copyright aditya birla nuvo limited 2008 aditya birla money commodities – an attractive...

Copyright Aditya Birla Nuvo Limited 2008

Aditya Birla Money

Commodities – An Attractive Proposition

Aditya Birla Money Limited



MCX, largest commodity exchange in India (87% market share in FY11), was ranked World No.1 for Silver & No.2 for Gold / Copper / Natural Gas & No.3 for Crude Oil in terms of number of contracts traded in 2010.

MCX is the leader in International Commodities (Precious Metals / Base Metals & Energy) whereas NCDEX is the leader in Agri Commodities.

Major Commodities Traded – (i) Gold (ii) Silver (iii) Crude (iv) Copper (v) Soybean (vi) Soy Oil (vii) Chana (viii) Guarseed (ix) Jeera (x) Pepper.

Commodity exchanges volumes have gone up from Rs.250 crores per day in 2004 to Rs.70000 crores as in 2011, 250 fold increase over past 7 years. (Currently daily volumes average Rs.70,000 crores as of November 2011).

Commodities form 45% of India’s GDP, the physical market in India is pegged at US$350bn – USD$450bn. Further, with India being a dominant producer of key agricultural commodities, trading of agriculture alone is a US$200bn annual market.

Commodities – The Great Indian Story



Why Commodities ?

Portfolio Diversification - Commodities don’t move exactly the same way & at the same time as equities do, for example, if equity falls on one day, commodities may not necessarily fall that day as factors affecting both these markets are different. For example, buying Infosys & buying Copper – both are completely unrelated.

Commodities are less related with each other as fundamentals driving each commodity is different. Unlike stocks, which are affected by global & domestic overall sentiments.

Global in Nature – hence there is less risk for manipulation (explained later)

Low Volatility over Equities (explained in later slide)

Leverage Effect (explained in later slide)



Why Commodities – An Example For example, if you Buy 1 contract of Gold (a 1 kg contract);

Say, current price of Gold for MCX Feb Contract = Rs.29,000/-10 grams

Value of 1 Kg Contract = Rs.29 lacs

Margin Required for Buying 1 Contract = 4% i.e. Rs.1,20,000/-

Gold Prices move up to Rs.29,100/10 grams

You make a profit = Rs.29,100 – Rs.29,000 = Rs.100 * 100 = Rs.10,000/- on an investment of Rs.1,20,000/-; a return of 8% (This return can be in a single day also).

Note: It is advised to trade with strict stop-loss in commodities markets as it is a purely leveraged product.

(Allocating 10% - 15% of a securities portfolio to commodities, investor can vastly improve performance in hostile markets.)



1.Commodities don’t move exactly as per equities markets. Hence risk can be reduced by investing part of your portfolio in commodities.

2.Factors effecting commodity markets may not necessarily affect equity markets. Like strike in copper mine in Chile may lead to price rise but may not at all affect Indian equity markets.

3.Looking at the chart, we see that Gold prices touched a high in October 08 when Sensex marked its low during same period.

4.If an investor had kept a percentage of his portfolio in commodities also, instead of entire investment in equities at that time, his losses would have been reduced. (explained later).

Commodities – A Diversification Tool

Source: Bloomberg,, Aditya Birla Money Commodities Research

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1500

3000

4500

6000

7500

9000

10500

12000

13500

15000

16500

18000

19500

21000

Nifty Gold

gold prices touched their high of 14300 in Oct 08 while Nifty fell to its 08 low 7700 in Oct

gold prices touched its previous high of 14300 in Oct 08 while Sensex fell to its 08 low 7700 in Oct



Commodities - Lowering Risk in Portfolio

The above table shows Sensex and gold prices during 2008. After the Sensex hit a high in Jan ’08, it hit a low by the end of the year while gold rose.

The above table clearly indicates that if an investors had invested 100% of his portfolio in equities he would have incurred a loss of 63% on his total investment during 2008. While 20% of portfolio diversified into gold would have reduced his losses by around 33%.

Asset Class 2004 Sep 2010 % ReturnsSensex 5900 19350 228

Gold 5800 19000 228 Yr. 2008 Yr. 2008

Sensex 21200(Jan)7700(Oct) -63.68

Gold 10000(Jan)14300(Oc

t) 43.00100% investment in Sensex -63.6880% in Sensex and 20% in

Gold -42.34



1. Commodities are less related not only with other asset classes like stock, real estate, etc but have a lower relation with each other as well.

2. For example a fire in crude refinery unit may lead to increase in crude oil prices, but may not impact other commodities like gold, copper etc.

3. Similarly the arrival of festival season may be bullish for precious metals but not for crude oil or copper or rubber.

4. Hence each commodity has its own unique fundamental price drivers.

5. This allows investors to take positions in various commodities simultaneously as one factor/event will not affect all commodities equally, leading to diversified lower risk trading in commodities.

Commodities- Less Related with each other



Gold Seasonal Chart is different from copper as factors affecting both metals are different.

Hence investors get an opportunity to invest any time during the year in various commodities since the price trend of different commodities differs from each other during a particular period.

Like copper is normally bullish during 1st quarter of a year while gold peaks during last quarter of a year.

Seasonal Pattern of Different Commodities Is Different

Gold Seasonal Chart Copper Seasonal Chart



Entire world trades in commodities. All industry sectors, Governmental organizations, Central Banks, Commodity funds to the common man, are affected by commodity in their daily lives.

Due to their global nature, manipulation is difficult in commodities unlike equities where a set of investors can move a stock; like KP 10 Stocks during KP heydays.

Commodity movements can be explained unlike equity movements where it is difficult to site a proper reason for a stock movement. For example, if Satyam stock moves by 5% in a day, exact reason would be difficult to find.

But it is easier to give a proper logical reason for most of the international commodities like gold, copper, crude etc.

Commodities – A Global Proposition

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Gold Prices

Purchase of 200 MT of gold by the Reserve Bank of India led to sharp price rise in Nov.'09



Historically commodities have been less volatile compared with equity markets.

Hence commodities as a part of portfolio will give a balance affect to the overall risk adjusted returns.

Low volatility means lower margins, hence higher leverage in Commodities.

Commodities – Low on Volatility over Equities

Sensex Govt Sec Index

Gold Silver Cotton Oilseeds0%

5%

10%

15%

20%

25%

30%

35%Average Annual Volatility



Commodities provides investors an option to trade in a contract by paying only low margin amounts. The effect is known as leverage effect.

Commodity provides higher degree of exposure with lower amount as margins are significantly lower as compared to equities.

CommodityPrice of one lot of

Contract at MCX (Rs)% of Money Reqd.

as MarginMargin Money

requiredPrices Quoted

(Rs)

Gold Regular 29,00,000/1kg 4% 1,20,000 29,000/10gm

Gold Mini 2,90,000/100 gm 4% 12,000 29,000/10gm

Copper 4,00,000/MT 5% 20,000 400/kg

Silver Reg 17,00,000/30kg 5% 85,000 56,500/kg

Silver M 2,80,000/5kg 5% 14,000 56,500/Kg

Crude 5,20,000/100 barrel 5% 25,000 5200/barrel

Leverage Effect



Commodities Segment wise (MCX & NCDEX)

COMMODITIES

Metals

Metals

Edible Oils

Edible Oils

Energy

Energy

Softs

Softs

Agri. Comm.Agri.

Comm. Gold Silver Steel Copper Zinc Nickel Lead &

Aluminium

Soy Oil Mustard Oil Crude Palm Oil

Crude Oil Brent crude Furnace oil Natural gas

Cotton Gur

Pepper Guar Seed Soy Bean Jeera Mustard Chilli Etc…..



Hedgers, Speculators, Investors, Arbitragers

Producers – Farmers , Manufacturer, Corporate

Consumers – Refiners, Food Processing Companies, Jewelers, Textile Mills, Exporters & Importers, Manufacturing Sector

Institutions, Banks, Mutual Funds (These are currently not permitted in Indian Commodities Exchanges).

Market Participants



Pure Trading

Speculators in the futures market can use different strategies to take advantage of rising and declining prices. The most common are known as “Going Long,” “Going Short”

As an Investment

Investors can build and Diversify their Portfolio

Calendar Spread trading

Spreads involve taking advantage of the price difference between two different contracts of the same commodity

Arbitrage Opportunities

Inter Exchange (NCDEX & MCX)

Spot -to- Futures

Alternative Ideas

Trading Strategies



Fundamentals Influencing Commodities

Demand & Supply

Seasonal patterns

Global & Indian economic data / policies

Weather conditions

Import / export parity and government policies

Forex / currency movement

Global political / economic events and data

Global Hedge / Commodity Fund Activity

US / Euro-Zone / China / Japan – Key Data Releases & Central Banks Statements



India is the 2nd fastest growing economy in the world after China.

We are amongst the top producers in Sugar/Wheat and other agri commodities, and the largest consumer of gold.

We anticipate commodity derivatives business in India to grow at the rate of +30% per annum over the next 3 years – A Rs.150,000 crore per day market by 2015.

Untapped Potential



Currency – The Biggest Market

Are you taking advantage ?



Avg. Average Daily Turnover : $ 3.98 trillion

World’s Major Financial Markets account for $3.21 trillion

Market Composition of $3.21 trillion :

(a) $1.005 trillion – Spot transactions (b) $362 billion – Outright Forwards

(c) $1.714 trillion - FX swaps (d) $129 billion– estimated gaps reporting

Global FX Daily Turnover Growth : $880 billion in 1992 / $3.21 trillion in

Major Markets & Market Share : (1) London (34%) (2) New York (16.6%)

(3) Tokyo (6%) (4) Switzerland (6%) (5) Singapore (6%)

Major Currency Pairs Traded : (1) EUR/USD (27%) (2) USD/JPY (13%) (3) GBP/USD (12%) (4) AUD/USD (6%)(5) USD/CHF (5%)

Global Forex Market – Key Highlights



Trading in Currency Futures began in 1972 on CME.

As per a WSJ Report, 7% of Total Foreign Exchange Volumes is FX Futures

World’s Main Financial Markets size stood at $3.21 trillion in April 2007

FX Futures Market Global Turnover works out to $180 - $200 billion per day.

CME is the world’s largest FX Exchange with daily volumes in excess of $100 billion with 43 Futures Contracts, 32 Option Contracts & 20 global currencies.

Other Global Exchanges for FX Derivatives

(1) Brazilian Mercantile & Futures Exchange (BM&F) (2) ICE – Intercontinental Exchange(3) Mexican Derivatives Exchange (MEXDER)(4) Korea Exchange (5) Tokyo Financial Exchange (6) Budapest Stock Exchange & (7) Turkish Derivatives Exchange

Global Currency Derivatives Market



Currency Movement Impact

Importer

Imports good and services

Payments in FCY

Buys currency from the bank

RE – STRONG Gain

Re – WEAK Loss

Exporter

Exports goods and services

Receivables in FCY

Sells currency to the bank

RE – STRONG Loss

Re – WEAK Gain



USD / INR VS Sensex



Benefits of Currency Derivatives

Linear Payoff – Not complicated for market participants to

understand

Standardized Contracts, small lot size – US$ 1,000 / Euro / Pound & 100,000 Yen

Electronic Settlement of MTM Profits / Losses

No counterparty default risk – Novation by clearing house

Efficient price discovery due to high liquidity

Large number of market participants

Transparency – Real-time dissemination of prices

Access through internet from remote locations

Lower transaction costs



USD / INR - Contract Specification

Trading Hours 9:00 AM to 5:00 PM (Monday to Friday)

Contract Size US$ 1,000

Price Quotation INR per USD

Tick Size INR 0.0025

Minimum Initial Margin 1.75% on first day & 1% thereafter

Contracts All months with a maturity duration of 12 months

Settlement Mechanism Cash Settled in Indian Rupee

Last Trading Day2 working days prior to the last BD of the expiry month

Final Settlement Rate RBI USDINR Reference Rate

Final Settlement Date Last working day of month, except Saturday



Daily Fundamental & Technical Reports covering major commodities / currencies – analyzing global trends, major news events; key data releases and a technical perspective as well.

Provide intraday and positional trading calls with a strike rate of 65%-70% on major commodities such as gold / silver / copper / crude / soybean / guarseed / chana, to name a few.

Publish indepth special monthly reports on Gold / Silver / Currency aimed at educating the investors on global happenings, to help them take advantage of price moves.

Our Research Capabilities



Thank You

For further details on research, you can reach us

[email protected]

022-42333480/022-42333484

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