the commodity market 2

8/2/2019 The Commodity Market 2

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THE COMMODITY MARKET

2.1 Introdouctation

Definition Of A Commodity

Any product that can be used for commerce or an article of commerce which is traded on

an authorized commodity exchange is known as commodity. The article should be movable

of value, something which is bought or sold and which is produced or used as the subject or

barter or sale. In short commodity includes all kinds of goods. Forward Contracts

(Regulation) Act (FCRA), 1952 defines goods as every kind of movable property other

than actionable claims, money and securities.In current situation, all goods and products

of agricultural (including plantation), mineral and fossil origin are allowed for commodity

trading recognized under the FCRA. The national commodity exchanges, recognized by the

Central Government, permits commodities which include precious (gold and silver) and

non-ferrous metals; cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and

oilcakes; raw jute and jute goods; sugar and gur; potatoes and onions; coffee and tea;

rubber and spices. Etc.Different dictionary defines commodity as under:

Any item that can be bought and sold. Taken to refer to Exchange traded items including

sugar, wheat, soya beans, coffee and tin.That which affords convenience, advantage, or

profit, especially in commerce, including everything movable that is bought and sold

(except animals), -- goods, wares, merchandise, produce of land and manufactures, etc.

In the world of business, a commodity is an undifferentiated product whose market value

arises from the owners right to sell rather than to use. Example commodities from the

financial world include oil (sold by the barrel), wheat, bulk chemicals such as sulfuric acid

and even pork-bellies. Definition by Marxian political economy:A commodity has avalue (i.e., has been produced by human labour), is a use value, and has exchange value.

Marxian values are determined by the amount of work an average worker using average

tools would require to produce such a good. As such, a commodity directly expresses

human labour and within capitalism proletarian servitude. Marxists see commodities as a

central element of the exploitation of labour within capitalism.


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2.2 Commodity Exchange Market

Overview of commodities exchanges in India:

Forward Mark To make up for the loss of growth and development during the four decades

of restrictive government policies, FMC and the Government encouraged setting up of the

commodity exchanges using the most modern systems and practices in the world. Some of

the main regulatory measures imposed by the FMC include daily mark to market system of

margins, creation of trade guarantee fund, back-office computerization for the existing

single commodity Exchanges, online trading for the new Exchanges, demutualization for

the new Exchanges, and one-third representation of independent Directors on the Boards of

existing Exchanges etc. Responding positively to the favourable policy changes, several

Nation-wide Multi- commodity Exchanges (NMCE) have been set up since 2002, using

modern practices such as electronic trading and clearing. Selected Information about the

two most important commodity exchanges in India Multi- commodity exchange of India

Limited (MCX), and National Multi- commodity & Derivatives

exchange of india Limited (NCDEX)]

2.3 The List Of Exchanges That Has Been Allowed To Trade In

Commodities Are

1. Bhatinda Om & Oil Exchange Ltd., Batinda.

2. The Bombay Commodity Exchange Ltd.Mumbai

3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd

4. The Kanpur Commodity Exchange Ltd., Kanpur

5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut


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6. The Spices and Oilseeds Exchange Ltd.

7. Ahmedabad Commodity Exchange Ltd.

8. Vijay Beopar Chamber Ltd.,Muzaffarnagar

9. India Pepper & Spice Trade Association. Kochi

10. Rajdhani Oils and Oilseeds Exchange Ltd. , Delhi

11. National Board of Trade. Indore.

12. The Chamber Of Commerce, Hapur

13. The East India Cotton Association Mumbai.

14. The Central India Commercial Exchange Ltd, Gwaliar

15. The East India Jute & Hessian Exchange Ltd,

16. First Commodity Exchange of India Ltd, Kochi

17. Bikaner Commodity Exchange Ltd., Bikaner

18. The Coffee Futures Exchange India Ltd, Bangalore.

19. Esugarindia Limited.

20. National Multi Commodity Exchange of India Limited.

21. Surendranagar Cotton oil & Oilseeds Association Ltd,

22. Multi Commodity Exchange of India Ltd.

23. National Commodity & Derivatives Exchange Ltd.

24. Haryana Commodities Ltd., Hissar


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25. e-Commodities Ltd.

Out of these 25 commodities the MCX, NCDEX and NMCE are large exchanges and MCX

is the biggest among them.

MCX Multi Commodity Exchange Ltd.

** Metals and Crude Oil

NCDEX National Commodity and Derivatives Exchange Ltd.

** Guar

NMCE National Multi Commodity Exchange Ltd.

** Jute, Pepper, Coffee

NBOT National Board of Trade Ltd.

2.3.1 National Commodity & Derivatives Exchange Ltd ( NCDEX)

NCDEX is a public limited company incorporated on April 23, 2003 under the Companies

Act, 1956. It has commenced its operations on December 15, 2003. National commodity &

Derivatives exchange Limited (NCDEX) is a professionally managed online multi

commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance

Corporation of India (LIC), National Bank for Agriculture and Rural Development

(NABARD) and National Stock exchange of India Limited (NSE). Punjab National Bank

(PNB), CRISIL Limited, Indian Farmers Fertilizer Cooperative Limited (IFFCO) and

Canara Bank by subscribing to the equity shares have joined the initial promoters as


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shareholders of the exchange. Started with an authorized capital of Rs. 50 crores, ICICI

BANK, LIC, NABARD and NSE hold the maximum share in the share capital (15% each).

NCDEX is located in Mumbai and offers facilities to its members in more than390 centers

throughout India. The reach will gradually be expanded to more centers. NCDEX is the

only commodity exchange in the country promoted by national level institutions.

NCDEX is a nation-level, technology driven on-line commodity exchange with an

independent Board of Directors and professionals not having any vested interest in

commodity markets.

commodity Trading, Smitha H & Deepti Iyer Bharathidasan Institute of Management,

Trichy NCDEX currently facilitates trading ofthirty six commodities - Cashew, Castor

Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller

Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot,

Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein,

Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur,

Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow

Soybean Meal. At subsequent phases trading in more commodities would be facilitated.

Currently NCDEX has 700 members at 470 locations across the country. The exchange

saw 400% growth in the first year of its operations and expects 200% in the second year

also. According to the latest news NCDEX plans to roll out more contracts like contracts

in nickel, tin and mentha oil.

2.3.2 Multi Commodity Exchange (MCX)

Multi Commodity Exchange of India (MCX), India's first multi-commodity, online

exchange launched its operations in November 2003. Its Technology Partner, Financial

Technologies (India) Ltd. (FTIL) delivered a comprehensive Exchange Technology

Framework to support the Exchange operations, which it did so in a record nine months.

The Exchange Technology Framework from FTIL, uses the Microsoft .NET Framework,

an integral Windows component that supports building and running the next generation of


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applications and Web services, development environment and a range of other Microsoft

enterprise software. The result is an industry-leading, mission-critical trading platform that

offers a low cost of entry for trading members, 99.99 per cent availability and seamless

integration supporting Pre-Trade, Trade and Post Trade data flow. The platform is designed

so that, going forward, new functionality can be added without disrupting Exchange

operations. Furthermore, the distributed architecture of the platform ensures that new

members can be added to the exchange quickly and easily .

Situation

The commodities market in India is vast, with over 30 major markets in operation

alongside 7,500 small localized markets (known as Mandies'). As a result, the Indian

Gross Domestic Product (GDP) is hugely dependent on agrarian commodities.

Two years ago, the Government of India identified the agricultural sector as a thrust area

for modernization and began an initiative to commission an effective nationwide

commodity trading infrastructure. As a key element of this strategy, the Ministry of

Consumer Affairs, Food and Public Distribution envisioned a state-of-the-art nationwide

commodities exchange, that by adopting global best practices' and technology standards,

would ensure the efficiency of its members.

Multi Commodity Exchange of India (MCX), an independent and demutualized multi-

commodity exchange, was amongst the first organizations to receive a mandate to

commission a nationwide multi-commodity trading platform in February 2003. They faced

a challenging deadline, wherein Exchange operations had to go live within 10 months.

Headquartered in Mumbai, MCX is led by a team of senior industry professionals, with

extensive business and operations expertise. MCX needed an infrastructure with an optimal

Total Cost of Ownership (TCO) and the potential to scale up seamlessly, with growing

transaction intensity. MCX was aware that its long term profitability depended on bringing

the platform to market quickly and cost effectively.


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With Exchange operations being technology centric, the MCX Management Team had

intensive discussions on the best alternative to fulfill its business objectives and at the same

time successfully comply with the requirements of the Ministry.

It was therefore decided to entrust the roll-out of the technology framework to the market

leader in mission-critical Straight Through Processing (STP) technologies and Microsoft

partner, Financial Technologies (India) Ltd. (FTIL).

Solution

The decision to work with FTIL as the Technology Partner was made based on its

experience of building mission-critical transaction technologies for Equities, Derivatives,

Foreign Exchange, Commodities and Fixed Income markets. FTIL's significant domain

knowledge and technology leadership gave MCX confidence that it could successfully

launch its operations in the shortest time possible.

FTIL used Microsoft technologies to build the end-to-end MCX trading architecture. In just

five months, core trading technologies and applications had been developed and deployed

to enable mock-trading for the first batch of Exchange members. Within just seven months

of the mandate, this new national exchange was fully operational.

The solution is based on FTIL infrastructure known as the Exchange Technology

Framework' comprising the Central Matching Engine, Risk Management System, Order

Management System, Broadcast Engine, Clearing & Settlement System and Trader

Workstation. The said framework uses Microsoft Windows 2000 Server and Microsoft

Windows Server 2003 operating systems, Microsoft SQL Server 2000 and Microsoft

Message Queue Server (MSMQ) 2.0 to support a number of mission critical infrastructure

components (see figure one).


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The MCX Trading Platform is built around the Microsoft .NET Framework, an

integral component of Windows that provides a programming model and runtime for Web

services, Web applications, and smart client applications, with the core Matching Engine

and Broadcast Engine written in the Microsoft Visual C# .NET development tool. The

trading platform is hosted on servers powered by Intel processors.

Dewang Neralla, Chief Technology Architect, FTIL, says: "The accepted wisdom that

mission critical applications should be based only on mainframe/UNIX environments is

fast disappearing. With the latest release of Intel and Microsoft technology, customers are

being presented with a viable alternative that delivers the highest level of reliability.

Today's distributed computing environment delivers superior performance and availability,

and most importantly, offers an optimal Total Cost of Ownership (TCO).

"Moreover, servers can be added to the infrastructure incrementally, so that the new order'

exchanges can start with optimal infrastructure and build up their framework gradually in

line with growing business needs. Low TCO also means lower cost of entry for new

members joining the Exchange, which is critical in building any new marketplace."


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2.4 History Of Commodity Exchange

In India, the futures market for commodities evolved by the setting up of the Bombay

Cotton Trade Association Ltd., in 1875.A separate association by the name "Bombay

Cotton exchange Ltd was established following widespread discontent amongst leading

cotton mill owners and merchants over the functioning of the Bombay Cotton Trade

Association. With the setting up of the Gujarati Vyapari Mandali in 1900, the futures

trading in oilseed began. Commodities like groundnut, castor seed and cotton etc began to

be exchanged.

Raw jute and jute goods began to be traded in Calcutta with the establishment of theCalcutta Hessian exchange Ltd. in 1919. The most notable centers for existence of

futures market for wheat were the Chamber of Commerce at Hapur, which was established

in 1913. Other markets were located at Amritsar, Moga, Ludhiana, Jalandhar, Fazilka,

Dhuri, Barnala and Bhatinda in Punjab and Muzaffarnagar, Chandausi, Meerut,

Saharanpur, Hathras, Gaziabad, Sikenderabad and Barielly in U.P. The Bullion Futures

market began in Bombay in 1990. After the economic reforms in 1991 and the trade

liberalization, the Govt. of India appointed in June 1993 one more committee on Forward

Markets under Chairmanship of commodity Trading, Smitha H & Deepti Iye Bharathidasan

Institute of Management, Trichy Prof. K.N. Kabra. The Committee recommended that

futures trading be introduced inbasmati rice, cotton, raw jute and jute goods, groundnut,

rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed, copra and

soybean, and oils and oilcakes of all of them, rice bran oil, castor oil and its oilcake,

linseed, silver and onions.

All over the world commodity trade forms the major backbone of the economy. In India,

trading volumes in the commodity market have also seen a steady rise - to Rs 5,71,000

crore in FY05 from Rs 1,29,000 crore in FY04. In the current fiscal year, trading volumes

in the commodity market have already crossed Rs 3,50,000 crore in the first four months of

trading. Some of the commodities traded in India include Agricultural Commodities like

Rice Wheat, Soya, Groundnut, Tea, Coffee, Jute, Rubber, Spices, Cotton, Precious Metals


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like Gold & Silver, Base Metals like Iron Ore, Aluminium, Nickel, Lead, Zinc and Energy

Commodities like crude oil, coal. Commodities form around 50% of the Indian GDP.

Though there are no institutions or banks in commodity exchanges, as yet, the market for

commodities is bigger than the market for securities. Commodities market is estimated to

be around Rs 44,00,000 Crores in future. Assuming a future trading multiple is about 4

times the physical market, in many countries it is much higher at around 10 times.

2.5 Benefits Of Commodity Trading Exchange

The commodity markets being cyclical in nature have inherent risks involved. Due to this,

banks have kept away. The exchanges have brought expertise, control, and transparency of

prices. Once the commodities are deemed negotiable and transferable, warehouse receipts

can be an effective tool in the hands of farmers. They can then wait for prices to soar up

before selling their produce. To encourage and assist farmers to use warehouse receipts,

banks like ICICI are providing up to 70 per cent loans against de-mat receipts which are

obtained from the exchange against physical produce. The idea is to transfer risk from the

entity to the commodity, by aligning repayment of the loan to actual use of the commodity.

Thus, the need for risk management strategies in this growth phase is very essential

because most companies do not have a policy for managing commodity risk. Development

of scientific tools for price discovery, promotion of contract farming commodity Trading,

Smitha H & Deepti Iyer Bharathidasan Institute of Management, Trichy and better weather

forecasts will help increase confidence and attract investors to commodities.Some of the

other benefits of having an exchange in commodity trading are:

Hedging - price risk management by risk mitigation

The details of hedging can be somewhat complex but the principle is simple. By buying or

selling in the futures market now, individuals and firms are able to establish a known price

level for something they intend to buy or sell later in the cash market. Buyers are thus able

to protect themselves againstthat is, hedge againsthigher prices and sellers are able to


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hedge against lower prices. Hedgers can also use futures to lock in an acceptable margin

between their purchase cost and their selling price. Consider this example.

A jewelry manufacturer will need to buy additional gold from its supplier in six months to

produce jewelry that it is already offering in its catalog at a published price. An increase

in the cost of gold could reduce or wipe out any profit margin. To minimize this risk, the

manufacturer buys futures contracts for delivery of gold in six months at a price of $300 an

ounce. If, six months later, the cash market price of gold has risen to $320, the

manufacturer will have to pay that amount to its supplier to acquire gold. But the $20 an

ounce price increase will be offset by a $20 an ounce profit if the futures contract bought

at a price of $300 is sold for $320.The hedge, in affect, provided protection against an

increase in the cost of gold. It locked in a cost of $300, regardless of what happened to the

cash market price. Had the price of gold declined, the hedger would have incurred a loss

on the futures position but this would have been offset by the lower cost of acquiring gold

in the cash market.

The number and variety of hedging possibilities is practically limitless. A corporate tree

surer who will need to borrow money at some future date can hedge against the possibility

of rising interest rates. An investor can use stock index futures to hedge against an overall

increase in stock prices if he anticipates buying stocks at some future time or against

declining stock prices if he or anticipates selling stocks. A cattle feeder can hedge against

lower livestock prices and a meat packer against higher livestock prices. An exporter who

has contracted to ship commodities on a future date at a fixed price can hedge to lock in the

cost of acquiring the commodities for shipment, much as the jewelry manufacturer did.

Whatever the hedging strategy, the common denominator is that hedgers are willing to give

up the opportunity to benefit from favorable price changes in order to achieve protection

against unfavorable price changes.


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Speculation - take advantage of favorable price movements

Were you to speculate in futures contracts by buying to profit from a price increase or

selling to profit from a price decrease, the party taking the opposite side of your trade on

any given occasion could possibly be a hedger or it might be another speculator, someone

whose opinion about the probable direction and timing of prices differs from your own.

The arithmetic of speculation in futures contracts, including the opportunities it offers and

the equally important risks it involves, for now, suffice it to say that speculators put their

money at risk in the hope of profiting from an anticipated price change.

Buying futures contracts with the hope of later being able to sell them at a higher price is

known as "going long." Conversely, selling futures contracts with the hope of being able to

buy back identical and offsetting futures contracts at a lower price is known as "going

short." An attraction of futures trading is that it is equally as easy to profit from declining

prices (by selling) as it is to profit from rising prices (by buying).

Leverage - pay low margin to enjoy large exposure

To say that gains and losses in futures trading are the result of price changes is an accurate

explanation but by no means a complete explanation. Perhaps more so than in any other

form of speculation or investment, price changes in futures trading are highly leveraged.

An understanding of this leverageand how it can work to either your advantage or

disadvantageis absolutely essential to an understanding of futures trading.

As mentioned in the introduction, only a relatively small amount of money (known as

margin) is required in order to buy or sell a futures contract. On a particular day, a margin

deposit of only $2,500 might enable you to purchase or sell a futures contract on $100,000

worth of U.S. Treasury Bonds. Or for an initial margin deposit of about $15,000 you might

buy or sell a contract covering common stocks currently worth $300,000. Or for around

$4,000 you may be able to buy or sell a futures contract on 37,000 pounds of coffee

currently worth $40,000. The smaller the margin in relation to the underlying values of the

futures contract, the greater the leverage.


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If you speculate in futures contracts and the price moves in the direction you anticipated,

high leverage can yield large profits in relation to your initial margin deposit. But if prices

move in the opposite direction, high leverage can produce large losses in relation to your

initial margin deposit. Leverage is a two-edged sword.

For example, assume that in anticipation of rising stock prices you buy one June S&P 500

stock index futures contract at a time when the June index is trading at 1200. Also assume

your initial margin requirement is $15,000. Since the value of the futures contract is $250

times the index, each one point change in the index represents a $250 gain or loss. An

increase of five percent in the in dex, from 1200 to 1260, would produce a $15,000 profit

(60 X $250). Conversely, a 60 point decline would produce a $15,000 loss. In either case,

an increase or decrease of only five percent in the index would, in this example, result in again or loss equal to 100 percent of the $15,000 initial margin deposit! That's the

arithmetic of leverage.

Said another way, while buying (or selling) a futures contract provides the same dollars and

cents profit potential as owning (or selling short) the actual commodity covered by the

contract, low margin requirements sharply increase the percentage profit or loss potential.

Futures trading thus require not only the necessary financial resources but also thenecessary financial and emotional temperament. It can be one thing to have the value of

your common stock portfolio decline by five percent but quite another, at least emotionally,

to have that same five percent stock price decline wipe out 100 percent of your investment

in futures contracts.

An absolute requisite for anyone considering trading in futures contractswhether it's

stock indexes or sugar, pork bellies or petroleumis to clearly understand the concept of

leverage. Calculate precisely the gain or loss that would result from any given change in

the futures price of the contract you would be trading. If you can't afford the risk, or even if

you're uncomfortable with the risk, the only sound advice is don't trade. Futures trading are

not for everyone.

Liquidity - ease of entry and exit of market


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There can be no ironclad assurance that, at all times, a liquid market will exist for offsetting

a futures contract that you have previously bought or sold. This could be the case, if a

futures price has increased or decreased by the maximum allowable daily limit and there is

no one presently willing to buy the futures contract you want to sell or sell the futures

contract you want to buy.

Even on a day-to-day basis, some contracts and some delivery months tend to be more

actively traded and liquid than others. Two useful indicators of liquidity are the volume of

trading and the open interest (the number of open futures positions still remaining to be

liquidated by an offsetting trade or satisfied by delivery). These figures are usually reported

in newspapers that carry futures quotations. The information is also available from your

broker or advisor and from online market reporting services and exchange web sites

Price discovery along with balancing demand and supply position

Futures prices increase or decrease largely because of the myriad factors that influence

buyers' and sellers' expectations about what a particular commodity will be worth at a

given time in the future (anywhere from less than a month to more than two years).

As new supply and demand developments occur and as more current information becomes

available, these judgments are reassessed and the price of a particular futures contract may

be bid upward or downward. This process of reassessment of price discovery is continuous.

On any given day the price of a July futures contract will reflect the consensus of buyers'

and sellers' current opinions about what the value of the commodity will be when the

contract expires in July. As new or more accurate information becomes available or as

expectations change, the July futures price may increase or decrease.

Competitive price discovery is a major economic functionand, indeed, a major economic

benefitof futures trading. Through this competition all available information about the

future value of a commodity is continuously translated into the language of price, providing

a dynamic barometer of supply and demand. Price "transparency" assures that everyone has

access to the same information at the same time.


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Flexibility, certainty and transparency in purchasing commodities facilitate bank

financing.

By commodity exchange you can sell and purchase commodity within minutes or we say

convert the commodity in to cash. But in real life if we have to sell her commodity we have

to go from long process. by commodity exchange you can purchase commodity at the

future price and future delivery and also current price and future delivery. Commodity

exchange provide flexibility for customer.

Spreads

While most speculative futures transactions involve a simple purchase of futures contracts

to profit from an expected price increaseor an equally simple sale to profit from an

expected price decreasenumerous other possible strategies exist. Spreads are one

example.

A spread involves buying one futures contract in one month and selling another futures

contract in a different month. The purpose is to profit from an expected change in the

relationship between the purchase price of one and the selling price of the other.

As an illustration, assume it's now November, that the March wheat futures price is

presently $3.50 a bushel and the May wheat futures price is presently $3.55 a bushel, a

difference of 5. Your analysis of market conditions indicates that, over the next few

months, the price difference between the two contracts should widen to become greater

than 5. To profit if you are right, you could sell the March futures contract (the lower

priced contract) and buy the May futures contract (the higher priced contract).

Assume time and events prove you right and that, by February, the March futures price has

risen to $3.60 and the May futures price is $3.75, a difference of 15. By liquidating both

contracts at this time, you can realize a net gain of 10 a bushel. Since each contract is

5,000 bushels, the net gain is $500.

November Sell March wheat @ $3.50

bushel

Buy May wheat @ $3.55

bushel

Spead

5


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February Buy March wheat @ 3.60 Sell May wheat @ 3.75 15

$.10 loss $.20 gain

Net gain 10 bushelGain on 5,000 bushel contract $500

Had the spread (i.e., the price difference) narrowed by 10 a bushel rather than widened by

10 a bushel, the transactions just illustrated would have resulted in a loss of $500.

Virtually unlimited numbers and types of spread possibilities exist, as do many other, even

more complex futures trading strategies. These are beyond the scope of an introductory

booklet and should be considered only by someone who clearly understands the risk/

reward arithmetic involved.

2.6 Commodity Futures

It took four decades for futures trading in gold and silver to start once again. Commodities

Trading is similar to derivatives trading in securities market and more often referred to as


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Commodity futures. Trading in commodities does not require physical holding of the

instrument such as in equities, bonds and other financial instruments. The trading is just a

simple speculation on the future direction of the price in the commodity being traded. The

terms "buy" and "sell" merely indicate the direction one expects the future prices to take. In

addition to speculators, both the commodity's commercial producers and commercial

consumers also participate. The principal economic purpose of the futures markets is for

these commercial participants to eliminate their risk from changing prices.

With a population of over a billion people, India is the world's largest importer of gold and

edible oils and third largest cotton producer. Indians buy gold worth US$8.5bn and edible

oil worth US$9bn every year. Futures trading was earlier allowed in few commodities like

oilseeds and oils, several fibres, turmeric and sugar.

2.7 Investing In Commodities

Purchasing a contract in commodities means entering into a contract with the counter party

to buy a fixed quantity of commodity at a future date. The future date is called the contract

expiry date. The fixed quantity is called the contract size. These futures are bought and sold

on the commodity exchanges. These futures serve as a good investment vehicle for

investors both with big and small appetite for risk. An investor is not interested in thephysical transaction of the commodities. He just takes a position on the future price and the

spot price at a particular date in future, and buys and sells options. The trader uses the

futures to make sure that he is guarded against any change in the prices. This process is

known as hedging of positions. Trader can enter into a futures contract for purchasing a

certain quantity of the underlying commodity at a specified price on a particular date.

Similarly he can enter into a futures contract for sale of a particular quantity at a particular

date at a particular price. This way the trader is assured of the margin profit because both

his purchase price as well as the sale price is fixed. He is protected against any change in

the market prices.

2.8 Available Commodities To Trade


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The commodities market instrument can be broadly classified into Bullion (Gold and

Silver), Metals (Steel, Copper, Nickel, Tin), Plantations (Cotton, Rubber,

Pepper, Jute etc), Pulses (Chana, Guar, Tur etc.), Oilseeds (Groundnut,

Palmolein, Castor, Refined Soya etc), Wheat, Rice and many more regularly

added. The exchanges NCDEX and MCX allows trading in all these

commodities whichever is available in respective exchanges and flexible opp ortunities are

there for an investor to take positions and trade. The contracts are

available for 2 months expiry period and one can net off his

positions any time during the contract cycle. The contract

specifications are mentioned for every commodity by the respective

exchanges, which tells about the commodity specifications such as

purity, caratage, tolerance limit, delivery method, delivery center etc.

Commodities Trading With India Infoline Commodities Pvt. Ltd.(IICPL)

IICPL offers you the opportunity to be a part of this market by facilitating trading in

commodity futures. We have entered into alliances with Multi Commodity Exchange of

India (MCX), and National Commodities and Derivatives Exchange in India (NCDEX), the

leading electronic exchanges for commodity futures trading in India. MCX is the first

commodity exchange in world to start steel futures. NCDEX is a public limited company

incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate

for Commencement of Business on May 9, 2003. It has commenced its operations on

December 15, 2003. The institutional promoters of NCDEX are prominent players in their

respective fields and bring with them institutional building experience, trust, nationwide

reach, technology and risk management skills. We have the advantage of providing our

esteemed customers a complete range of commodities for trading, both in the morning as

well as evening sessions, in both the exchanges. Trading can be on-line, or off-line ie on

phone or at our branches.

We invite you to the world of commodities trading where you partner with us and gauge

the opportunities in this market, Commodities the next sunrise.


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2.9 List Of Commodies In Exchange Market

Bullion- Gold, Silver

Oil & Oil Seeds- Castor Oil, Castor Seeds, Coconut cake, Coconut Oil, Cotton Seeds etc.

Spices- Cardamom, Jeera, Pepper, Red Chilli etc.

Metal- Aluminum, Copper, Lead, Nickel, Sponge iron etc.

Fibre- Cotton Long Staple, Cotton Yarn, Kapas.

Pulses- Channa, Masur, Tur, Urad, Yellow peas etc.

Cereals- Basmati rice, Maize, Rice, Wheat, etc.

Energy- Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil

Others- Rubber, HDPE, Guar Seed, Guar gum, Potato, Sugar

Total Number of Commodity is over 100.

2.10 Participants Of Commodity Exchange Market

HedgerExports

Industry

Producer(Farmers/co_

opratives/institutational)

QualityCertification

Agencies


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2.11 Important Terms used in Commodity Exchange Market

Actuals Or Cash Or Physical Transaction

- Generally raw material is sold

Commodity

ExchangeParticipation

Customers(Retail/

institutational)

Trader

(Speculators/Arbitrageurs/Client)

Transporters/

Supportsagencies

Clearing

Bank

Warehouse


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- Which are traded on Spot Market (Mandi)

- Contracts for immediate or very quick delivery (within 11 days)

- Immediate Payment

Commodity Futures

- Traded on Futures Market

- Contracts to buy and sell a Fixed Quantity and Quality of Particular commodity

- Delivery at a fixed date in the future at a fixed price

Forward Contract

- Under this contract the seller undertake to provide the client with a fixed amount of a

commodity on a fixed date at a fixed price

Difference Between Futures And Forward Contract

-Forward Contract is Once Only Deal

-Futures are Standardised Contract (Similar for every future)

Commodity Option ( Prohibited in India)

- Right to buy or sell a Fixed quantity of a commodity at a particular date at a fixed price

- that price is called Strike price

Call Option To buy Expectation of rising price

Put Option To sell Expectation of falling price

Arbitrage

-Purchase and simultaneous sale of the same commodity in the different commodity market

-This is to take advantage of the differences in commodity prices between the two markets


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Upward movement where it is purchased

Downward movement where it is sold

Hedging-

Its a tool to ensure against the losses due to

The change in the value of commodity already held

To protect an open position

Example- A Hedger will buy Commodity futures of X for six months and also buys the

equal amount of Commodity X from the physical market in six months time.

Any rise or fall of prices will be offset by the profit or loss that results from the futures

contract.

Stop Loss- Buy or sell a stock once its reaches a certain price. Stop loss order 10%

below at which you bought a commodity.

Spot Price- It is the current market price of any Commodity.

How price increase and decreases?

Prices are determined by following factors

Expectation of buyers and sellers expectation about a particular Commodity will be

worth at a given time in future

New Demand and Supply Developments

Information pertaining to Demand and Supply

Due to Climatic changes

Trading in different commodity future market

Turn over on commodity future market (in crore)

2002-2003 2003-2004 2004-2005(first half)

NCDEX 1490 54011

MCX 2456 30695


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NMCE 4572 23842 7943

Total 4572 27788 92649

0

10000

20000

30000

40000

50000

60000

2002-2003 2003-2004 2004-

2005(f.h.)

NCDEX

MCX

NMCE

Trade in different commodity exchange


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Crude oil

Silver

Gold

Soya oil

Guar seed

Other

Gold

Silver

Crude

Menthe oilSoya oil

Other

Gold

Silver

Copper

Crude oil

Natural gas

Other

Volume Trade In MCX

July 2005 January 2006 June 2006

Commodity %share Commodity %share Commodity %share

Crude oil 40.2 Gold 50.3 Gold 58.6

Silver 21.5 Silver 26.6 Silver 17.7

Gold 20.4 Crude 7.4 Copper 10.0

Soya oil 4.9 Menthe oil 7.3 Crude oil 3.5

Guar seed 3.4 Soya oil 1.0 Natural gas 1.9

Volume Trade In NCDEX

Jul 2005 Januar 2006

June 2006


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Guar seed

Chana

Pure Silver

Urad

Soya oil

Other

Urad

Chana

Guar seed

Silver

Pure Gold

Other

Guar seed

Chana

Silver

Papper

Urad

Other



Guar seed 39.7 Urad 23.9 Guar seed 34.4

Chana 24.8 Chana 21.1 Chana 19.8

Pure silver 7.0 Guar seed 14.1 Silver 7.2

Urad 4.4 Silver 11.2 Pepper 6.5

Soya oil 4.1 Pure gold 8.2 Urad 2.6

Volume Trade In NMCE


June 2006


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Raw jute

Rubber

Pepper

Coffee

Cardamom

Other

Rubber

Chana

Guar seed

Pepper

Cardamom

Other

Guar seed

Chana

Soya oil

Papper

Kilo Gold

Other



Raw jute 37.8 Rubber 31.4 Guar seed 38.5

Rubber 34.9 Chana 26.0 Chana 31.7

Pepper 24.2 Guar seed 25.7 Soya oil 9.3

Coffee 1.6 Pepper 11.7 Pepper 6.0

Cardamom 1.5 Cardamom 2.1 Kilo gold 4.1


June 2006


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Exchange wise Value of trading

Name of the Exchange Value of trading( in Rs crores)

2000-2001 2003-2004

1. Bhatinda Om & Oil Exchange

Ltd., Batinda.

1813 1018.66

2. The Bombay Commodity

Exchange Ltd.Mumbai

30 3.76

3. The Rajkot Seeds oil &

Bullion Merchants` Association

Ltd

2495 5585.56

4. The Kanpur Commodity

Exchange Ltd., Kanpur

NTP 0.11

5. The Meerut Agro

Commodities Exchange Co.

Ltd., Meerut

340 497.18

6. The Spices and Oilseeds

Exchange Ltd.

NT 0.03

7. Ahmedabad Commodity

Exchange Ltd.

806 6234.07

8. Vijay Beopar Chamber

Ltd.,Muzaffarnagar

9518 2871.99

9. India Pepper & Spice Trade

Association. Kochi

2834 585.51

10. Rajdhani Oils and Oilseeds

Exchange Ltd. , Delhi

383 1493.19

11. National Board of Trade.

Indore.

* 53013.69

12. The Chamber Of Commerce,

Hapur

2166 5672.05

13. The East India Cotton

Association Mumbai.

9 0.2

14. The Central India

Commercial Exchange Ltd,

Gwalior

* 369.07

15. The East India Jute & 5592 882.43


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Hessian Exchange Ltd Calcutta.

16. First Commodity Exchange

of India Ltd, Kochi

* 247.46

17. Bikaner Commodity

Exchange Ltd., Bikaner

* 647.062

18. The Coffee Futures

Exchange India Ltd, Bangalore.

* ----

19. E-sugar India Limited

Mumbai .

* 2.66

20. National Multi Commodity

Exchange of India Limited.

Ahamdabad

* 23840.30

21. Surendranagar Cotton oil &

Oilseeds Association Ltd,

Surendranagar.

* 20913.13

22. Multi Commodity Exchange

of India Ltd. Mumbai

* 2456.229

23. National Commodity &

Derivatives Exchange Ltd.

* 1490.25

24. Haryana Commodities Ltd.,

Hissar

* 3036.55

. TOTAL 33186 130214.70

* Not Operational NTP Not Trading Permission NT No Trading

3 Objective Of Study

1. To know the underlying Feature of commodity market.

2. To know the advantages/Benefits of commodity Exchange.

3. To describe the basic terminology about commodity market.

4. To compare the proportion of each commodity in the market.


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5. New vista for further research.

4 Results and Discussion

Commodity is a moveable goods and securities which is purchase and sell on authorized

commodity exchange like agriculture products, metal. There are 25 exchanges In India

which provide facility to trade of commodity trade. MCX, NCDEX and NMCE are largest

exchange used by investor. By this study we can found the following advantage of

exchange.

Hedging - price risk management by risk mitigation

Speculation - take advantage of favorable price movements

Leverage - pay low margin to enjoy large exposure


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Liquidity - ease of entry and exit of market

Price discovery along with balancing demand and supply position

Flexibility, certainty and transparency in purchasing commodities

facilitate bank financing.

Spreads

When we compare the trade of different commodity exchange, we found NCDEX (nation

commodity and derivative exchange of India) and MCX (multi commodity exchange of

India) have the largest turnover in commodity future market. NCDEX has 54011 crores

turnover in 2004-2005 and MCX has a turnover of Rs 30695 in frist half of 2004-2005.

In MCX gold, silver, Soya and crude oil are most commodities used for trade. Goldhas 20%share in July 2005, 50.3% share in January 2006 and 58.6% share in June 2006.

In NCDEX the most commodities used for trade are Guar seed, chana, and silver.

Guar seed has the 39.7% share in july2005, 14.1% share in January 2006 and 34.4% share

in June 2006 respectively.

In NMCE Rubber, Guar seed and Paper are most commodities used for trade.

Rubber has 34.9%share in July 2005, 31.4% share in January 2006 in volume trade.

the commodity market 2

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