COMMODITY FUTURES IN INDIA

Why Commodity?

Diversification Less Manipulations / Intrinsic Value High Leverage

History of Commodity Derivative MarketChicago businessman formed CBOT in1848In 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

Benefits1. Driven on demand & supply

2.3. 4. 5. 6.

Easy to understand & invest Less investment i.e. 5 - 7 % Market timing 10 am 11.55 pm Price manipulation not possible because of global market Volatility gives chance for easy entry and exit

OpportunitiesHedgingArbitrage Trading Intra Day Positional

Indian Commodity ExchangeNBOTRegional Others FMC National NMCE ICEX NCDEX MCX

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 & NCDEXMCXMonth Expiry day Timing Different for each commodity Different for commodities Summer (May to October) : All Commodities : 10 am to 5 pm International Commodities : 5 pm to 11.30 pm Winter (Nov to April) : 10 am to 5 pm International Commodities: 5 pm to 11.55 pm

NCDEXNormally monthly 20th of each contract month Summer (May to October): All Commodities : 10 am to 5 pm International Commodities : 5 pm to 11.30pm Winter (Nov to April) : 10 am to 5 pm International Commodities : 5 pm to 11.55

Active Commodity

Gold, Silver, Crude, Oil, Copper, Pulses, Sugar, Wheat, Spices, Gold, Natural Gas, Nickel, Ref. Oil, Menthe Silver, Steel, Soy Complex Oil

Exchange Volume of MCX & NCDEX

NCDEX MCX

Jul-09 Mar-09 Nov-08 Jul-08 Mar-08 Nov-07 Jul-07 Mar-07 Nov-06 Jul-06 Mar-06 Nov-05 Jul-05 Mar-05 Nov-04 Jul-04 Month

600000

500000

400000

300000

200000

100000

0

Classification of CommoditiesBu l l i on Me tal s En e rgy Pu l se s O th e rs O il & O i l se e ds S pi ce s Gol d an d S i l ve r Zi n c,Le ad, C oppe r, Ni ck e l , S te e l i n gots C ru de O i l , Natu ral Gas, He ati n g oi l , Gasol i n e C h an a Ru bbe r, Gu ar S e e d , Gu argu m , C ash e w, Al mon d,Gu r, C offe e C astor S e e ds, S oy S e e ds, C astor O i l , Re fi n e d S oy O i l , S oyme al , Mu stard S e e d Pe ppe r, Re d C h i l l i , Je e ra,Tu rme ri c

Contact Specification (MCX)Commodity GOLD SILVER COPPER CRUDEOIL NATURALGAS NICKEL LTP 17700 28300 322 3550 240 750 Lot Size (Qty) / 1 Price Quotation Rs (+ & -) 10GRMS 1KGS 1KGS 1BBL 1mmBtu 1KGS 100 30 1000 100 1250 250 Margin % 4.00% 5.00% 5.00% 5.00% 8.00% 7.00% Lot Value(Rs) 1,770,000 849,000 322,000 355,000 300,000 187,500 Approx Margin (Rs) Contract Months 70,800 42,450 16,100 17,750 24,000 13,125 Feb, April, June, Aug, Oct, Dec. Mar, May, July, Sep, Dec. Nov, Feb, April. Jan, Feb, Mar. (Monthly) Nov, Dec, Jan.(Monthly) Nov, Dec, Jan.(Monthly)

Contact Specification (NCDEX)Commodity LTP Price 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. Nov, Dec, Jan, Feb, Mar, Apr.(Monthly)

Guar Seed

2800

RS/QUINTAL

10 MT

7.00%

100

280,000

19,600

Soy Oil

495

Rs/10Kgs

10 MT

5.00%

1000

495,000

24,750

Nov, Dec, Jan.(Monthly) Nov, Dec, Jan, Feb, Mar, Apr.(Monthly)

Pepper

15650

RS/QUINTAL

1 MT

5.00%

10

156,500

7,825

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 International Commodity Exchange exchange

New York Mercantile Exchange (NYMEX)Biggest exchange for trading in Physical Commodity Future NYMEX

COMEX

Crude oil

Natural Gas

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 metalsLME 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 TOCOM initiative towards establishing Asia as the benchmark for price discovery & risk management in commodities Platform for future price discovery in Asian for Asian players in Crude Oil Commodity Traded- Crude Oil, Gasoline

2.

3.

4.

Market Players

Producers

Exporters / Importers

HNI / F & O

Consumers

Traders / Brokers

Concept of Commodity DerivativeGold 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.

StrategyXYZ BuyXYZ Sell 1 kg hold short

Spot PriceFuture Price

21000 / 10gm21050

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 ScheduleOn Expiry Closes At17000 18000 19000 20000 21000 22000 23000 24000

Physical Gold

Future Position (21,050)+4,05,000 +3,05,000 +2,05,000 +1,05,000 0 -95000 -85000 -75000

Net Payoff

-4,00,000 -3,00,000 -2,00,000 -1,00,000 0 1,00,000 2,00,000 3,00,000

+5000 +5000 +5000 +5000 0 +5000 +5000 +5000

Mechanism of Hedging (Agent)APRILAgree to sell flour to bread manufacturer Buy wheat futures contract

WHEAT MILLERSell wheat futures contact Buy wheat in the physical market for delivery of flour to Bread Manufacturer

JULY

Mechanism of Hedging (Producer)SEPTEMBER Sell Guar seed November Futures

FARMER Buy Guar seed November Future to square off transaction Sell Guar seed Harvest

NOVEMBER

Mechanism of Hedging(Exporter)Export contract to sell (export) automobiles in October Buy steel futures contract AUTOMOBILE MANUFACTURER Sell steel futures contract to square off transaction Buy steel from Physical market to meet export requirement

JUNE

SEPTEMBER

Commodity V/S Financial DerivativesCommodity DerivativeSettlement Delivery Notice Period Warehousing Quality Of Assets Physical / Cash Yes Yes Issue

Financial DerivativeCash No No No Issue

Parity CalculationCrudeNYMEX Crude Present Exchange Rates Parity Price Of MCX Crude 76.30 46.50 3547.95 3547.95

Natural GasNYMEX Natural Gas ($/mmbtu) Present Exchange Rates 5.14 46.50 239.01 Parity Price Of MCX Natural Gas 239.01

Brokerage CalculationBrokerage for Clients Gold Gold price per 10 gm 17600/Brokerage 0.03% Service Tax (10.2%) Turnover Charges (0.004%) Service Tax on Turnover Charges (10.2%) Stamp Duty on Turnover (0.001%) Total Cost Per 1 Kg 1760000 528 54 70 7 18 677

Learning the CommoditiesDemand & 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 PricesEmployment Data GDP ISM Mfg. Index Trade Deficit Consumer Price Index Production Price Index Industrial Production Retail Sale Durable Goods Order Federal Bank Meeting First Friday of month Last Friday of month First working day of month Third week of month Third week Third week Third week Third week of month Last week of month Eight times in year

Important Websitewww.bulliondesk.com www.forexfactory.com www.bloombear.com www.futureresource.com www.nymex.com www.tocom.com.jp www.gold.org www.kitco.com