commodity_trading03

8/7/2019 COMMODITY_TRADING03

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COMMODITY

TRADING

Submitted By:

Prerna Gadia

Sandeep Hanumant

Shilpa Verma

Shubhi Ghai



COMMODITY

A commodity is a good for which there is

demand, but which is supplied without

qualitative differentiation across a market.



DEFINITION OF COMMODITY TRADING

Commodities trading is a sophisticated form of investing. It is similar to stock trading but instead of buying and selling shares of companies, an investorbuys and sells commodities.

Commodity trading is the market activity, whichlinks the producers of the commodities effectivelywith their commercial consumers. Commodity tradingmainly takes place in the commodity markets where

raw or primary products are usually exchanged. Theraw commodities here are traded on regulatedcommodities exchanges, in which they are bought andsold in standardized forms of contracts



CONT«

To completely understand the commodity trading

we need to describe two more terms which are

similar to each other.

a.) Commodity exchangeb.) Commodity market



COMMODITY EXCHANGE

A commodities exchange is an exchange where

various commodities and derivatives products are

traded. Most commodity markets across theworld trade in agricultural products and other

raw materials like wheat, barley, sugar, maize,

cotton, cocoa, coffee, milk products, pork bellies,

oil, metals, etc.



COMMODITY MARKET

Commodity markets are markets where raw or

primary products are exchanged. These raw

commodities are traded on regulated commodities

exchanges, in which they are bought and sold instandardized contracts.



COMMODITY-INDIAN STRUCTURE

20 Other Regional

Exchanges

NMCE

Commodity Exchanges

MCX

National

Exchanges

Regional

Exchanges

FMC ± The Regulator

NBOTNCDEX



COMMODITY EXCHANGES IN INDIA

Today India has four national commodity exchanges namely:1.) Multi Commodity Exchange (MCX)2.) National Commodity and Derivatives Exchange

(NCDEX)3.) National Multi-Commodity Exchange (NMCE)

4.) Indian Commodity Exchange (ICEX)

Apart from this India has numerous regional exchanges.

Batinda Om & Oil Exchange Ltd. (BOOE)+

20 other Regional Exchange

All these Commodity exchange overseen by Forward MarketsCommission (FMC) which was set-up in 1953.



LIST OF TRADED COMMODITIES

Agricultural (Grains, and Food and Fiber)

Livestock & Meat

Energy

Precious metals

Industrial metals



COMMODITY MARKETS«..

Exchange traded commodities markets:

(Standardized contract size and maturity dates)

mainly trades Metals, Agricultural, Energy,

Bullion etc.

OTC commodities markets: (Individually tailored

contracts) mainly trades Precious metals,

Energy, Agricultural based on Spot market.



DIFFERENT TYPES OF STANDARD

CONTRACT

Spot price: Spot trading is any transaction

where delivery either takes place immediately, or

with a minimum lag between the trade and

delivery due to technical constraints.

Forward contract: A forward contract is an

agreement between two parties to exchange at

some fixed future date a given quantity of a

commodity for a price defined today. The fixed

price today is known as the forward price.



CONTD«

Future contract and future option: A futures

contract has the same general features as a

forward contract but is transacted through a

futures exchange.



PPARTICIPANTSARTICIPANTS ININ CCOMMODITYOMMODITY FFUTURESUTURES

Farmers/ Producers

Merchandisers/ Traders

ImportersExporters

Consumers/ Industry

Commodity Financers

Agriculture Credit providing agencies

Corporate having price risk exposure incommodities



MECHANISM OF COMMODITY TRADING

The Trader W ork Station (TWS) is the

application through which members access the

trading platform, place orders and execute

trades.

The TWS offers a multitude of user friendly

trading features which include commodity price

ticker, market watch screen displaying best buy,

best sell, last traded price, volume for the day,

open interest etc., top gainer and loser contracts,net position, on-line back up facility etc



TRADING SYSTEM

The best five buy and sell orders for every

contract available for trading are visible to the

market and orders are matched based on price

time priority logic.



TIME RELATED CONDITIONS

Orders can be placed with time conditions and/ or

price conditions

DAY order- A Day order is valid for the day on

which it is entered. If the order is not matchedduring the day, the order gets cancelled

automatically at the end of the trading day.

GTC - A Good Till Cancelled (GTC) order is an

order that remains in the system until the expiry

of the respective contract in which it is entered or

until when the same is cancelled by the member.

Market Order ² The order at the best available

price at the time of placing the same.



CONTD«.

GTD - A Good Till Date (GTD) order is valid till

the date specified by the member. After the

specified date the unexecuted orders get

automatically cancelled by the system.

IOC - An Immediate or Cancel (IOC) order allows

a member to execute the orders as soon as the

same is placed in the market, failing which the

order will get cancelled immediately .

Price Conditions Limit Order²

The order

wherein the price is to be specified while placing

the same.



TRADE TIMINGS

Special Session:

Monday to Saturday: 9:45 a.m. to 9:59 a.m.

Special Session (order cancellation session) is held to

cancel the pending orders prior to opening of market.

Normal Session:

Monday through Friday: 10:00 a.m. to 11:30 p.m.

(up to 11:55 p.m. on account of day light savings

typically between every November and March of the

following year)

Saturdays: 10:00 a.m. to 2:00 p.m.

Agri-commodities are available for futures trading up

to 5:00 p.m. whereas non agri-commodities (bullions,

metals, energy products) are available up to 11:30 pm

/ 11.55pm.



A DVANTAGE AND DISADVANTAGE OF

COMMODITY TRADING

Leverage. Commodity futures operate on

margin, meaning that to take a position only

a fraction of the total value needs to be

available in cash in the trading account.

Commission Costs. It is a lot cheaper to

buy/sell one futures contract than to buy/sell

the underlying instrument.



COTD«

Ability to go short. Futures contracts can be

sold as easily as they are bought enabling a

speculator to profit from falling markets as well

as rising ones. There is no 'upstick rule' for

example like there is with stocks.

No 'Time Decay'. Options suffer from time

decay because the closer they come to expiry the

less time there is for the option to come into the

money. Commodity futures do not suffer fromthis as they are not anticipating a particular

strike price at expiry.



DISADVANTAGES

Speed of trading. Traditionally commoditiesare pit traded and in order to trade a speculatorwould need to contact a broker by telephone toplace the order who then transmits that order to

the pit to be executed. Once the trade is filled thepit trader informs the broker who then theninforms his client. This can take some take andthe risk of slippage occurring can be high. Onlinefutures trading can help to reduce this time by

providing the client with a direct link to anelectronic exchange.



CONTD«

Leverage. Can be a double edged sword. Low

margin requirements can encourage poor money

management, leading to excessive risk taking.

Not only are profits enhanced but so are losses.

Most futures contracts are not deliverable and

are cash settled at expiry.



ROLE OF COMMODITY TRADING

IN PFM

Commodity market is one of a few investment areas

where an individual with limited capital can make

extraordinary profits in a relatively short period.

Nevertheless, because most people lose money,

commodity trading has had a bad reputation, as being

too risky for the average individual.

Those who treat trading, as get-quick money schemes

are likely to lose because they have to take bigger

risks. If you act prudently, by treating your trade like

a business instead of a gambling casino and are

satisfied with a reasonable return, the risks are quite

acceptable. The probability of achieving success here

is excellent.



CONTD«..

Even though the profits in the case of commodity

are quite large, it is quite difficult and is

practically impossible to make consistently

correct decisions all the time about what and

when to buy and sell.

Commodities count as extremely lucrative

investment opportunities due to their liquidity,

as the speculators do not have to hold onto them.

However, risk management strategies play animportant role for commodity trading.

Thus investing in commodities is advisable for

the high risk takers.



THANK YOU

commodity_trading03

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