Commodity Derivative Market in Nepal23rd Aug. 2012, Uniglobe college

Presentation by:- MBA 1st Trimester -Somnath Kandel-Avash Bhattarai -Baburam Subedi

Contents Introduction History/ global commodity exchange Commodity exchanges in Nepal Proposed structure in Nepal Importance/Advantage of Market Participants of Derivative market Commodity market condition In Nepal Risk of Market Factors affect trading decision Why investors are loosing ? Conclusion

Derivatives It has no independent value. Its value is entirely derived from the

value of an underlying asset.

The underlying asset can be securities, commodities, bullions and currencies, Livestock or anything else.

To qualify as a commodity

Not a complicated manufacturing process

Standardized quality

Available in large volumes

Presence of many competing buyers & sellers

It should be unbranded

Types of Derivatives & its Classification

Commodities

BullionBase Metals

EnergyAgriculture

History/ global commodity exchange

• The history of derivative market began with establishment of Chigao Board o f Trade in 1848, USA

• Chicago Mercantile Exchange (CME) established in 1874-USA

• New York Mercantile Exchange (NYMEX)-U.S.A• London Metal Exchange (LME)- U.K.• Dalian Commodities Exchange(DCE)-China • Dubai Gold and Commodities Exchange (DGCX) -Dubai• Sydney Futures Exchange (SFE)-Australia• Multi Commodities Exchange(MCE)-India

SFE

SICOM

MCX

TOCOM

DGCX

LIFFE

CBOTNYBOT

NYMEX

CME LME

According to us report of Oct. 2008, size of derivative market of world was $791 trillions where as size of share market was only $37 trillions.The size of the derivative market is 11 times greater than the size of world economy.

DCE

Commodity exchanges in Nepal

Commodities and Metal Exchange Nepal (COMEN) established in 14 Dec 2006.

Mercantile Exchange Nepal Limited(MEX) established in 2008

Nepal Derivative Exchange Limited (ndex) established in Nov 20, 2008

Commodities Future Exchange(CFX) established in June 2011

• Government of Nepal

» Ministry of Finance

» Regulator ( Must probably SEBON)

• Derivative Exchanges

• Clearing Member (CM)

• Trading member(TM)

• Trader/Client

• Sub-Trading Member

• Trader/Client

• Banking Partner

• Proposed Structure

Importance/Advantage of Market

Alternative in Nepalese Investment portfolio

Risk minimization (Hedging Mechanism)

Fair Price discovery ( large no. of buyer and seller/ huge volume)

High leverage(Margin trading) High liquidity Speculation and arbitraging. Two way profit/loss.(buy or sell)

Participants of Derivative market

Hedgers

Investors who attempt to minimize the risk of financial loss from adverse price changes by assuming futures positions opposite to cash positions.

Speculators

Who wish to invest on the future movement in the price of an asset. They use derivatives to get an extra leverage. A speculator will buy and sell in anticipation of future price movements, but has no desire to actually own the physical commodity.

Arbitragers

They are in the business to take advantage of a discrepancy between prices in two different markets. If , for example, they see the future prices of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in profit.

Commodity market condition In Nepal Commodities and Metal Exchange Nepal

(COMEN) In the budget of fiscal year 2066/2067,

government of Nepal addressed commodity market first time, and lay down the 10% capital gain tax form profit amount.

Due to the lack of regulatory body exchanges are doing what ever they want, e.g. there are different commission rate in different exchange of same contract.

What is the system of exchange rate between us dollar and NC(because in software price is coated in NC but market is of us dollar) ? There is no fix rule.

What is the liquidity position of exchanges(e.g. COMEN crisis) who cares this ?

Contd.. Today's commodities exchange in

Nepal are like the existence of banks without having central bank.

What is the TAX paying system (e.g. COMEN tax evasion).

People are investing blindly without any research because of which they are loosing the money.

No provision of physical delivery.

Risk of Market

Legal risk

Credit risk

Market risk

Liquidity risk

Operational risk

Factors affect trading decisionFundamental Factors

Demand & Supply Equation Inflationary pressures Money supply Political events Weather Transportation costs Data announcements Performance of key commodities Technological changes Taxes

Example of fundamental analysis: Factors affects for gold price

Price of Crude oil increases= Price of gold increases and vice-versa

Inflation increase= Price of gold increases and vice-versa

Interest rate rises= Price of gold decrease and vice-versa

Overall output increase= Price of gold decrease and vice-versa

Factors affect trading decisionTechnical Factors

Charts Trend lines Technical indicators The study of historical price

patterns to help forecast futures prices.

Market Sentiment Market psychology(Fear, greed &

emotion)

Basic Trading strategy

Market

Buy

Market

Sell

Information

Interaction

Investment

Investment

Interaction

Informatio

n

Why Investors are Loosing?

x √

Conclusion Commodity derivative market in

Nepal is very young. It is an great alternative for an

investor to diversify their portfolio.

Market is very volatile. Impatient trader lose a lot. Good trader trade a lot, lose a

lot and eventually earn a lot.