUCTION TO ECONOMY


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1.1 Introduction

Commodity trading impacts the economy by making public the analysts forecasts of

future prices of the most important market goods. For example, one of the most

widely watched commodities is oil. The price of oil changes daily, which has an

impact on every good and service produced in the U.S economy. As traders take into

account all information regarding oil supply and demand, as well as geopolitical

considerations, this affects oil prices. It is these assumptions behind oil prices that

affect the economy so significantly.

Changes in commodity prices have long played an important indicative role in

analyses of global economic conditions, principally because of their importance for

developing countries. More than 70 countries derive at least 50 percent of theirexport earnings from nonfuel primary commodities; another 20 derive the majority of

their export earnings from fuels. Changes in the terms of trade for these countries

typically arise largely from changes in world commodity prices.

Recently, however, attention has also been drawn to the importance of changes in

commodity prices as indicators of changes in inflationary conditions affecting

industrial countries. For example, the World Economic Outlook recently began to

include an analysis comparing percentage changes in an index of 40 primary

commodity prices with the aggregate inflation rate of the seven largest industrial

countries. Commodity prices as a leading indicator of inflation in the large industrial

countries as a group. Commodity prices have recently re-surfaced in discussions of

the inflationary outlook for western economies. The popular view seems to be that

changes in commodity prices are a consequence of developments occurring solely in

commodity markets. There has, however, been a resurgent interest in recent years

in the argument that monetary conditions account for changes in commodity prices.


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1.2 Links Between Commodity Prices and Inflation

Commodity prices are argued to be leading indicators of inflation through two basic

channels. One is that they respond more quickly to general economic shocks, suchas an increase in demand. The second is that some changes in commodity prices

reflect idiosyncratic shocks, such as a flood that decimates the supply of certain

agricultural products, which are subsequently passed through to overall prices.

Depending on the type of the shock, the observed link between commodity prices

and inflation would be expected to be different. Moreover, changes over time in the

mix of shocks in the economy could affect the stability of a bivariate link between

commodity prices and inflation.

The strongest case for commodity prices as indicators of future inflation is that they

are quick to respond to economy - wide shocks to demand. Commodity prices

generally are set in highly competitive auction markets and consequently tend to be

more flexible than prices overall. As a result, movements in commodity prices would

be expected to lead and be positively related to changes in aggregate price inflation

in response to aggregate demand shocks. In addition, to the extent that demand

shocks are not sector- specific, the levels of commodity prices and overall prices

also would be linked.


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Any commodity, however, also is subject to idiosyncratic shocks. This complicates

the empirical relation between commodity prices and inflation. In the case of a direct

shock to the supply of a commodity, movements in the price of the commodity could

be positively related to overall prices. The observed effect would depend on the

relative importance of the commodity being shocked and the flexibility of other

prices. Poor weather conditions, for example, could reduce the supply of agricultural

commodities and push up their prices. The higher prices would eventually be

reflected in the price of the related final food products bought by consumers. To the

extent that the shock affects aggregate supply and that the stickiness in the prices of

other consumer goods limits their adjustment, the net effect would be higher overall

prices.

The rise in the prices of the affected agricultural commodities would be larger than

the effect on overall prices, which means the relationship of the level of prices of the

affected commodities to overall prices, would be affected. One complication,

however, is that a shift in relative demand for a commodity might dampen an

otherwise positive correlation between the change in the price of a commodity and

overall inflation. Take, for example, the case in which an increase in aggregate

demand coincides with an increase in demand for manufactured goods or services

relative to agricultural products. While this could lead to a rise in overall prices,

prices of agricultural commodities might fall. In the short run, changes in commodity

prices would not be positively related to inflation, and the levels of prices of the

affected commodities and overall prices would drift apart.


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1.3 Introduction of Indian Economy

Indias economy has been one of the stars of global economics in recent years,

growing 9.7% in 2007 and 9.5% in 2006. Growth had been supported by markets

reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real

estate boom, and a flourishing capital market.

Like most of the world, however, India is facing testing economic times in 2008. The

Reserve Bank of India had set an inflation target of 4%, but by the middle of the year

it was running at 11%, the highest level seen for a decade. The rising costs of oil,

food and the resources needed for Indias construction boom are all playing a part.

The Indian stock market has fallen more than 40% in six months from its January

2008 high. $6b of foreign funds has flowed out of the country in that period, reacting

both to slowing economic growth and perceptions that the market was over-valued.

The Indian government certainly hopes that is the case. It views investment in the

creaking infrastructure of the country as being a key requirement, and has ear-

marked 23.8 trillion rupees, approximately $559 billion, for infrastructure upgrades

during the 11th five year plan. It expects to fund 70% of project costs, with the other

30% being supplied by the private sector. Ports, airports, roads and railways are all

seen as vital for the Indian Economy and have been targeted for investment.


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1.4 Recent Growth Trends in Indian Economy

Indias Economy has grown by more than 9% for three years runni ng, and has seen

a decade of 7% growth. This has reduced poverty by 10%, but with 60% of Indias

1.1 billion populations living off agriculture and with droughts and floods increasing,

poverty alleviation is still a major challenge. The structural transformation that has

been adopted by the national government in recent times has reduced growth

constraints and contributed greatly to the overall growth and prosperity of the

country. However there are still major issues around federal v/s state bureaucracy,

corruption and tariffs that require addressing. Indias public debt is 58% of GDP

according to the CIA World Fact book, and this represents another challenge.

During this period of stable growth, the performance of the Indian service sector has

been particularly significant. The growth rate of the service sector was 11.18% in

2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the

same period and is now 29% of GDP. Agriculture is 17% of the Indian economy.

Growth in the manufacturing sector has also complemented the countrys excellent

growth momentum. The growth rate of the manufacturing sector rose steadily from

8.98% in 2005, to 12% in 2006. The storage and communication sector also

registered a significant growth rate of 16.64% in the same year.

Additional factors that have contributed to this robust environment are sustained in

investment and high savings rates. As far as the percentage of gross capital

formation in GDP is concerned, there has been a significant rise from 22.8% in the

fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross rate of savings

as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same

period.


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1.5 Economic Benefits of the Commodity Futures Trading

Futures market for commodities has a very vital role to play in any economy given

the fact that futures contracts perform two important functions of price discovery and

price risk management with reference to the given commodity. At a broader levelcommodity markets provide advantages like it leads to integrated price structure

throughout the country, it ensures price stabilization-in times of violent price

fluctuations and facilitates lengthy and complex production and manufacturing

activities.

At micro level also they provide several economic benefits to several different

sections of the society. For example it is useful to producer of agricultural commodity

because he can get an idea of the price likely to prevail at a future point of time and

therefore can decide between various competing commodities. The futures trading is

very useful to the exporters as it provides an advance indication of the price likely to

prevail and thereby help the exporter in quoting a realistic price and thereby secure

export contract in a competitive market. Further after entering into an export contract,

it enables him to hedge his risk by operating in futures market.

Also from the point of view of a consumer these market provide an idea about the

price at which the commodity would be available at a future point of time. Thus it

enables the consumer to do proper costing and also cover his purchases by making

forward contracts.


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CHAPTER - 2

INTRODUCTION TO

BROKING


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2.1 Introduction

The Indian broking industry is one of the oldest trading industries that have been

around even before the establishment of the BSE in 1875. Despite passing through

a number of changes in the post liberalization period, the industry has found its waytowards sustainable growth. With the purpose of gaining a deeper understanding

about the role of the Indian stock broking industry in the countrys economy.

Mr. Dinesh Thakkar established Angel Broking in 1987, and today it is one of the

leading Indian stock broking and wealth management houses, with an absolute focus

on retail business and a commitment to provide real value for money to its clients.

The Angel Group is a member of the Bombay Stock Exchange, the National Stock

Exchange, and the countrys two leading commodity exchanges, the NCDEX and

MCX. Angel is also registered as a depository Participant with CDSL. The

International Finance Corporation (IFC) in Washington, a World Bank affiliate,

recognized the great value proposition of Angels unique Retail Focused Business

Model by acquiring a 12.3% stake in the groups holding company in December

2007.

Angel provides a wide range of personalized wealth-management and investment

services to its retail clients. These include stock and Commodity Trading, Portfolio

Advisory and Management Services, Investment Advisory Services, distribution of

Mutual Funds, IPOs, Personal Loans and Insurance, as well as E-broking &

Depository services all supported by intensive research and a six sigma-backed

Quality Assurance program. Angel Group provides its value-added services to over

5.1 lakh individual retail investors through its nationwide network of 164 branches,

including 20 regional hubs & 25 distribution offices , 5,430+ sub-brokers/business

associates and 5,900+ direct and 15, 000 indirect employees. Angel Broking has one

of the largest trading terminal bases (11,997 terminals) in the country, and the

largest sub-broker network on the NSE. It records daily business volumes of 3,500

crores in equities, 650 crores in commodities, and 550 crores through online broking.

With over 1,500 outlets connected through its state-of-the-art IT network, Angel

offers personalized and world-class services.


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The company has top-quality, retail-focused research, as well as expert dealing

facilities. Modern, centralized helpdesks answer investor queries and address any

concerns 24x7. Angels web-enabled, value-added back office is staffed by a brilliant

team of experts for Quality Assurance.

2.2 Management Team

Mr. Dinesh

Thakkar

Founder, Chairman

&

Managing Director

Mr. Lalit Thakkar

Director

Research

Mr. Amit

Majumdar

Chief Strategy

Officer

Mr. Sachinn Joshi

Executive Director

& CFO

Mr. Vinay Agrawal

Executive Director

Equity Broking

Mr. Nikhil Daxini

Executive Director -

Sales and

Marketing

Mr. Hitungshu

Debnath


Distribution &

WealthManagement

Mr. Mudit

Kulshreshtha


Business

Intelligence& Analytics

Mr. Santanu Syam

Executive Director

Operations

Mr. Ketan Shah

Associate Director -

Information

Technology

Ms. Pinky Kothari


Sales & Marketing

Mr. Naveen

Mathur


Commodities &

Currencies
http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=1http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=1http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=2http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=3http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=3http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=14http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=5http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=6http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=7http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=7http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=8http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=8http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=10http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=11http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=12http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=13http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=13http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=13http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=13http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=12http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=11http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=10http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=8http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=8http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=7http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=7http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=6http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=5http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=14http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=3http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=3http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=2http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=1http://www.angelbroking.com/About_Us/ManagementProfile.aspx?sr_no=1


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2.3 Vision

To provide best value for money to investors through innovative products,

trading/investments strategies, state of the art technology and personalized service.

2.4 Motto

To have complete harmony between quality-in-process and continuous improvement

to deliver exceptional service that will delight our Customers and Clients.

2.5 Policy

A Customer is the most Important Visitor on our premises. He is not dependent on

us, but we are dependent on him. He is not an interruption in our work. He is the

purpose of it. He is not an outsider in our business. He is part of it. We are not doing

him a favour by serving him. He is doing us a favour by giving us an opportunity to

do so. - Mahatma Gandhi


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2.6 Business Philosophy

Ethical practices & transparency in all our dealings

Customers interest above our own

Always deliver what we promise

Effective cost management

2.7 Quality Assurance Policy

We are committed to providing world-class products and services which exceed

the expectations of our customers, achieved by teamwork and a process of

continuous improvement.


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2.8 Angel Broking Gives Following Services

Equities

Commodities

Mutual Funds

Portfolio Management Services

Life Insurance

Personal Loans

Depository Services

Investment Advisory

IPO

Private Client Group


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Introduction of Research

Research Topic

Objective of the Project

Research Design

Data Collection Method

Advantage of the Project

Limitation of Project

CHAPTER - 3

RESEARCH

METHODOLOGY


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3.1 Introduction of Research

Financial research is the collection analysis and interpretation of facts kid figures

pertaining to financial management. The management must exercise a prudent judgment in formulating course of action based on the above research. Finance

research is the systematic, objective and exhaustive search for the study of fact

relevant any problem in the field of finance.

Financial research is considered all pervasive as its utility has been seen in all areas

of management. It has objectively so solve specific problems or to manage the day-

to-day business of the organization, it is applied and related to the present and

potential market, finance management and other areas of management.

3.2 Research Topic

The first step in research process is selecting a research topic. It is most important

stage in applied research as poorly defined problems will not yield useful results.

Here, I defined about Overview of Indian Commodity Market and Correlation

between Sugar, Coffee and Sensex.

3.3 Objective of the Project

A problem is one which requires a researcher to find out the best solution for the

given problem i.e. to find out by which course of action the objective can be attained

optimally in the context of a given environment.

To understand the basic concept of commodity.

To understand the process of commodity from farm to commodity market.

To understand the contribution of agriculture sector in Indian GDP.

To know the correlation between sugar, coffee and sensex.

To provide depth information to the investors who would like to trade in

commodity market.


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3.4 Research Design

There are two types of research design.

(i) Exploratory Research(ii) Descriptive Research

This report made on basic of descriptive studies. Descriptive study is typically

structured with clearly stated hypothesis or investigates and formal studies serve a

variety of research objective.

Descriptive of phenomena and associated with a subject of population. Estimate of the proportion of a population that has these characteristics. Discovery of associates among different variables.

Exploratory Research

Exploratory research studies are also termed as formulate research studies. The

main purpose of such studies is that of formulating a problem for more precise

investigation or of developing the working hypothesis from an optional point it view.

Descriptive Research

Descriptive research studies are those studies which are concerned with describing

the characteristic of a particular individual or a group. Descriptive studies are

undertaken in many circumstances. There is a general feeling that they are factual

very simple. This is not necessary true. They can be complex demanding a high

degree of the part of researcher.


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3.5 Data Collection Method

Sources of Data:

The finance researcher has to decide whether he has to collect primary data ordepend exclusively on secondary data is based on both primary data and secondary

data.

1. Primary data:-

The data which are not collected before in the past are known as primary data in this

project, it is very less or not applied.

2. Secondary Data :-

Any data, which have been gathered earlier for some other purpose, are secondary

data in the hands of the financial researcher. Thus, primary data collected by one

person may become the secondary for another. In my research the secondary data

has been taken from the following source.

o From various types of stock exchange websites

o From RBI Statistical Bulletin Reports

o From Reference Book

- Financial Markets and Services (Author Gorden & Natarajan)

- Investment Management (Author V.K. Bhalla)

o From Annual Commodity Report


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3.6 Advantage of the Project

This project will help those investors who want to invest in the commodity

market. This project report may help to get in depth knowledge about regarding the

commodity market.

The report provides detail information regarding sugar and coffee commodity

and its relation with the sensex.

The report can become the one of the sources for Secondary Data for further

studies in particular topic.

3.7 Limitation of Project

Here time limitation is most affect our projects, because in short period of time

we complete this project. Accuracy we have not considered.

No historical data are taken. All data provided are from year 2008 and no past

data are taken.

There are various commodities which trading in the commodity market but

here there are only two commodities i.e. sugar and coffee considered.

Here only some major factors are considered for analysis.


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Introduction

Function and Purpose of Stock Market

Relation of Stock Market with Modern Financial System

The Bombay Stock Exchange

Sensex Movement

Regulatory Body of Stock Market

CHAPTER - 4

INTRODUCTION OF

INDIAN STOCK MARKET


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4.1 Introduction

India has surfaced since the last several years as one of the fastest growing

economies in the world. This is the reason why the Indian capital market, i.e. the

stock market attracts investors big and small and from within and outside thecountry. It is the Sensex that is termed interdependently with India stock market.

Also called BSE Sensex, as it represents the Bombay Stock Exchange (BSE), it is

considered significant to India's burgeoning economy given its role in raising funds

beyond expectations for the Indian capital market.

As the oldest stock exchange in Asia and ranking amongst the top in the world in

terms of listed companies, revenue generated transaction numbers, and other

aspects, the BSE; originally The Native Share & Stock Brokers' Association' is the

investment destination for lakhs of investors. No wonder its presence since the year

1875 has seen it grow by leaps and bounds, now prominent with a list of 6000+

companies.

Its permanent recognition by the Indian Government under Securities Contracts

(Regulation) Act 1956 well substantiates its significance. It was during the recessionin the year 2008-09 that the sensex index figures that rose to the 21,000 plus mark

suddenly started exhibiting a downtrend. Situations turned worse when the figure

went down more than half its greatest rise. But at the pace that it descended, it

started recovering at a greater pace post recession. In no time the sensex index

reached the 17000 plus figure. There is lot of potential in the future too.
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4.2 Function and Purpose of Stock Market

The stock market is one of the most important sources for companies to raise

money. This allows businesses to be publicly traded, or raise additional capital for

expansion by selling shares of ownership of the company in a public market. Theliquidity that an exchange provides affords investors the ability to quickly and easily

sell securities. This is an attractive feature of investing in stocks, compared to other

less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of

the dynamics of economic activity, and can influence or be an indicator of social

mood. Rising share prices, for instance, tend to be associated with increased

business investment and vice versa. Share prices also affect the wealth of

households and their consumption. Therefore, central banks tend to keep an eye on

the control and behavior of the stock market and, in general, on the smooth

operation of financial system functions. Financial stability is the raison d'tre of

central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they

collect and deliver the shares, and guarantee payment to the seller of a security.

This eliminates the risk to an individual buyer or seller that the counterparty could

default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower

costs and enterprise risks promote the production of goods and services as well as

employment. In this way the financial system contributes to increased prosperity.
http://en.wikipedia.org/wiki/Liquidity%20/%20Liquidityhttp://en.wikipedia.org/wiki/Real_estate%20/%20Real%20estatehttp://en.wikipedia.org/wiki/Share_%28finance%29%20/%20Share%20(finance)http://en.wikipedia.org/wiki/Central_bank%20/%20Central%20bankhttp://en.wikipedia.org/wiki/Financial_system%20/%20Financial%20systemhttp://en.wikipedia.org/wiki/Raison_d%27%C3%AAtre%20/%20Raison%20d'%C3%AAtrehttp://en.wikipedia.org/wiki/Counterparty%20/%20Counterpartyhttp://en.wikipedia.org/wiki/Economic_growth%20/%20Economic%20growthhttp://en.wikipedia.org/wiki/Economic_growth%20/%20Economic%20growthhttp://en.wikipedia.org/wiki/Counterparty%20/%20Counterpartyhttp://en.wikipedia.org/wiki/Raison_d%27%C3%AAtre%20/%20Raison%20d'%C3%AAtrehttp://en.wikipedia.org/wiki/Financial_system%20/%20Financial%20systemhttp://en.wikipedia.org/wiki/Central_bank%20/%20Central%20bankhttp://en.wikipedia.org/wiki/Share_%28finance%29%20/%20Share%20(finance)http://en.wikipedia.org/wiki/Real_estate%20/%20Real%20estatehttp://en.wikipedia.org/wiki/Liquidity%20/%20Liquidity


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4.3 Relation of Stock Market with Modern Financial System

The financial system in most western countries has undergone a remarkable

transformation. One feature of this development is disintermediation. A portion of the

funds involved in saving and financing flows directly to the financial markets insteadof being routed via banks' traditional lending and deposit operations. The general

public's heightened interest in investing in the stock market, either directly or through

mutual funds, has been an important component of this process. Statistics show that

in recent decades shares have made up an increasingly large proportion of

households' financial assets in many countries.

In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk

made up almost 60 per cent of households' financial wealth, compared to less than

20 per cent in the 2000s. The major part of this adjustment in financial portfolios has

gone directly to shares but a good deal now takes the form of various kinds of

institutional investment for groups of individuals, e.g., pension funds, mutual funds,

hedge funds, insurance investment of premiums, etc. The trend towards forms of

saving with a higher risk has been accentuated by new rules for most funds and

insurance, permitting a higher proportion of shares to bonds.
http://en.wikipedia.org/wiki/Disintermediation%20/%20Disintermediationhttp://en.wikipedia.org/wiki/Mutual_fund%20/%20Mutual%20fundhttp://en.wikipedia.org/wiki/Statistics%20/%20Statisticshttp://en.wikipedia.org/wiki/Sweden%20/%20Swedenhttp://en.wikipedia.org/wiki/Deposit_account%20/%20Deposit%20accounthttp://en.wikipedia.org/wiki/Financial_portfolio%20/%20Financial%20portfoliohttp://en.wikipedia.org/wiki/Financial_portfolio%20/%20Financial%20portfoliohttp://en.wikipedia.org/wiki/Deposit_account%20/%20Deposit%20accounthttp://en.wikipedia.org/wiki/Sweden%20/%20Swedenhttp://en.wikipedia.org/wiki/Statistics%20/%20Statisticshttp://en.wikipedia.org/wiki/Mutual_fund%20/%20Mutual%20fundhttp://en.wikipedia.org/wiki/Disintermediation%20/%20Disintermediation


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4.4 The Bombay Stock Exchange

It is known as the oldest exchange in Asia. It traces its history to the 1850s, when

stockbrokers would gather under banyan trees in front of Mumbai's Town Hall. The

location of these meetings changed many times, as the number of brokers constantlyincreased. The group eventually moved to Dalal Street in 1874 and in 1875 became

an official organization known as 'The Native Share & Stock Brokers Association'. In

1956, the BSE became the first stock exchange to be recognized by the Indian

Government under the Securities Contracts Regulation Act.

The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a

means to measure overall performance of the exchange. In 2000 the BSE used this

index to open its derivatives market, trading Sensex futures contracts. The

development of Sensex options along with equity derivatives followed in 2001 and

2002, expanding the BSE's trading platform. Historically an open-cry floor trading

exchange, the Bombay Stock Exchange switched to an electronic trading system in

1995. It took the exchange only fifty days to make this transition.

What are the Sensex?

The Sensex is an "index".

What is an Index?

An index is basically an indicator. It gives you a general idea about whether most of

the stocks have gone up or most of the stocks have gone down. The Sensex is an

indicator of all the major companies of the BSE.


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4.5 Sensex Movement

4.6 Regulatory Body of Stock Market

SEBI is the regulator for the Securities Market in India. It was formed officially by the

Government of India in 1992 with SEBI Act 1992 being passed by the Indian

Parliament. Chaired by C B Bhave, SEBI is headquartered in the popular business

district of Bandra-Kurla complex in Mumbai, and has Northern, Eastern, Southern

and Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad.

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14000

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JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC

SENSEX IN 2009
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Functions and Responsibilities:

SEBI has to be responsive to the needs of three groups, which constitute the market:

The issuers of securities

The investors

The market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and

quasi-executive. It drafts regulations in its legislative capacity, it conducts

investigation and enforcement action in its executive function and it passes rulings

and orders in its judicial capacity. Though this makes it very powerful, there is an

appeals process to create accountability. There is a Securities Appellate Tribunal

which is a three member tribunal and is presently headed by a former Chief Justice

of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme

Court.

SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively

and successively (e.g. the quick movement towards making the markets electronic

and paperless rolling settlement on T+2 basis). SEBI has been active in setting up

the regulations as required under law.SEBI has also been instrumental in taking

quick and effective steps in light of the global meltdown and the Satyam fiasco. It

had increased the extent and quantity of disclosures to be made by Indian corporate

promoters.
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Overview

Meaning of Commodity

History of Commodity Market

Types of Commodity

Size of the Commodity Market

Major International Commodity Exchanges

Fundamental Factors Affecting the Commodity Market

Players of Commodity Exchanges

CHAPTER - 5

INTRODUCTION OF

COMMODITY MARKET


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5.1 Overview

Before the North American futures market originated some 150 years ago, farmers

would grow their crops and then bring them to market in the hope of selling their

commodity of inventory. But without any indication of demand, supply often

exceeded what was needed, and unpurchazed crops were left to rot in the streets.

Conversely, when a given commodity such as Soybeans was out of season, the

goods made from it became very expensive because the crop was no longer

available, lack of supply.

In the mid-19th century, grain markets were established and a central marketplace

was created for farmers to bring their commodities and sell them either for immediatedelivery (spot trading) or for forward delivery. The latter contracts, forwards

contracts, were the fore-runners to today's futures contracts. In fact, this concept

saved many farmers from the loss of crops and helped stabilize supply and prices in

the off-season.

Today's commodity market is a global marketplace not only for agricultural products,

but also currencies and financial instruments such as Treasury bonds and securities

futures. It's a diverse marketplace of farmers, exporters, importers, manufacturers

and speculators. Modern technology has transformed commodities into a global

marketplace where a Kansas farmer can match a bid from a buyer in Europe.
http://www.oxfordfutures.com/futures-education/fundamental-analysis/law-of-demand.htmhttp://www.oxfordfutures.com/specs/soybean-futures-options-contract.htmhttp://www.oxfordfutures.com/futures-education/fundamental-analysis/law-of-supply.htmhttp://www.oxfordfutures.com/specs/treasury-bond-futures-options-specs.htmhttp://www.oxfordfutures.com/specs/treasury-bond-futures-options-specs.htmhttp://www.oxfordfutures.com/futures-education/fundamental-analysis/law-of-supply.htmhttp://www.oxfordfutures.com/specs/soybean-futures-options-contract.htmhttp://www.oxfordfutures.com/futures-education/fundamental-analysis/law-of-demand.htm


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5.2 Meaning of Commodity

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

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

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

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

products began.

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

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

5.3 History of Commodity Market

Commodity market, organized traders' exchange in which standardized, graded

products are bought and sold. Worldwide, there are 48 major commodity exchanges

that trade over 96 commodities, ranging from wheat and cotton to silver and oil. Most

trading is done in futures contracts, that is, agreements to deliver goods at a set time

in the future for a price established at the time of the agreement. Futures trading

allow both hedging to protect against serious losses in a declining market and

speculation for gain in a rising market.

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 commercialcurrency. Latter on rules came in to being, to standardize the trading in rice tickets.
http://www.businessdictionary.com/definition/food.htmlhttp://www.businessdictionary.com/definition/grain.htmlhttp://www.businessdictionary.com/definition/metal.htmlhttp://www.investorwords.com/3874/product.htmlhttp://www.investorwords.com/2630/investor.htmlhttp://www.investorwords.com/636/buy.htmlhttp://www.investorwords.com/4467/sell.htmlhttp://www.investorwords.com/2136/futures_contract.htmlhttp://www.investorwords.com/3807/price.htmlhttp://www.investorwords.com/5873/Commodities.htmlhttp://www.businessdictionary.com/definition/subject-to.htmlhttp://www.businessdictionary.com/definition/supply-and-demand.htmlhttp://www.businessdictionary.com/definition/supply-and-demand.htmlhttp://www.investorwords.com/4292/risk.htmlhttp://www.investorwords.com/1797/exchange.htmlhttp://www.investorwords.com/5030/trading.htmlhttp://www.investorwords.com/1148/cost.htmlhttp://www.investorwords.com/2962/market.htmlhttp://www.businessdictionary.com/definition/selling-price.htmlhttp://www.answers.com/topic/hedginghttp://www.answers.com/topic/speculationhttp://www.answers.com/topic/speculationhttp://www.answers.com/topic/hedginghttp://www.businessdictionary.com/definition/selling-price.htmlhttp://www.investorwords.com/2962/market.htmlhttp://www.investorwords.com/1148/cost.htmlhttp://www.investorwords.com/5030/trading.htmlhttp://www.investorwords.com/1797/exchange.htmlhttp://www.investorwords.com/4292/risk.htmlhttp://www.businessdictionary.com/definition/supply-and-demand.htmlhttp://www.businessdictionary.com/definition/supply-and-demand.htmlhttp://www.businessdictionary.com/definition/subject-to.htmlhttp://www.investorwords.com/5873/Commodities.htmlhttp://www.investorwords.com/3807/price.htmlhttp://www.investorwords.com/2136/futures_contract.htmlhttp://www.investorwords.com/4467/sell.htmlhttp://www.investorwords.com/636/buy.htmlhttp://www.investorwords.com/2630/investor.htmlhttp://www.investorwords.com/3874/product.htmlhttp://www.businessdictionary.com/definition/metal.htmlhttp://www.businessdictionary.com/definition/grain.htmlhttp://www.businessdictionary.com/definition/food.html


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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.

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. Thats 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.

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.

1.4 Types of Commodity

There are several different types of commodities that are traded on the commodity

exchanges today. They break down into a few major areas.

Commodities are categorized for ease of price comparison, research and other

conveniences in trading. Investors interested in getting involved in one of the riskiest,and potentially most profitable, areas will need to know the basics.
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Energies

One of the most active areas recently, the energies encompass a basketful of

products used to provide energy to heat and power homes and businesses. The

most common are petroleum and its byproducts: crude oil, heating oil, propane,

natural gas, coal and a few others, mostly sub-types or derivatives.

Each commodity has its distinctive tick (minimum price change, set by the

exchanges) and standard contract size. A standard contract size is the amount

covered by a standard futures contract. In the case of crude oil, for example, the

amount is 1,000 barrels. By contrast, the amount for wheat is 5,000 bushels.

Grains

Wheat, oats, corn, rice and soybean are all agricultural products traded on various

exchanges, not least of which is the venerable Chicago Board of Trade (CBOT).

Here again the exchanges also trade the product, as well as futures and options

contracts on these and several derivative products such as bean oil.

Each product has a tick, unit and standard contract size. Some prices, like soybean

meal, are listed in dollars per ton where the standard contract size is 100 tons. Easy

to see why most traders never see the actual commodity.


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Softs

Coffee, cocoa, sugar, cotton and orange juice are all soft commodities, many of

which are traded on the aptly named CSCE (Coffee, Sugar and Cocoa Exchange).

Interestingly, since 80% of the oranges grown in the U.S. are turned into frozen

orange juice concentrate, its the juice that is traded as a commodity, not the fruit.

A relative newcomer on the New York Cotton Exchanges, FCOJ (Frozen

Concentrated Orange Juice) has been actively traded since the creation and

widespread use of inexpensive refrigeration, post WWII.

Meats

Live cattle, pork bellies and lean hogs, and some derivatives are traded on various

exchanges, including the KCBT (Kansas City Board of Trade), the historical center of

livestock trading in the U.S. Pork bellies are particularly interesting, in that the bacon

produced from them generally has no substitute with a similar product. Also, their

price is heavily dependent on the price of grain, since the hogs are fed mostly corn

and a few others. Prices tend to be less volatile than many other commodities.

Financials

Since most traders invest in commodities futures or options, not the good itself,

financial products are often listed on the same exchanges. Along with purchasable

U.S. Treasury Bonds futures traded on the CBOT and elsewhere, there are a few

indexes that track stocks and others. The S&P 500 Index futures contract is a

popularly traded item, for example.


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5.5 Size of the Commodity Market

The trading of commodities includes direct physical trading and derivatives trading.

In the 5 years up to 2007, the value of global physical exports of commoditiesincreased by 17% while the notional value outstanding of commodity OTC

derivatives increased more than 500% and commodity derivative trading on

exchanges more than 200%.

The national value outstanding of banks OTC commodities derivatives contracts

raised 27% in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading in

gold and silver. Overall, precious metals accounted for 8% of OTC commodities

derivatives trading in 2007, down from their 55% share a decade earlier as trading in

energy derivatives rose.

Global physical and derivative trading of commodities on exchanges increased more

than a 3rd in 2007 to reach 1,684 million contracts. Agricultural contracts trading

increased by 32% in 2007, energy 29% and industrial metals by 30%. Precious

metals trading grew by 3%, with higher volume in New York being partially offset by

declining volume in Tokyo. Over 40% of commodities trading on exchanges was

conducted on US exchanges and a quarter in China. Trading on exchanges in China

and India has gained in importance in recent years due to their emergence as vital

commodities consumers and producers.


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5.6 Major International Commodity Exchanges

A stock exchange is an entity which provides "Trading" facilities for stock brokers

and traders, to trade stocks and other securities. Stock exchanges also provide

facilities for the issue and redemption of securities as well as other financial

instruments and capital events including the payment of income and dividends. The

securities traded on a stock exchange include: shares issued by companies, unit

trusts, derivatives, pooled investment products and bonds.

Brazilian Mercantile and Futures

Exchange

Chicago Board of Trade

Chicago Mercantile Exchange Euro next life

Intercontinental Exchange Dalian Commodity Exchange

London Metal Exchange Multi Commodity Exchange

New York Mercantile Exchange New York Board of Trade
http://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Trader_%28finance%29http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Derivative_%28finance%29http://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Derivative_%28finance%29http://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Trader_%28finance%29http://en.wikipedia.org/wiki/Stock_broker


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5.7 Fundamental Factors Affecting the Commodity Market

Commodity trading is trading in commodity derivatives that include a range of

commodities from Petals, Precious metals, Energy and Agricultural commodities.

Risk & Return

High return is followed by high risk. Based on an investors appetite to take risk and

his expectation of return he can prepare his portfolio. Commodity trading is not like

trading shares at spot prices. It is futures trading process. The uncertainty and risk

involved are part and parcel of the commodity market. Though futures trading of

commodity market is same as the futures trading in equity market the only

differences is that supply demand estimates in commodity market may not be as

tough.

Trading, Clearing and Settlement

Trading is when two or more parties negotiate to exchange goods with cash at a

specific date and price. There may be two types of investors in the commodity

market. One is the delivery based investors and other the cash (non-delivery) based

investors. Exchanges clear the trade in sense that both the negotiating parties are

capable of respecting the contract and the settlement agency take care of the

settlement of goods against cash.

Except for these basic fundamentals of trading there are various other fundamentals

that drive the commodity markets. These fundamentals may be different for different

commodities based on its characteristics. There are certain important fundamentals

that apply to all commodities either directly or indirectly.

Demand & Supply

Demand and supply are basic factors that affect the movement of any commodity

prices. The law of demand and supply is same for equity as well as commodity

markets. However demand and supply of all commodities vary during different time

periods depending upon seasons, domestic and global conditions and various other

major factors influencing its characteristics.


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Demand Curve

It is refined form of demand analysis. Demand curve in a laymens term is a

graphical representation of demand over a period of time. Price is represented on y-

axis and demand on the x-axis. The graph is a line graph representing demand at

particular prices over a period of time. It gives a clear understanding of the demand

situation over a period of time at various price levels.

Global and Domestic Economy

Economic scenario significantly affects the prices of a commodity. Demand and

supply of any commodity has a direct relationship with economic condition in the

state. Depending upon the nature of the commodity, global and domestic economic

scenarios affect the commodity prices. For e.g.; Steel prices highly depend on global

economic factors as this is a globally and massively used commodity. However as

far as a commodity like Kapas (cotton beans) is concerned global factors affect less

when compared to domestic factors.

Economic Growth

Economic growth of the world as well as the domestic economy is an important

fundamental that will affect the demand and supply positions in a country. If the

country is growing at a fast rate the consumption level will also be at a higher rate.

This will increase the demand on one hand but supply may not increase at the same

rate as it takes time to set up new industries and increase production. This drives the

commodity prices of all major commodities.

Inflation

Commodities are considered as hedge against inflation because unlike equity,

commodity prices move in direction of inflation. With increase in inflation the prices of

major commodities tend to increase and it is true the other way as well.

Geo-Political Concerns

Political factors have a direct as well as indirect effect on commodity prices. For

example if we take the case of Potato when one year back it was barred from trading

on the exchanges. However at time political factors can have positive effects as well.


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Extra-ordinary events

There may be certain extra-ordinary factors that do not occur very frequent. Wars,

natural calamities, depression etc. are such events that affect the commodity prices

in a dramatic way.

Speculation

Speculators bring information into system at times fake or over hyped in-order to

trigger the price movement in a particular direction. Speculators are though a part of

technical analysis but it is important in the matter of fact that speculation may be of

some fundamental factors. However they are an important part of the markets price

discovery mechanism.

5.8 Players of Commodity Exchanges

There are three different types of players in the commodity markets:

1. Commercials:

The entities involved in the production, processing or merchandising of a commodity.

For example, both the corn farmer and Kelloggs from the example above are

commercials. Commercials account for most of the trading in commodity markets.

2. Large Speculators:

A group of investors that pool their money together to reduce risk and increase gain.

Like mutual funds in the stock market, large speculators have money managers that

make investment decisions for the investors as a whole.

3. Small Speculators:

Individual commodity traders who trade on their own accounts or through a

commodity broker. Both small and large speculators are known for their ability to

shake up the commodities market.


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Introduction

History

Present Scenario of Indian Commodity Market

Relevance and Potential of Commodity Markets in India

Indian Commodity Market Structure

Commodities Traded In India

Working Procedure of Commodity Market

Regulatory Framework Indian Commodity Market

Participants of Commodity Market

CHAPTER - 6

INDIAN COMMODITY MARKET


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6.1 Introduction

Indian economy has finally risen and is one of the fast developing economies of the

world. In the recent years, importantly in the recent decades growth in the economy

is not lop sided i.e. growth restricted to couple of sectors but it is widespread.Particularly in the recent years financial services sector has witnessed noticeable

boom in terms of newer financial products and services being introduced and well

received by the respective markets participants. One such relatively new financial

market product has been commodity market. Commodities play an important role

in Indias economy and India is the worlds leading producer of several agricultural

commodities. In 2004-05, agriculture and related industries accounted for

approximately 21.13% of Indias GDP and this fact it underline the importance of

various agricultural commodities and their spiraling effects on the overall economy.

6.2 History

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 derivatives 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.


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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- are the ultimate regulatory authority.

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.

6.3 Present Scenario of Indian Commodity Market

The growth paradigm of Indias commodity markets is best reflected by the figures

from the regulators official website, which indicated that the total value of trade on

the commodity futures market in the financial year 2008/09 was INR52.49 lakh crore

(over US$1 trillion) as against INR 40.66 lakh crore in the preceding year, registering

a growth of 29.09%, even under challenging economic conditions globally. The main

drivers of this impressive growth in commodity futures were the national commodity

exchanges. MCX, NCDEX and NMCE along with two regional exchanges NBOT

Indore and ACE, Ahmedabad contributed to 99.61% of the total value of

commodities traded during 2008/09.


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So far, this years volumes have seen a significant jump over the last year in agro-

commodities, as well as international commodities like gold, silver, crude oil and

copper. Of course, more than 100 commodities are today available for trading in the

commodity futures market and more than 50 of them are actively traded. These

include bullion, metals, agricultural commodities and energy products. Most

importantly, an archaic market has suddenly turned into an organized, service-

oriented set-up with shooting volumes.

The unqualified success of the futures market has ensured the next step, i.e., the

launch of electronic spot markets for agro-products. Being in a time-zone that falls in

the gap left by the major commodity exchanges in the US, Europe and Japan has

also worked in Indias favour because commodity business by its very nature is a

24/7 business. Innovation coupled with modern and successful financial market

environment has ensured the beginning of a success story in commodities which will

eventually see India becoming a price-setter in major commodities on the strength of

its large production and consumption.

It is pertinent to note that India and China are being projected as the major drivers

for the initiation of yet another commodity super-cycle. Tracking price trends and

analyzing the statistics have always been key areas of economic research; but in

each cycle whether defined by Jim Rogers, Kondratieff or Dewey & Dakin the

trigger is always different, and in this case it may well be increase in regional

consumption, some of which we have already seen.

One outcome of the recent boom-bust cycle has been that mergers and acquisitions

have gained speed and the biggest beneficiaries will likely be large companies from

historically conservative countries, like India. This phase is likely to propel India into

the international big league quicker and on a firmer footing. In fact, India did well to

weather the global financial crisis over the last year and a half, with GDP growing at

6% at the worst of times, compared to almost every other country which showed

negative growth in one or more quarters during this period. Growth did fall from 9%

to 6% but was way above the World Bank s forecast of 4%, demonstrating economic

resilience, a sure sign of things to come.


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6.4 Relevance and Potential of Commodity Markets in India

Majority of commodities traded on global commodity exchanges are agri-based.

Commodity markets therefore are of great importance and hold a great potential in

case of economies like India, where more than 65% of the population are dependenton agriculture.

There is a huge domestic market for commodities in India since India consumes a

major portion of its agricultural produce locally. Indian commodities market has an

excellent growth potential and has created good opportunities for market players.

India is the worlds leading producer of more than 15 agricultural commodities and is

also the worlds largest consumer of edible oils and gold. It has major markets in

regions of urban conglomeration (cities and towns) and nearly 7,500+ Agricultural

Produce Marketing Cooperative (APMC) mandis. To add to this, there is a network of

over 27,000+ haats (rural bazaars) that are seasonal marketplaces of various

commodities. These marketplaces play host to a variety of commodities every day.

The commodity trade segment employs nearly five million plus traders.

The potential of the sector has been well identified by the Central government and

the state governments and they have invested substantial resources to boost

production of agricultural commodities. Many of these commodities would be traded

on the futures markets as food-processing industry grows at a phenomenal pace.


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6.5 Indian Commodity Market Structure

FMC

Commodity Exchanges

National

Exchanges

Regional

Exchanges

NCDEX NMCE MCX NBOT 22 Other

Regional

Exchanges


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National Level Commodity Exchanges in India

(1) NMCE (National Multi Commodity Exchange of India Ltd.)

NMCE is the first demutualised electronic commodity exchange of India granted the

National exchange on Govt. of India and operational since 26th Nov, 2002.

Promoters of NMCE are, Central warehousing corporation (CWC), National

Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-

Industries Corporation Limited (GAICL), Gujarat state agricultural Marketing Board

(GSAMB), National Institute of Agricultural Marketing (NIAM) and Neptune Overseas

Ltd. (NOL). Main equity holders are PNB.

Turnover Apr-June 09 Jun-08 Apr-09 May-09 June 09

Rs. In Crore 57180 2142 13250 14719 29211

In Percentage 3.7% 0.5% 2.7% 3.0% 5.1%

The Head Office of NMCE is located in Ahmedabad. There are various commodity

trades on NMCE Platform including Agro and non-agro commodities.


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(2) NCDEX (National Commodity & Derivates Exchange Ltd.)

NCDEX is a public limited co. incorporated on April 2003 under the Companies Act

1956, It obtained its certificate for commencement of Business on May 9, 2003. It

commenced its operational on Dec 15, 2003.

Promoters shareholders are: Life Insurance Corporation of India (LIC), National Bank

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

India (NSE) other shareholder of NCDEX are: Canara Bank, CRISIL limited,

Goldman Sachs, Intercontinental Exchange (ICE), Indian farmers fertilizer

corporation Ltd (IFFCO) and Punjab National Bank (PNB). NCDEX is located in

Mumbai and currently facilitates trading in 57 commodities mainly in Agro product.


Rs. In Crore 148072 47263 65202 51032 31838

In Percentage 9.5% 11.4% 13.3% 10.3% 5.5%


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(3) MCX (Multi Commodity Exchange of India Ltd.)

Headquartered in Mumbai, MCX is a demutualised nationwide electronic commodity

future exchange. Set up by Financial Technologies (India) Ltd. permanent

recognition from government of India for facilitating online trading, clearing and

settlement operations for future market across the country. The exchange started

operation in Nov, 2003.

MCX equity partners include, NYSE Euronext,, State Bank of India and its

associated, NABARD NSE, SBI Life Insurance Co. Ltd. , Bank of India, Bank ofBaroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, etc.

MCX is well known for bullion and metal trading platform.


Rs. In Crore 1337487 360647 404352 423780 509355

In Percentage 85.5% 87.2% 82.5% 85.3% 88.3%

(4) ICEX (Indian Commodity Exchange Ltd.)

ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is

jointly promote by Indiabulls Financial Services Ltd. and MMTC Ltd. and has Indian

Potash Ltd. KRIBHCO and IFC among others, as its partners having its head office

located at Gurgaon (Haryana).


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6.6 Commodities Traded In India

Fibers & Manufactures

Kapas Gram

Hessian Cottonbales

Indian Cotton Cottonseeds

Sttaple Fibre Yarn Long Staple Cotton

Sacking Medium Stapple Cotton

Silk Sugar

Coffee-Arabica Cement etc

Commodities

Fibers &

Manufact-

ures

Spices

Edible

Oilseeds

and Oil

Energy

Products

Vegetables

Metals

Others

Pulses


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Spices

Pepper Domestic Red Chilly

Turmeric Jeera

Pepper Domestic-500g/l Rubber RSS4Black Pepper Jeera Unjha

Pepper Cuminseed

Cardamom Arecanut etc

Edible Oilseeds and Oil

Sunflower Oil Cotton Seed

Groundnut Oil Rice Bran

Soy Bean Vanaspati

Soy Meal Linseed

Soy Oil Kapaskhali

Copra CastorseedDisa etc

Pulses

Masoor Urad

Tur / Arhar Moong

Yellow Peas Chana etc

Energy Product

Crude Oil Brent Crude Oil

Furnace Oil Natural Gas

Vegetables

Potato


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Metals

Aluminium Ingots Nickel

Copper Zinc

Lead TinGold Silver

Steel Sponge Iron

Others

Gur Coffee Plantation A

Guar Gum Rice

Maize Castor oil

Sugar S Sugar M

Sarbati Rice Mentha Oil

Rubber Isabgul

Gurchaku Castorseed etc


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6.7 Working Procedure of Commodity Market

The futures market is a centralized market place for buyers and sellers from around

the world who meet and enter into commodity futures contracts. Pricing mostly is

based on an open cry system, or bids and offers that can be matched electronically.The commodity contract will state the price that will be paid and the date of delivery.

Almost all futures contracts end without the actual physical delivery of the

commodity.

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 which allows him to ask for physical delivery of the good from the

warehouse but someone 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.

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


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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.

6.8 Regulatory Framework Indian Commodity Market

Need for Regulation

The need for regulation arises on account of the fact that the benefits of futures

markets accrue in competitive conditions. Proper regulation is needed to create

competitive conditions. In the absence of regulation, unscrupulous participants could

use these leveraged contracts for manipulating prices. This could have undesirable

influence on the spot prices, thereby affecting interests of society at large.

Regulation is also needed to ensure that the market has appropriate risk

management system. In the absence of such a system, a major default could create

a chain reaction. The resultant financial crisis in a futures market could create

systematic risk. Regulation is also needed to ensure fairness and transparency in

trading, clearing, settlement and management of the exchange so as to protect and

promote the interest of various stakeholders, particularly non-member users of the

market.

After independence, the Constitution of India brought the subject of "Stock

Exchanges and futures markets" in the Union list. As a result, the responsibility for

regulation of commodity futures markets devolved on Govt. of India. A Bill on forward

contracts was referred to an expert committee headed by Prof. A.D.Shroff and Select


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Committees of two successive Parliaments and finally in December 1952 Forward

Contracts (Regulation) Act, 1952, was enacted. The Act provided for 3-tier regulatory

system;

(a) An association recognized by the Government of India on the recommendation of

Forward Markets Commission,

(b) The Forward Markets Commission (it was set up in September 1953) and

(c) The Central Government.

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

July, 1954.

The Act divides the commodities into 3 categories with reference to extent of

regulation, viz.:

(a) The commodities in which futures trading can be organized under the auspices of

recognized association.

(b) The Commodities in which futures trading is prohibited.

(c) Those commodities which have neither been regulated for being traded under the

recognized association nor prohibited are referred as Free Commodities and the

association organized in such free commodities is required to obtain the

Certificate of Registration from the Forward Markets Commission.


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6.9 Participants of Commodity Market

Participants who trade in the derivatives market can be classified under the following

three broad categories:

HEDGERS

A Hedger can be Farmers, manufacturers, importers and exporter. A hedger buys orsells in the futures market to secure the future price of a commodity intended to be

sold at a later date in the cash market. This helps protect against price risks. The

holders of the long position in futures contracts (buyers of the commodity), are trying

to secure as low a price as possible. The short holders of the contract ( sellers of the

commodity) will want to secure as high a price as possible.

The commodity contract, however, provides a definite price certainty for both parties,

which reduces the risks associated with price volatility. By means of futures

contracts, Hedging can also be used as a means to lock in an acceptable price

margin between the cost of the raw material and the retail cost of the final product

sold. Someone going long in a securities future contract now can hedge against

rising equity prices in three months. If at the time of the contract's expiration the

equity price has risen, the investor's contract can be closed out at the higher price.

The opposite could happen as well: a hedger could go short in a contract today to

hedge against declining stock prices in the future.

Producers - Farmers

Consumers - Food Processing CompaniesHEDGERS

Brokerage House

Retail Investors

People Involved in Commodity Spot Trading

SPECULATORS

Brokerage House

People Trading in Commodity Spot Markets

Warehousing Companies

ARBITRAGERS


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SPECULATORS

Other commodity market participants, however, do not aim to minimize risk but

rather to benefit from the inherently risky nature of the commodity market. These are

the speculators, and they aim to profit from the very price change that hedgers areprotecting themselves against. A hedger would want to minimize their risk no matter

what they're investing in, while speculators want to increase their risk and therefore

maximize their profits. In the commodity market, a speculator buying a contract low

in order to sell high in the future would most likely be buying that contract from a

hedger selling a contract low in anticipation of declining prices in the future.

Unlike the hedger, the speculator does not actually seek to own the commodity in

question. Rather, he or she will enter the market seeking profits by offsetting rising

and declining prices through the buying and selling of contracts.

ARBITRAGERS

A central idea in modern economics is the law of one price. This states that in a

competitive market, if two assets are equivalent from the point of view of risk and

return, they should sell at the same price. If the price of the same asset is different in

two markets, there will be operators who will buy in the market where the asset sells

cheap and sell in the market where it is costly. This activity termed as arbitrage,

involves the simultaneous purchase and sale of the same or essentially similar

security in two different markets for advantageously different prices. The buying

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

equilibrium. Hence, arbitrage helps to equalize prices and restore market efficiency.

Since the cash and futures price tend to move in the same direction as they both

react to the same supply/demand factors, the difference between the underlying

price and futures price is called as basis. Basis is more stable and predictable than

the movement of the prices of the underlying or the Futures price. Thus, arbitrageur

would predict the basis and accordingly take positions in the cash and future

markets.


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Introduction

Types of Derivatives

The Present System of Regulation in Commodity Forward /

Future Trading in India

CHAPTER - 7

DERIVATIVES OF

COMMODITY MARKET


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7.1 Introduction

Derivatives in the form of forwards and options have been around as long as there

has been commerce because all commerce involves business risk. The history of

derivatives can be traced far back to renaissance period (15th Century) where theVenetian spice traders awaiting a cargo on high seas would enter into a forward

contract. Forward contracts are also traced in Japanese and American markets for

hundreds of years ago. The Futures trading on the commodities first started in

Chicago way back in 1874. But the explosion of derivative markets in the form we

see today can be attributed to volatility in the foreign exchange rates created due to

collapse of Bretton Woodss system. It led to the introduction of the forward contracts

in the foreign currency by 1972. The equity options were introduced in 1973. The

early 80s also led to the introduction of few more derivative products viz. currency

swaps, interest rate swaps, Index futures and options, etc.

Meaning

A derivative security is a financial contract whose value is derived from the value of

something else, such as a stock price, a commodity price, an exchange rate, an

interest rate, or even an index of prices. In the Appendix, I describe some simple

types of derivatives: forwards, futures, options and swaps.

The Need for a Derivatives Market

The derivatives market performs a number of economic functions:

1. They help in transferring risks from risk adverse people to risk oriented people.

2. They help in the discovery of future as well as current prices.

3. They catalyze entrepreneurial activity.

4. They increase the volume traded in markets because of participation of risk

adverse people in greater numbers.


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7.2 Types of Derivatives

There are various types of derivatives in commodity market such as:

(1) Forward:A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for certain

specified price. The other party assumes a short position and agrees to sell the asset

on the same date for the same price. Other contract details like delivery date; price

and quantity are negotiated bilaterally by the parties to the contract.

The salient features of forward contracts are:

They are bilateral contracts and hence exposed to counter party risk.

Each contract is custom designed, and hence is unique in terms of contract

size, expiration date and the asset type and quality.

The contract price is generally not available in public domain.

On the expiration date, the contract has to be settled by delivery of the asset.

(2) Future:

A financial future is a notional to buy or sell, on a specified future date, a standard

quantity of a financial instrument at a price determined in the present (the futures

price). It is rate for a futures contract to be used for the exchange of financial

instruments. Indeed, many contracts have no facility for the exchange of the financial

instrument. Instead, financial futures markets are independent of the underlying cash

market. The main economic function of futures is to provide a means of hedging. A

hedger seeks to reduce an already existing risk. This risk reduction could be

achieved by taking a future position that would tend to show a profit in the event of a

loss on the underlying position.

There are two types of futures:

A) Commodity futures

B) Financial futures


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A) Commodity futures:

An agreement to buy and sell a commodity at a certain date at a certain price. For

example, Investor A may make a contract with Farmer B in which A agrees to buy a

certain number of bushels of B's corn at $15 per bushel. This contract must behonored whether the price of corn goes to $1 or $100 per bushel. Commodity futures

contracts can help reduce volatility in the normally volatile commodity markets, but

contain the risks inherent to all speculative investing. These contracts may be sold

on the secondary market, but the person holding the contract at its end must take

delivery of the underlying.

Fortnightly Value of Turnover in USD Millions

Sr.

No.

Name of the Exchange

16 Mar 2005

To

31 Mar 2005

16 June 2005

To

30 June 2005

16 Sept 2005

To

30 Sept 2005

1 Multi Commodity

Exchange of India Ltd.

$m 3503.69 $m 4974.76 $m 11042.25

2 National Multi Commodity

Exchange of India Ltd.

$m 135.64 $m 113.13 $m 106.85

3 National Commodity &

Derivatives Exchange Ltd.

$m 5360.45 $m 7950.49 $m 10694.29

B) Financial futures:

A legally binding agreement to buy or sell a commodity or financial instrument in a

designated future month at a price agreed upon today by the buyer and seller.

Futures contracts are standardized according to the quality, quantity, and delivery

time and location for each commodity. A futures contract differs from an option

because an option is the right to buy or sell, while a futures contract is the promise to

actually make a transaction. A future is part of a class of securities called derivatives,

so named because such securities derive their value from the worth of an underlying

investment.
http://financial-dictionary.thefreedictionary.com/Buyhttp://financial-dictionary.thefreedictionary.com/Sellhttp://financial-dictionary.thefreedictionary.com/Commodityhttp://financial-dictionary.thefreedictionary.com/Pricehttp://financial-dictionary.thefreedictionary.com/Volatilityhttp://financial-dictionary.thefreedictionary.com/Riskhttp://financial-dictionary.thefreedictionary.com/Secondary+Markethttp://financial-dictionary.thefreedictionary.com/Underlyinghttp://financial-dictionary.thefreedictionary.com/Commodityhttp://financial-dictionary.thefreedictionary.com/Financehttp://financial-dictionary.thefreedictionary.com/Optionhttp://financial-dictionary.thefreedictionary.com/Optionhttp://financial-dictionary.thefreedictionary.com/Transactionhttp://financial-dictionary.thefreedictionary.com/Classhttp://financial-dictionary.thefreedictionary.com/Derivative+securityhttp://financial-dictionary.thefreedictionary.com/Securityhttp://financial-dictionary.thefreedictionary.com/Underlyinghttp://financial-dictionary.thefreedictionary.com/Underlyinghttp://financial-dictionary.thefreedictionary.com/Securityhttp://financial-dictionary.thefreedictionary.com/Derivative+securityhttp://financial-dictionary.thefreedictionary.com/Classhttp://financial-dictionary.thefreedictionary.com/Transactionhttp://financial-dictionary.thefreedictionary.com/Optionhttp://financial-dictionary.thefreedictionary.com/Optionhttp://financial-dictionary.thefreedictionary.com/Financehttp://financial-dictionary.thefreedictionary.com/Commodityhttp://financial-dictionary.thefreedictionary.com/Underlyinghttp://financial-dictionary.thefreedictionary.com/Secondary+Markethttp://financial-dictionary.thefreedictionary.com/Riskhttp://financial-dictionary.thefreedictionary.com/Volatilityhttp://financial-dictionary.thefreedictionary.com/Pricehttp://financial-dictionary.thefreedictionary.com/Commodityhttp://financial-dictionary.thefreedictionary.com/Sellhttp://financial-dicti

sugar & coffee commodity

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