a study on identification of investment opportunities in commodity futures market in india infoline...

7/29/2019 A Study on Identification of Investment Opportunities in Commodity Futures Market in India Infoline Ltd (1)

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A STUDY ON IDENTIFICATION OF INVESTMENT

OPPORTUNITIES IN COMMODITY FUTURES MARKET IN

INDIA INFOLINE LTD, CHENNAI

In partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by

R.SIVASANKARAN

(REG.NO:1000109071)

Under the guidance of

Mr.G.PRITHIVIRAJ

Faculty member

DEPARTMENT OF MANAGEMENT STUDIES

HINDUSTAN INSTITUTE OF TECHNOLOGY&SCIENCE

CHENNAI-603103

2011-2012


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HINDUSTAN INSTITUTE OF TECHNOLOGY & SCIENCE

BONAFIDE CERTIFICATE

Certified that this project report A STUDY ON IDENTIFICATION OF

INVESTMENT OPPORTUNITIES IN COMMODITY FUTURES MARKET

IN INDIA INFOLINE LTD, CHENNAI is the bonafide work of

R.SIVASANKARAN and1000109071 who carried out the project work

under my supervision during the academic year2010 -2012

SIGNATURE SIGNATURE

Prof. Gopichander Mr.G.PrithivirajHEAD OF THE DEPARTMENT PROJECT GUIDE

School of Management Teaching Research Associate

School of Management

INTERNAL EXAMINER EXTERNAL EXAMINER


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DECLARATION

I affirm that the project work titled A STUDY ON IDENTIFICATION OF INVESTMENT

OPPORTUNITIES IN COMMODITY FUTURES MARKET IN INDIA INFOLINE LTD

being submitted in partial fulfilment for the award of MBA is the original work carried out byme. It has not formed the part of any other project work submitted for award of any degree or

diploma, either in this or any other University.

(Signature of the Candidate)

R.SIVASANKARAN

(1000109071)

I certify that the declaration made above by the candidate is true

Signature of the Guide,

Mr.G.PRITHIVIRAJ,

Teaching Research Associate

ACKNOWLEDGEMENT


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I am extremely thankful to the Management of Hindustan University for providing me

the opportunity to undergo Master of Business Administration course during the academic year

2010-2012.

I would like to express my sincere gratitude to our Chancellor Dr. Elizabeth Verghese,

Our Vice-Chancellor Dr. Sarukesi and our Director Academics Mr.Joseph Stanley for their

inspiration and support.

I am thankful to Mr. P. Ramnath, Director, School of Management, and

Prof. M.L.Gopichander, Head of the Department, School of Management, for their support in

doing my project. They have been a source of encouragement and guidance in my endeavors.

I express my gratitude to my project guide Mr.G.Prithiviraj Teaching research associate

School of Management, for her consistent encouragement and valuable suggestion in completing

this project, without her the completion of this project would have been practically impossible.

I take this opportunity to thank Mr.Swaminathan, Executive Director. And Mr.Ganesh,

and Mr. Praveen, Finance manager in India Info line Ltd, Perungudi, Chennai for allowing me to

do the project work in the esteemed organization and for extending their full co-operation. Last

but not least I would like to thank our beloved parents and all our friends for their co- operation

in helping me to complete the project work

TABLE OF CONTENTS


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S. No TITLE PAGE NO

ABSTRACT

LIST OF TABLES

LIST OF CHARTS

CHAPTER I

1.1 Introduction

1.2 Need and Scope of the study

1.3 Statement of the problem

1.4 Objectives of the study

1.5 Research Methodology

CHAPTER II

2.1 Industry profile

2.2 Company profile

CHAPTER III

3.1 Conceptual framework

3.2 Review of literature

CHAPTER IV

4.1 Data Analysis and Interpretation

CHAPTER V

5.1 Findings

5.2 Suggestions

5.3 Limitations of the study

5.4 Conclusion

APPENDIX

5.5 REFERENCES


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ABSTRACT

A Study on investors awareness about Commodity Futures market with reference to

INDIA INFOLINE Ltd, Chennai.

The project is carried out to find out the awareness level of the investors in commodity

futures market with reference to Chennai and to identify the factors influencing the investor to

invest. It also helped the researcher to identify the investors objective of investment and the

preference of the commodities. This project follows Descriptive type of Research Method and

Systematic Random Sampling are used this project

The major findings that influences the respondents to investment is their own interest.

respondents preference in commodities for bullions. It is also found that the period of investment

and level of investment is directly proportionate to each other

Based on the above said findings the company recommended by educating and making

the people aware of commodity future market will attract the most number of people to invest in

commodities futures market.


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LIST OF TABLES


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TABLE NO. PARTICULARS PAGE

NO.

4.1.1 Table showing the annual income of the respondents

4.1.2 Table showing the type of investor

4.1.3 Table showing the level of awareness about commodity

futures amoung the respondents

4.1.4 Table showing the details about inducing factors

4.1.5 Table showing the level of investment of the respondents

4.1.6 Table showing the reason for not investing in commodity

futures4.1.7 Table showing the customer preference in commodities

4.1.8 Table showing the intruments invested

4.1.9 Table showing the weighted average score and ranking of

the reason for investing in commodity futures respective to

the type of investor

4.1.10 Table showing the overall all weighted average score for

the reason for investing in commodity futures market

4.1.11 Table showing the income level of the people and their objective of investments

4.1.12 Table showing the overall all weighted average score for

the objective of investment

4.1.13 Table showing the precautions during uptrend and

downtrend of the market

4.1.14 Table showing the bivariate frequency

4.1.15 Table showing the analysis of variance between type of

investor and expected returns

4.1.16 Table showing the analysis of variance between level of

investment and expected returns


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LIST OF CHARTS

CHART NO. PARTICULARS PAGE


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NO.

4.1.1 Chart showing the annual income of the respondents

4.1.2 Chart showing the type of investor

4.1.3 Chart showing the level of awareness about commodity

futures amoung the respondents

4.1.4 Chart showing the details about inducing factors

4.1.5 Chart showing the level of investment of the respondents

4.1.6 Chart showing the reason for not investing in commodity

futures

4.1.7 Chart showing the customer preference in commodities

4.1.8 Chart showing the intruments invested

4.1.9 Chart showing the type of investor and the reason for

investing in commodity futures

4.1.10 Chart showing the overall all weighted average score for

the reason for investing in commodity futures market

4.1.11 Chart showing the income level of the people and their objective of investments

4.1.12 overall all weighted average score for the objective of

investment

4.1.13 Chart showing the venn diagram of precautions taken

during uptrend and downtrend of the market

CHAPTER-I

1.1 INTRODUCTION

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

It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and


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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.

Futures trading perform two important functions of price discovery and price risk

management with reference to the given commodity. It is useful to all segments of the economy.

It is useful to the producer 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 best that

suits him. It enables the consumer, in that he gets an idea of the price at which the commodity

would be available at a future point of time. He can do proper costing and also cover his

purchases by making forward contracts. Futures trading are 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. Having

entered into an export contract, it enables him to hedge his risk by operating in futures market.

Forward/futures trading involves a passage of time between entering into a contract and its

performance making thereby the contracts susceptible to risks, uncertainties, etc. Hence there is a need for

the regulatory functions to be exercised by an exchange that is the Forward Markets Commission (FMC).

Participants of Commodity Derivatives

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 price of anycommodity that the person deals in. The classic hedging example is that of wheat farmer who

wants to hedge the risk of fluctuations in the price of wheat around the time that his crop is ready

for harvesting. By selling his crop forward, he obtains a hedge by locking in to a predetermined

price. Hedging does not necessarily improve the financial outcome; indeed, it could make the

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


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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. Ashort 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 shares and hold them for whatever duration he wants to.

However, commodities are bulky products and come with all the costs and procedures of

handling these products. The commodities futures markets provide speculators with an easy

mechanism to speculate on the price of underlying commodities. To trade commodity futures on

the NCDEX, a customer must open a futures trading account with a commodity derivatives

broker. Buying futures simply involves putting in the margin money. This enables futures traders

to take a position in the underlying commodity without having to actually hold that commodity.

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

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

expiration date of the contract).


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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.

1.2 NEED AND SCOPE OF THE STUDY

The Financial planners are working hard to attract the customers and retain their market

share by providing them with various markets. One of the most important market is commodity

futures market. It is a suitable market for long term investors. Hence awareness about

commodity futures market is very essential among the investors for their financial planning.


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This project will provide the information about the investors awareness about the Commodity

futures market.

The reasons for investing in commodity futures market are also analyzed by the

researcher. The important reason for which the investor is using commodity futures can be found

by the researcher.

The investors awareness about their roles and obligations are also analyzed. This will

help the financial planners to realize their need to educate their investors and to improve their

customers education level.

1.4 OBJECTIVES OF THE STUDY

The objectives of the research are,

1) To find the awareness level about commodity futures market among the investors.

2) To find the important reason for investing and also not investing in commodity

futures

3) To find the awareness level of investors about their obligation and rights.

4) To find out the preference of the investors in commodities.


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1.5 RESEARCH METHODOLOGY

Research design:

This project follows Descriptive type of Research Method. This project also identifies the

relationship between the social classes, personal factors with the investment decision of theinvestor.

Sampling Design

a. Population : 1165

b. Sampling area : Chennai.

c. Sampling size : 110

d. Sampling method : Systematic Random Sampling.

e. Sampling unit : Investors.

Data Collection Method

Primary Source: Questionnaire

Primary data

Source:

The source of primary data is responses collected from the investors of Chennai.

Method:

The method adopted for primary data collection is questionnaire method. Under the

questionnaire method, a questionnaire has to be constructed which should pertain to the

factors considered under the study.

Secondary Data:

Source:

The source of the secondary data is magazines, journals and websites. It also includes the

projects done on Commodity futures market.

Research instrument

Scaling technique:

1. Dichotomous question


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2. Multiple choice single response question

3. Likert scale

Data analysis tools and technique:

1. Correlation

2. ANOVA

3. Percentage analysis

4. Weighted average and score

5. Charts

Line charts

Bar charts

Pie- charts

CHAPTER-II

2.1 INDUSTRY PROFILE

Introduction

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 organised

trading in cotton through the establishment of Cotton Trade Association in 1875. Over a period


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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.

Evolution of the commodity market in India

Although India has a long history of trade in commodity derivatives, this segment

remained underdeveloped due to government intervention in many commodity markets to

control prices. The production, supply and distribution of many agricultural commodities are still

governed by the state and forwards and futures trading are selectively introduced with stringent

controls. While free trade in many commodity items is restricted under the Essential

Commodities Act (ECA), 1955, forward and futures contracts are limited to certain commodity

items under the Forward Contracts (Regulation) Act (FCRA), 1952.

The first commodity exchange was set up in India by Bombay Cotton Trade Association

Ltd., and formal organized futures trading started in cotton in 1875. Subsequently, many

exchanges came up in different parts of the country for futures trade in various commodities. The

Gujrati Vyapari Mandali came into existence in 1900 which has undertaken futures trade in

oilseeds first time in the country. The Calcutta Hessian Exchange Ltd and East India Jute

Association Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. In 1921,

futures in cotton were organized in Mumbai under the auspices of East India Cotton Association

(EICA). Many exchanges were set up in major agricultural centres in north India before world

war broke out and they were mostly engaged in wheat futures until it was prohibited. The

existing exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc were established during this

period. The futures trade in spices was first organized by India Pepper and Spices Trade

Association (IPSTA) in Cochin in 1957. Futures in gold and silver began in Mumbai in 1920 and

continued until it was prohibited by the government by mid-1950s. Options are though permitted

now in stock market, they are not allowed in commodities. The commodity options were traded

during the pre-independence period. Options on cotton were traded until they along with futures

were banned in 1939 (Ministry of Food and Consumer Affairs, 1999). However, the government

withdrew the ban on futures with passage of FCRA in 1952. The Act has provided for the


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establishment and constitution of Forward Markets Commission (FMC) for the purpose of

exercising the regulatory powers assigned to it by the Act. Later, futures trade was altogether

banned by the government in 1966 in order to have control on the movement of prices of many

agricultural and essential commodities.

After the ban of futures trade all the exchanges went out of business and many traders

started resorting to unofficial and informal trade in futures. On recommendation of the Khusro

Committee in 1980 government reintroduced futures on some selected commodities including

cotton, jute, potatoes, etc. As part of economic liberalization of 1990s an expert committee on

forward markets under the chairmanship of Prof. K.N. Kabra was appointed by the government

of India in 1993. Its report submitted in 1994 recommended the reintroduction of futures which

were banned in 1966 and also to widen its coverage to many more agricultural commodities and

silver. In order to give more thrust on agricultural sector, the National Agricultural Policy 2000

has envisaged external and domestic market reforms and dismantling of all controls and

regulations in agricultural commodity markets. It has also proposed to enlarge the coverage of

futures markets to minimize the wide fluctuations in commodity prices and for hedging the risk

arising from price fluctuations. In line with the proposal many more agricultural commodities are

being brought under futures trading.

The Present Status

Presently futures trading is permitted in all the commodities. Trading is taking place in about 78

commodities through 25 Exchanges/Associations as given in the table below:-

No. Exchange COMMODITY

1. India Pepper & Spice Trade Association,

Kochi (IPSTA)

Pepper (both domestic and

international contracts)

2. Vijai Beopar Chambers Ltd.,

Muzaffarnagar

Gur, Mustard seed

3. Rajdhani Oils & Oilseeds Exchange Ltd., Gur, Mustard seed its oil &


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Delhi oilcake

4. Bhatinda Om & Oil Exchange Ltd.,

Bhatinda

Gur

5. The Chamber of Commerce, Hapur Gur, Potatoes and Mustard seed

6. The Meerut Agro Commodities Exchange

Ltd., Meerut

Gur

7. The Bombay Commodity Exchange Ltd.,

Mumbai

Oilseed Complex, Castor oil

international contracts

8. Rajkot Seeds, Oil & Bullion Merchants

Association, Rajkot

Castor seed, Groundnut, its oil &

cake, cottonseed, its oil & cake,

cotton (kapas) and RBD

palmolein.

9. The Ahmedabad Commodity Exchange,

Ahmedabad

Castorseed, cottonseed, its oil

and oilcake

10. The East India Jute & Hessian Exchange

Ltd., Calcutta

Hessian & Sacking

11. The East India Cotton Association Ltd.,

Mumbai

Cotton

12. The Spices & Oilseeds Exchange Ltd.,

Sangli.

Turmeric

13. National Board of Trade, Indore Soya seed, Soyaoil and Soya

meals, Rapeseed/Mustardseed its

oil and oilcake and RBD

Palmolien

14. The First Commodities Exchange of India

Ltd., Kochi

Copra/coconut, its oil & oilcake

15. Central India Commercial Exchange Ltd., Gur and Mustard seed


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Gwalior

16. E-sugar India Ltd., Mumbai Sugar

17. National Multi-Commodity Exchange of

India Ltd., Ahmedabad

Several Commodities

18. Coffee Futures Exchange India Ltd.,

Bangalore

Coffee

19. Surendranagar Cotton Oil & Oilseeds,

Surendranagar

Cotton, Cottonseed, Kapas

20. E-Commodities Ltd., New Delhi Sugar (trading yet to commence)

21. National Commodity & Derivatives,

Exchange Ltd., Mumbai

Several Commodities

22. Multi Commodity Exchange Ltd., Mumbai Several Commodities

23. Bikaner commodity Exchange Ltd.,

Bikaner

Mustard seeds its oil & oilcake,

Gram. Guar seed. Guar Gum

24. Haryana Commodities Ltd., Hissar Mustard seed complex

25. Bullion Association Ltd., Jaipur Mustard seed Complex

Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority which

is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India . It is a

statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.


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2.2 COMPANY PROFILE

The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd

(NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of the leading players in theIndian financial services space. IIFL offers advice and execution platform for the entire range of

financial services covering products ranging from Equities and derivatives, Commodities,

Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking,

GoI bonds and other small savings instruments. IIFL recently received an in-principle approval

for Securities Trading and Clearing memberships from Singapore Exchange (SGX) paving the

way for IIFL to become the first Indian brokerage to get a membership of the SGX. IIFL also

received membership of the Colombo Stock Exchange becoming the first foreign broker to enter

Sri Lanka. IIFL owns and manages the website, www.indiainfoline.com, which is one of Indias

leading online destinations for personal finance, stock markets, economy and business.

IIFL has been awarded the Best Broker, India by FinanceAsia and the Most

improved brokerage, India in the AsiaMoney polls. India Infoline was also adjudged as Fastest

Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the field of


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equity research, IIFLs research is acknowledged by none other than Forbes as Best of the Web

and a must read for investors in Asia. Our research is available not just over the Internet but

also on international wire services like Bloomberg, Thomson First Call and Internet Securities

where it is amongst one of the most read Indian brokers.

IIFL - History & Milestones

1995

Commenced operations as an Equity Research firm

1997

Launched research products of leading Indian companies, key sectors and the economy

Client included leading FIIs, banks and companies

1999

Launched www.indiainfoline.com

2000

Launched online trading through www.5paisa.com Started distribution of life insurance and mutual fund

2003

Launched proprietary trading platform Trader Terminal for retail customers

2004

Acquired commodities broking license

Launched Portfolio Management Service

2005

Maiden IPO and listed on NSE, BSE

2006

Acquired membership of DGCX

Commenced the lending business

2007
http://www.indiainfoline.com/http://www.5paisa.com/http://www.indiainfoline.com/http://www.5paisa.com/


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Commenced institutional equities business under IIFL

Formed Singapore subsidiary, IIFL (Asia) Pte Ltd

2008

Launched IIFL Wealth Transitioned to insurance broking model

2009

Acquired registration for Housing Finance

SEBI in-principle approval for Mutual Fund

Obtained Venture Capital license

2010

Received in-principle approval for membership of the Singapore Stock Exchange

2011

Received membership of the Colombo Stock Exchange

IIFL (India Infoline Ltd) - Corporate Structure


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CHAPTER-III


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3.1 Conceptual framework:

The Following diagram illustrates the conceptual framework of this study.

Investor need

Acquiring therequired

Identification of

investment

opportunities in the

Internal

factors

External

factors

Choosing thecommodity for

Post Investment

Behavior

Continue with the

investing

Sale of the

Refusal ofthe trial


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3.2 REVIEW OF LITERATURE

A well-developed and effective commodity futures market, unlike physical market,

facilitates offsetting the transactions without impacting on physical goods until the expiry of a

contract. Futures market attracts hedgers who minimise their risks, and encourages competitionfrom other traders who possess market information and price judgment. While hedgers have

long-term perspective of the market, the traders, or arbitragers as they are often called, hold an

immediate view of the market. A large number of different market players participate in buying

and selling activities in the market based on diverse domestic and global information, such as

price, demand and supply, climatic conditions and other market related information. All these

factors put together result in efficient price discovery as a result of large number of buyers and

sellers transacting in the futures market.

Futures market, as observed from the cross-country experience of active commodity

futures markets, helps in efficient price discovery of the respective commodities and does not

impair the long-run equilibrium price of commodities. At times, however, price behaviour of a

commodity in the futures market might show some aberrations reacting to the element of

speculation and bandwagon effect inherent in any market, but it quickly reverts to long-run

equilibrium price, as information flows in, reflecting fundamentals of the respective commodity.

In futures market, speculators play a role in providing liquidity to the markets and May

sometimes benefit from price movements, but do not have a systematic causal influence on

prices.

An effective architecture for regulation of trading and for ensuring transparency as

well as timely flow of information to the market participants would enhance the utility of

commodity exchanges in efficient price discovery and minimise price shocks triggered by

unanticipated supply demand mismatches.

References:

1. Ghosh, S. et.al, 1987, Stabilising Speculative Commodity Markets, New York, Oxford

University Press

2. International Monetary Fund, World Economic Outlook, September 2006

3. WWW.indiabudget.nic.in Economic survey 2006-2007
http://www.indiabudget.nic.in/http://www.indiabudget.nic.in/


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The Fundamentals of Commodity Futures Returns June 12, 2007

Commodity futures markets allow market participants to obtain insurance against the

fluctuations of future spot prices of commodities. Prior research by Gorton and Rouwenhorst

(2006) shows that long investors in commodity futures markets haven historically received a risk

premium of 5% per annum in return for assuming some of the price risk of short hedgers. This

note summarizes new research which shows that this risk premium has historically varied in

systematic ways across commodities and over time depending on the level of physical

inventories. These findings are based on The Theory of Storage, which identifies the level of

physical commodity inventories as an important determinant of the risk of commodity futures.

Because buffer stocks help to dampen the price impact of shocks to demand and supply, price

volatility increases at low inventory levels. Our empirical results show that the compensation forbearing price risk increases at low inventory levels, when theory predicts that the amount of risk

to insure increases. We provide an economic rationale for two commodity futures trading

strategies based on price signals. In particular we show that the returns to certain strategies based

on backwardation and prior returns are successful because these price signals select commodities

when their inventories are low.

Authors:

1. Gary B. Gorton, The Wharton School, University of Pennsylvania, and National Bureau

of Economic Research,

2. Fumio Hayashi, University of Tokyo and National Bureau of Economic Research

3. K. Geert Rouwenhorst, School of Management, Yale University.


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CHAPTER IV

4.1DATA ANALYSIS AND INTERPRETATIONS

Tools for analysis:

MS.Office software package is used for the analysis. The following statistical and

mathematical tools used by the researcher for the analysis.

The data collected through questionnaire and analyzed with various statistical tool and

presented of tables figure in this chapter

Correlation

ANOVA

Percentage analysis

Weighted average and score

Charts

o Line charts

o Bar charts

o Pie- charts


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4.1.1.Income segment of the people:

Table 4.1.1. Table showing the Annual Income of the respondents:

Source: Primary Data

INFERENCE:

Among the total respondents 47% of people are in the segment 1.5 to 3 lakhs, 25% of

people belongs to 3 to 5 lakhs , 15% of people are lying between 5 to 10 lakhs and remaining 7%

and 6% of peple are in between less than 1.5 lakhs and above 10 lakhs.

Majority of the annual income of the people lies with the 1.5 lakhs to 3 lakhs.so it shows

their investment level approach would be maximum.

Chart: 4.1.1. Chart showing the Annual Income of the Respondents:

4.1.2. Type of Investors

Annual income ofthe people

< 1.5lakhs

1.5 lakhsto 3 lakhs

3 to 5lakhs

5 to 10lakhs

Above 10lakhs

No of people 8 52 27 16 7

Percentage 7 47 25 25 6


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Table 4.1.2. Table showing the Type of investor

Type of investor Aggressive Moderate Conservative

No of Respondents 50 45 15

Percentage 45% 41% 14%


Inference:

The above table shows that the major portion of people are aggressive in investing. It

shows that the people are interested in savings. Amoung the respondents 45%, 41% and 15% of

belongs to aggressive, moderate and conservative respectively. The major portion of people,

nearly 86% are continuesly investing and intersted in investing.

Chart 4.1.2: Chart showing the Type of Investor

4.1.3. Level of awareness about commodity futures amoung the respondents


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Table 4.1.3: Table showing the Level of awareness about commodity futures amoung the

respondents

Awareness about commodity

futures YES NO

No of Respondents 47 63

Percentage 42% 58%


Inference:

The above table clearly shows that nearly 63 respondents are not aware aboutcommodity futures market. Among the Respondents 47 people have awareness about

commodity futures market. The major group of this segment belongs to MBA and people

working in Banking sector.

Chart 4.1.3: Chart showing the awareness about commodity futures amoung the

respondents

4.1.4 Induced to Invest:


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Table 4.1.4: Table showing the Details about Inducing Factors:

Induced to

InvestAdvertisements

Financial

PlannerFriends/Relatives

Own

InterestOthers

No of

Respondents

16 32 4 47 11

Percentage 14.55 29.09 3.64 42.73 10.00


Inferences:

The major factor that influences the people to invest is their Own Interest. The rest of

the factors are financial planners, advertisements, others and friends / relatives.

Chart 4.1.4: Chart showing the Details about Inducing Factors:


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4.1.5. Level of Investment of the Respondents:

Table 4.1.5: Table showing the Level of investment of the respondents

Level of

investment< 1 lakhs 1 to 2 lakhs 2 to 5 lakhs 5 to 10 lakhs

10 to 20

lakhs

No of respondents 9 23 27 40 11

Percentage of

respondents8% 21% 25% 36% 10%


Inference:

Most of the respondents used to invest between 5 to 10 lakhs, and 2 to 5 lakhs

respectively. Totally 61% of people investment between 2 to 10 lakhs. Out of 23 people ,21% of

people invest amount between 1 to 2 lakhs.

Chart 4.1.5: Chart showing the Level of investment of the respondents:


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4.1.6. Reason for Not Investing in COMMODITY FUTURES:

Table 4.1.6. Table showing the Reason for Not Investing in COMMODITY FUTURES:

Reason Risk Volatility

Margin

trading Low returns

Not aware

about

commodity

futures

No of

respondents12 26 10 21 41



Inference:

The important reason for respondents not investing in commodity futures is the lack of

awareness about the commodity futures market. Nearly 31% of respondents are not

aware about commodity futures.

The other important reasons are volatility, low returns from their investment , risk and

marginal trading respectively.

Chart 4.1.6. Chart showing the Reason for Not Investing in COMMODITY FUTURES:


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4.1.7. Investor preference in commodities:

Table 4.1.7. Table showing the Customer preference in commodities:

Commodities Energy Bullions Base metals Agri products

No of respondents

29 48 13 20

Percentage 26 44 12 18


Inference:

From the above table it is clear that the respondents preference first goes to bullions next to that

are energy,agri-products and base metals.

Chart 4.1.7. Chart showing the Customer Preference In Commodities:


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4.1.8. Intruments Invested

Table 4.1.8 : Table showing the Intruments Invested

Instruments No of respondents percenta

Post office & banks 6 5.45

Commodities 1 0.91

Shares & bonds 2 1.82

Mutual Funds 3 2.73

Insurance 9 8.18

ALL 1 0.91

Post office & bamks + Mutual Funds 1 0.91

Post office & banks + Insurance 17 15.45

Commodities + Shares & Bonds 9 8.18

Commodities + Shares & Bonds + Mutual funds 14 12.73

Commodities + Shares & bonds + Mutual Funds + insurance 11 10.00

Commodities + Mutual Funds 2 1.82

Shares & bonds + Mutual Funds 7 6.36

Shares & bonds + Mutual Funds + Insurance 15 13.64

Shares & Bonds + Insurance 7 6.36

Mutual Funds + insurance 5 4.55


Inferences:

Amoung the respondents nearly 64 are investing in shares and bonds.

In mutual funds, 58 people are investing.


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Around 65 respondents are investing in insurance.

In commodities, 47 respondents are invested

25 respondents are investing in post office and banks

table 4.1.8 :table showing the Expected return

Expected

return20 %


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No of

respondents19 18 13 50 10


Chart 4.1.8 :Chart showing the Expected return

Inference:

19 respondents are expected return below 8%, and 18 and 13 repondents are expected

return between 8%to 16% .and 50 respondents are expected return for 16%to20%. So more

respondent like high return

4.1.9. Type of investor and the reason for investing in commodity futures:

Table 4.1.9. Table showing the Weighted average score and ranking of the reason for

investing in commodity futures respective to the type of investor:

Investor Type Aggressive Moderate Conservative


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Reason for Investing in

commodity Futures

weighted

Average Score

Rank Weighted

Average Score

Rank weighted

Average Score

Ra

INVESTMENT

AMOUNT

3.92 2 4.09 2 4.07 2

RISK 3.70 4 3.36 5 3.47 5

MARKED TO MARKET 3.72 3 3.31 6 3.53 4

HEDGING PURPOSE 3.64 5 3.73 3 3.60 3

EXPOSURES 2.96 8 3.18 8 3.00 8

VARIETY OF

COMMODITIES

AVAILABLE

3.24 7 3.38 4 3.27 7

FINANCIAL ADVISOR 3.28 6 3.29 7 3.47 6

DIVERSIFICATION 4.30 1 4.13 1 4.47 1


Inference:

It is well known from the table that for all the three type of Investors, Diversification and

Investment amount are in the first and second position.Reason for investment changesfor all the three type of investors,it depends upon their personal thoughts.

Chart 4.1.9. Chart showing the Semantic chart for type of investor and the reason for

investing in commodity futures:


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4.1.10. Overall all weighted average score for the reason for investing in

commodity futures market:


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Table 4.1.10. Table showing the Overall all weighted average score for the reason for

investing in commodity futures market:

Reason for

Investing in

commodity

Futures

Strong

ly

Agree

Agree

Neither agree

Nor

disagr

ee

Disagr

ee

Strongl

y

Disagre

e

Total No

of

Respond

ents

Weigh

t score

weighte

d

Average

Score

Ra

k

DIVERSIFICA

TION49 40 21 0 0 110 468 4.25 1

INVESTMEN

T AMOUNT45 30 26 9 0 110 441 4.01 2

HEDGING

PURPOSES25 46 20 16 3 110 404 3.67 3

RISK 13 52 25 20 0 110 388 3.53 4

MARKED TO

MARKET19 40 34 14 3 110 388 3.53 5

FINANCIAL

ADVISOR26 29 18 27 10 110 364 3.31 6

VARIETY OF

COMMODITI

ES

AVAILABLE

19 28 37 19 7 110 363 3.30 7

EXPOSURES 11 26 36 32 5 110 336 3.05 8


Inference:

The overall order of reason for investing in commodity futures are Diversification,

Investment amount, Hedging purpose, Risk, Marked to Market, Financial Advisor, variety of

commodities available and exposures.

Chart 4.1.10. Chart showing the Overall all weighted average score for the reason for

investing in commodity futures market:


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4.1.11: Semantic income level of the people and their objective of investments:


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Type 4.1.11: Table showing the Semantic table for income level of the people and their

objective of investments:

Level of

Income< 1 lakhs

1 lakhs to 2

lakhs2 to 5 lakhs 5 to 10 lakhs

10 lakhs to

20 lakhs

Objective of

Investment

weighted

Avera

ge

Score

Ran

k

weighted

Avera

ge

Score

Ran

k

weighted

Avera

ge

Score

Ran

k

weighted

Avera

ge

Score

Ran

k

weighted

Avera

ge

Score

Ran

k

FOR ME &

MY SAFETY4.00 1 3.85 1 4.07 1 4.38 1 3.43 3

SHORT

TERM

GAINS

2.50 7 3.40 5 3.48 3 3.63 3 3.43 4

LONG TERM

GAINS3.75 2 3.50 4 3.41 4 3.69 2 3.43 5

USE MY

SURPLUS

CASH

3.63 3 3.25 7 3.30 6 3.38 5 3.71 1

FUTURE

REQUIREME

NTS

3.50 4 3.71 2 3.56 2 3.56 4 3.57 2

HOBBY 2.63 6 3.23 6 3.33 5 3.31 6 2.86 6

KNOWLEDG

E3.25 5 3.71 3 2.96 7 3.13 7 2.43 7


Inference:

From the above table it is clear that the Income level group upto 10 lakhs, they are

investing for their personal things and their family safety. It remains in the first

position.But for income level above 10 lakhs it changes, for them the first objective of

investment is to use their surplus cash and gain return from that.


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Chart 4.1.11:Chart showing the Semantic chart for income level of the people and their

objective of investments:


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4.1.12. Overall weighted average score for the objective of investment:

Table 4.1.12. Table showing the Overall weighted average score for the objective of

investment:

Objective of

Investment

< 1

lakhs

1

lakhs

to 2

lakhs

2 to

5

lakhs

5 to

10

lakhs

10

lakhs

to 20

lakhs

Total No of

Respondent

s

Weight

score

weighte

d

Average

Score

R

FOR ME & MY

SAFETY42 32 26 10 0 110 436 3.96 1

FUTURE

REQUIREMENTS20 48 26 13 3 110 399 3.63 2

LONG TERMGAINS

22 38 27 21 2 110 387 3.52 3

SHORT TERM

GAINS16 43 25 20 6 110 373 3.39 4

USE MY

SURPLUS CASH21 29 33 20 7 110 367 3.34 5

KNOWLEDGE 27 30 22 14 17 110 366 3.33 6

HOBBY 24 26 21 26 13 110 352 3.20 7


Inference:

The order of investors objective of investment is

1. For me and my family safety

2. Future requirements

3. Longterm gains

4. Shortterm gains

5. Use the surplus cash and get return from that

6. Knowledge


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7. Hobby

Chart 4.1.12. Chart showing the Overall weighted average score for the objective of

investment:


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4.1.13. Precautions during uptrend and downtrend of the market:

Table 4.1.13.Table showing the Precautions during uptrend and downtrend of the market:

Precautions

Changes

in fund

Portfolio

updating

Market

updating

No

precautions

Changes in

fund +

portfolio

updating

Portfolio

updating +

market

updating

No of

respondents5 50 24 11 17 3


Inference:

Amoung the respondents 70 people are portfolio updating when the market faces

downtrend or uptrend.

27 people are doing markeet updating

22 people are changing the funds and 11 people are not taking any precautions, they are

not responding to the market movements.

Venn Diagram:4.1.13. Chart showing the venn diagram of Precautions taken by the

respondents when market uptrend and downtrend


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4.1.14. Correlation between level of investment and period of investment:

Table 4.1.14: Table showing the Bivariate frequency (correlation table)

Period of

investment/Level

of investment

< 1 lakhs1lakhs 2

lakhs

2lakhs 5

lakhs

5 lakhs 10

lakhs

10 lakhs

20 lakhs

< 1 year 3 8 1 4 0

1 2 years 5 8 6 3 1

2 3 years 0 4 11 15 1

3 5 years 1 2 8 9 0

5 10 years 0 1 1 8 9

10 to 15 years 0 0 0 1 0


The correlation between the level of investment and period of investment is 0.57.

Inference:

The correlation between the level of investment and period of investment is 0.57.So the

level of investment and the period of investment is positively correlated. If there is a increase in

the period of investment definitly there is a increase in level of investment and vice versa. The

period of investment and level of investment is directly proportinal to each other.


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4.1.15: Analysis of variance between type of investor and expected returns:

Table 4.1.15: Table showing the Analysis of variance between type of investor and expected

returns:

TYPE/

Expected

return

< 8% 8 12 %12 16

%

16 20

%>20%

Grand

Total

Aggressive 0 9 8 24 9 50

Moderate 7 11 5 21 1 45

Conservative 12 3 0 0 0 15

Grand Total 19 23 13 45 10 110


Calculations:

Correction factor = 1102 / 15 = 807

SST = Total sum of squares = 1592 807 = 785

SSC = sum of squares between expected return = = 1061 807=

254

SSR = sum of squares between the type of investor = 950 807 = 143

Error sum of squares = 785 254 143 = 388

Hypothesis:

Null hypothesis H0:

There is no significant difference in the expectation of return of the three type

of investors


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There is no significant difference in the type of investor with regard to

expectation of return

Alternate hyphothesis H1:

1. There is a significant difference in the expectation of return of the three type of

investors

2. There is a significant difference in the type of investor with regard to


Table 4.1. 15.1. ANOVA TABLE :

Sources of

variation

Degrees of

freedomS.S MSS=S.S/d.o.f FC

Ftable

vaule(5%)

Between the

Expected

return

4 254MSC= 254/4

=63.5

MSC/MSE=

1.313.84

Between the

type of

investors

2 143MSR= 143/2

=71.5

MSR/MSE=

1.47

4.46

Error 8 388MSE=388/8

=48.5

Total Cr 1 =14 785

Table value of F at 5%:

1. Value of F at degrees of freedom (4,8) = 3.84

2. Value of F at degrees of freedom (2,8) = 4.46


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Conclusion:

Since the calculated value is less than the table value of F for the two null hyphothesis.

So we fail to reject the null hyphothesis

Null hypothesis H0:

There is no significant diffrence in the expectation of return of the three type of

investors

There is no significant difference in the type of investor with regard to



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4.1.16: Analysis of variance between level of investment and expected returns:

Table 4.1.16: Table showing the Analysis of variance between level of investment and

expected returns:

Period of

investment /

Expected

return

< 8% 8 12 % 12 16 % 16 20 % >20%Grand

Total

< 1 year 3 5 1 6 1 16

1 2 years 9 2 3 4 5 23

2 3 years 4 10 2 14 1 31

3 5 years 1 3 3 13 0 20

5 10 years 2 3 4 8 3 20

Grand total 19 23 13 45 10 110


Calculations:

Correction factor = 1102 / 25 = 484

SST = Total sum of squares = 814 484 = 330

SSC = sum of squares between expected return = = 636 484=

152

SSR = sum of squares between the type of investor = 509 484 = 25

Error sum of squares = 330 152 25 = 153

Hypothesis:

Null hypothesis H0:


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The expected of return is same for all the period of investment

The period of investment does not vary with respect to expected return


The expected of return is not same for all the period of investment

The period of investment vary with respect to expected return

Table 4.1.16. 1. ANOVA TABLE :

Sources of

variation

Degrees of

freedom

S.S MSS=S.S/d.o.f FCFtable

vaule(5%)

Between the

Expected

return

4 152MSC= 152/4

=38

MSC/MSE=

3.973.01

Between the

type of

investors

4 25MSR= 25/4

= 6.25

MSR/MSE=

0.653.01

Error 16 153MSE= 153/16

= 9.56Total Cr 1 = 24 330

Table value of F at 5%:

Value of F at degrees of freedom (4,16) = 3.01

Conclusion:

In this case we have to accept one null hypothesis and reject the other.

Null hypothesis H0:


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The expected of return is same for all the period of investment




The period of investment vary with respect to expected return

Here we are accepting




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CHAPTER-V

5.1 FINDINGS:

The majority of the respondents 87% of peoples belongs to income level of in 1.5 lakhs to

10 lakhs

45%, 41% and 15% of respondents are belongs to aggressive, moderate and conservative

type of investment respectively.86% of people are interested in an investing.

43% of respondents are not aware about commodity futures market.The major group of

this segment belongs to MBA and people who are working in banking sector.

The major factor that influences the respondents to invest is their own interest. The factors

that influences the respondents to invest are financial planners, advertisements, others and

friends and relatives

40% and 27% respondents investment level belongs to 5 to 10 lakhs, and 2 to 5 lakhs

respectively.61% of people investment level belongs to 2 to 10 lakhs.21% of peoples

investment level belongs to 1 to 2 lakhs

80% of respondents are getting periodic information from their financial advisor and

balance 20% of respondents do not asking information for their portfolio.

70% of people are updating portfolio, when the market faces downtrend or uptrend.

27% of people are doing market updating.

22% of people are changing the funds and 11% people are not taking any precautions, they

are not responding to the market movements.

31% of respondents are not investing in commodity futures because they are not having

any awareness about the commodity futures market..


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The other important reason are volatility, low returns, risk and marginal trading

respectively.

The order of the Respondents preference in commodities

1. Bullions

2. Energy

3. Agri-products

4. Base metals

The order of reason for investing in commodity futures is

1. Diversification,

2. Investment amount,

3. Hedging purpose,

4. Risk,

5. Marked to market,

6. Financial advisor,

7. Variety of commodities available and

8. Exposures.

Income level group upto 10 lakhs, they are investing for them and their family safety. It

remains in the first position.

But for income level above 10 lakhs it changes, for them the first objective of investment is

to use their surplus cash and gain return from that.

The order of investors objective of investment is


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1. For me and my family safety

2. Future requirements

3. Longterm gains

4. Shortterm gains

5. Use the surplus cash and get return from that

6. Knowledge

7. Hobby

The correlation between the level of investment and period of investment is 0.57.So the

level of investment and the period of investment is positively correlated. If there is a

increase in the period of investment definitly there is a increase in level of investment and

vice versa. The period of investment and level of investment is directly proportinate to

each other.


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5.2 SUGGESTIONS;

Generally respondents are not aware about commodity futures market. The respondents

mainly MBA graduates and Banking people are aware about the commodity futures. By

educating and making the people aware of commodity futures market will attract the

most number of people to invest in commodities futures market..

The promotion of this commodity market can be done by means of the advertisement and

financial planners .

More respondents are preferring bullions in commodities.

The respondents main objective of the investment is their safety. So, the investor thinks

the money will be safe then ready to invest.


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5.3 LIMITATIONS:

1. Geographical:

The study is limited to the Chennai city only. Hence all the other cities in

Tamilnadu were not considered for the current research.

2. Procedural:

All the data collected generally limited by the method adopted. This limits to the

extent of data generation available through that method.

3. Specific:

Some of the respondents were reluctant in giving information.


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5.4CONCLUSIONS;

Most of the investors were unaware about the commodity future market. Commodity

futures are used by the investor as a hedging tool. It helps the investors to diversify the

portfolio and reduce the risk. Many of the people are interested in bullions and energy

commodities. Now commodity futures are widely used by the investor to minimize the

risk. Many of the people were interested in investing the money in the commodity

market but their main problem is that they were not that much well known about the

market. By means of educating them, the problem can be eradicated then many will

show interest and confidently they will invest their money in the market.


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5.5 REFERENCES

BOOKS:

Executive Corporate Finance by Samir Asaf, Second edition 2002.

A Traders First Book on Commodity by Carley Garner, Third edition 2003.

Investment in Shares by Joshua Rosenbaum, Second edition 2003.

Commodity Investing by Adam Dunsby, Fourth edition 2004.

Careers in Finance by Trudy Ring, Second edition 2004.

WEBSITES:

www.indiainfoline.in

www.5paisa.com

www.wikipedia.org

www.nseindia.com

www.moneycontrol.com www.myiris.com
http://www.indiainfoline.in/http://www.5paisa.com/http://www.wikipedia.org/http://www.nseindia.com/http://www.moneycontrol.com/http://www.myiris.com/http://www.indiainfoline.in/http://www.5paisa.com/http://www.wikipedia.org/http://www.nseindia.com/http://www.moneycontrol.com/http://www.myiris.com/


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A Study on Identification of Investment Opportunities in Commodity Futures Market

Questionnaire

Dear Sir/Madam,

As a part of my MBA program, I am doing a research study in the above-mentioned topic . In

order to collect data for my research, I request you to kindly provide data and information for the

same. I assure that no part of this questionnaire will be misused for any kind of activity and its

used only for the sole purpose of this research.

Thanking you

With regards,

Sivasankaran.R,

II MBA, Hindustan Institute of Technology and Science, Chennai.

Name: Mr. /Ms__________________________ Gender: ______ Age: _____

Occupation: ________________________ Qualification: ______________

E- Mail: _____________________________________Mobile: ____________________

1. Mention your annual income?

Less than 1.5lakhs 1.5 to 3Lakhs 3lakhs to 5lakhs


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5lakhs to 10lakhs above 10lakhs

2. What type of investor you are?

Aggressive moderate Conservative

3. Are you aware about the commodity market?

Yes No

4. What induced you to invest?

Advertisements Financial planners Friends/Relatives

Own interest Others

5. What is your level of investment?

Less than 1 lakhs 1 lakhs to 2 lakhs 2 to 5 lakhs

5 to 10 lakhs 10 to 20 lakhs more than 20 lakhs

6. What is the reason for not investing in commodities?

Risk Volatility Marginal trading Low returns

dont know about commodity futures market

7. If you are interested in commodity market which commodity do you prefer?

Energy Bullions Base metals Agri-products

8. In which of the following you are investing?

Post Office & Banks commodities Shares &Bonds


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Mutual funds Insurance others

9. Will you review the financial situation of your investment periodically?

Yes No

10. Will you ask your advisor to provide you the periodic review of your portfolio?

Yes No

11. Which precautions will you take during uptrend and downtrend of the market?

Changes in fund Portfolio updating Market updating No Precautions

12. The reason for investing in commodity futures is

Strongly

agreeAgree Neutral Disagree

Strongly

Disagree

Investment

amount

Risk

Marked to market

Hedging purpose

Exposures

Variety of

commodities

available

Financial advisor

Diversification of

portfolio

13. Mention your monthly savings?


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Less than 1000 1000 to 3000 3000 to 5000

5000- 8000 8000-10000 More than 10000

14. How long you have been investing?

Less than one year 1- 2 years 2-3 years 3-5 years

5- 10 years More than 10 years

15. Please Rank the following Objective of Your Investment according to your preference

1Very high 2High 3 Neither high nor Low 4Low 5 Very Low

S.No Factors 1 2 3 4 5

1 I invested for me and my family Safety

2 I invested for the Short term gains

3 I invested For the Long Term Gains

4I Invested to Use my Surplus Cash and get the

return from it

5 I Invested to meet my Future Requirements

6 Investing is my hobby

7 Investing gives me to update my knowledge

16. How much returns you expect from your investment?

Less than 4% 4% to 8 % 8% to 12 % 12% 16%

16% 20% More than 20%


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