commodity futures in india

COMMODITY FUTURES IN INDIA

A Career In Financial Market

Why Commodity?

Diversification

Less Manipulations / Intrinsic Value

High Leverage



History of Commodity Derivative Market

Chicago businessman formed CBOT in1848

In 1898 Chicago Mercantile Exchange start trading on Future Contract

For Spot Market Forward Market Commission (FMC) setup in 1953

In 1875 establishment of Cotton Trade Association

4 National level exchanges MCX, NCDEX, NMCE, ICEX


Benefits

• Driven on demand & supply 1.

• Easy to understand & invest 2.

• Less investment i.e. 5 - 7 %3.

• Market timing 10 am – 11.55 pm4.

• Price manipulation not possible because of global market 5.

• Volatility gives chance for easy entry and exit 6.

Opportunities Hedging

Arbitrage

Trading

• Intra Day • Positional


Indian Commodity Exchange FMC

Regional NBOTOthers

National NCDEX

MCXNMCEICEX



Multi Commodity Exchange of India Ltd.An independent and demutualised exchange

Promoted by Financial Technologies (India) Limited

Introduced a state –of –the –art, online digital exchange for commodities trading

On the first week of November, 2004 signed MOU with the Tokyo commodity Exchange


National Commodity & Derivatives Exchange Limited (NCDEX)

A public limited company incorporated on April 23, 2003 under the Companies Act,1956

Professionally Managed online Multi Commodity Exchange

A only commodity exchange promoted by National Level Institution

Regulated by Forward Market Commission


Difference & Similarities between MCX & NCDEX

MCX NCDEXMonth Different for each commodity Normally monthly

Expiry day Different for commodities 20th of each contract month

Timing Summer (May to October) : All Commodities : 10 am to 5 pmInternational Commodities :5 pm to 11.30 pmWinter (Nov to April) :10 am to 5 pmInternational Commodities: 5 pm to 11.55 pm

Summer (May to October): AllCommodities : 10 am to 5 pmInternational Commodities :5 pm to 11.30pmWinter (Nov to April) :10 am to 5 pmInternational Commodities :5 pm to 11.55

Active Commodity Gold, Silver, Crude, Oil, Copper, Natural Gas, Nickel, Ref. Oil, Menthe Oil

Pulses, Sugar, Wheat, Spices, Gold, Silver, Steel, Soy Complex

Exchange Volume of MCX & NCDEX


0

100000

200000

300000

400000

500000

600000

Month

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

NCDEXMCX

Classification of Commodities


Bullion Gold and Silver

Metals Zinc,Lead, Copper, Nickel, Steel ingots

Energy Crude O il, Natural Gas, Heating oil , Gasoline

Pulses Chana

O thers Rubber, Guar Seed , Guargum , Cashew, Almond,Gur, Coffee

O il & O ilseeds

Castor Seeds, Soy Seeds, Castor O il, Refined Soy O il, Soymeal, Mustard Seed

Spices Pepper, Red Chilli , Jeera,Turmeric

Contact Specification (MCX)


Commodity LTP Price QuotationLot Size (Qty) / 1

Rs (+ & -) Margin % Lot Value(Rs)Approx Margin

(Rs) Contract Months

GOLD 17700 10GRMS 100 4.00% 1,770,000 70,800 Feb, April, June,

Aug, Oct, Dec.

SILVER 28300 1KGS 30 5.00% 849,000 42,450 Mar, May, July,

Sep, Dec.

COPPER 322 1KGS 1000 5.00% 322,000 16,100 Nov, Feb, April.

CRUDEOIL 3550 1BBL 100 5.00% 355,000 17,750Jan, Feb, Mar.

(Monthly)

NATURALGAS 240 1mmBtu 1250 8.00% 300,000 24,000Nov, Dec,

Jan.(Monthly)

NICKEL 750 1KGS 250 7.00% 187,500 13,125Nov, Dec,

Jan.(Monthly)

Contact Specification (NCDEX)

Commodity LTPPrice

Quotation Lot Size Margin %Variant (1 Rs + & - ) Lot Value(Rs)

Approx Margin (Rs)

Contract Months

Turmeric 10700 Rs/Quintal 10 MT 34.00% 100 1,070,000 363,800 Nov, Dec,

Apr.

Guar Seed 2800 RS/QUINTAL 10 MT 7.00% 100 280,000 19,600

Nov, Dec, Jan, Feb,

Mar, Apr.(Monthly)

Soy Oil 495 Rs/10Kgs 10 MT 5.00% 1000 495,000 24,750 Nov, Dec,

Jan.(Monthly)

Pepper 15650 RS/QUINTAL 1 MT 5.00% 10 156,500 7,825

Nov, Dec, Jan, Feb,

Mar, Apr.(Monthly)

Chana 2620 RS/QUINTAL 10 MT 6.00% 100 262,000 15,720

Nov, Dec, Jan, Feb,

Mar.(Monthly)

Soy Bean 2420 RS/QUINTAL 10 MT 6.00% 100 242,000 14,520

Nov, Dec, Jan, Feb,

Mar.(Monthly)


International commodity exchange International Commodity Exchange



New York Mercantile Exchange (NYMEX)

Biggest exchange for trading in Physical Commodity Future

NYMEX

Crude oil Natural Gas

COMEX

Gold Silver

London Metal Exchange (LME)1877 as a direct consequence of the industrial revolution witnessed in Britain in 19th 1877

Primary focus on base metals

LME trades 24 hours a day

LME also offer option contract (Trade Average Price Option Contract – TAPOC) based on Monthly Average Settlement Price (MASP)

Trading turnover value is more than US $ 2,000 billion per annual

Commodity traded –Aluminum, Coppers, Nickel, Lead, Tin, Zinc


Chicago Mercantile Exchange (CME)

1898 primarily to trade in

agricultural commodities

Trade heavily interest rate future, stock

indices & foreign exchange futures

Commodities trade – Butter,

Milk, Frozen Pork bellies, live,

cattle, Non –fat Dry Milk



Tokyo Commodity Exchange (TOCOM)

1. • Second largest commodity future exchange

2. • TOCOM initiative towards establishing Asia as the benchmark for price discovery & risk management in commodities

3. • Platform for future price discovery in Asian for Asian players in Crude Oil

4. • Commodity Traded- Crude Oil, Gasoline


Market Players

Producers Exporters / Importers

HNI / F & O

Traders / Brokers Consumers

Concept of Commodity Derivative


Gold Jeweler

Example:- For making jewellery XYZ buy 1 kg gold at 21000 for & it sell jewellery in 3 month cycle after 3 month gold prices are 19000.

Strategy

XYZ Buy Spot Price 21000 / 10gm

XYZ Sell 1 kg hold short Future Price 21050


Net Payoff – 21,000*100 + Initial Margin= 21,00,000 + 5% of 21,00,000

Expiry 3 months = 1,05,000 + 21,00,000= 22,05,000

Pay Off Schedule On Expiry Closes At

Physical Gold Future Position (21,050)

Net Payoff

17000 -4,00,000 +4,05,000 +500018000 -3,00,000 +3,05,000 +5000

19000 -2,00,000 +2,05,000 +5000

20000 -1,00,000 +1,05,000 +500021000 0 0 0

22000 1,00,000 - 95000 +500023000 2,00,000 -85000 +5000

24000 3,00,000 -75000 +5000


Mechanism of Hedging (Agent)


APRIL

JULY

WHEAT MILLER

• Agree to sell flour to bread manufacturer

• Buy wheat futures contract

• Sell wheat futures contact • Buy wheat in the physical market for delivery of flour

to Bread Manufacturer


Mechanism of Hedging (Producer)

SEPTEMBER

NOVEMBER

FARMER

• Sell Guar seed November Futures

• Buy Guar seed November Future to square off

transaction • Sell Guar seed Harvest


Mechanism of Hedging(Exporter)

JUNE

SEPTEMBER

AUTOMOBILE MANUFACTURER

• Export contract to sell (export) automobiles in

October• Buy steel futures contract

• Sell steel futures contract to square off transaction

• Buy steel from Physical market to meet export

requirement

Commodity V/S Financial Derivatives

Commodity Derivative

Financial Derivative

Settlement Physical / Cash Cash

Delivery Notice Period

Yes No

Warehousing Yes No

Quality Of Assets Issue No Issue



Parity Calculation

CrudeNYMEX Crude 76.30

Present Exchange Rates 46.50

3547.95Parity Price Of MCX Crude 3547.95

Natural Gas

NYMEX Natural Gas ($/mmbtu) 5.14

Present Exchange Rates 46.50

239.01

Parity Price Of MCX Natural Gas 239.01

Brokerage Calculation


Brokerage for Clients

Gold Per 1 Kg

Gold price per 10 gm 17600/- 1760000

Brokerage 0.03% 528

Service Tax (10.2%) 54

Turnover Charges (0.004%) 70

Service Tax on Turnover Charges (10.2%) 7

Stamp Duty on Turnover (0.001%) 18

Total Cost 677


Learning the Commodities

Demand & Supply Seasonity

Global Commodity

Prices

Fx Currency movement - $

Global Political /

economic events

INR V/S - $

Indian economic data / policies Weather

Factor Effecting Gold /Silver / Crude / Coppers Prices

Employment Data First Friday of month

GDP Last Friday of month

ISM Mfg. Index First working day of month

Trade Deficit Third week of month

Consumer Price Index Third week

Production Price Index Third week

Industrial Production Third week

Retail Sale Third week of month

Durable Goods Order Last week of month

Federal Bank Meeting Eight times in year



Important Website

www.bulliondesk.comwww.forexfactory.comwww.bloombear.comwww.futureresource.comwww.nymex.comwww.tocom.com.jpwww.gold.orgwww.kitco.com

commodity futures in india

Business