Interim report

“Commodity market-A new source of investment and customer preference

towards commodity market in volatile market”

Presented by:

Sunil .D. Tiwari.

Enroll no.8NBMM017

Semester: III, ASIM Mumbai.

Submitted to:

Faculty Supervisor - Prof. P. S. Raghukumari

 INTRODUCTION
Whether it’s retiring early, saving for children’s education, paying off a loan or to live a
secured and satisfied life everyone has dreams they can achieve by investing their
savings. However, the question that arises is that, should one leave his money tucked
away in the bank or plough it into the stock market where the potential for higher returns
is greater but the chances of losing money is higher? Deciding where to invest depends
on one`s attitude towards risk (one`s capacity to take risk and one`s tolerance towards
risk) and the investment horizon and non-availability of guaranteed-return investment
products.

In such a scenario, investing in equity, which offers returns that are higher than the
inflation rate, help to build wealth and to improve the standard of living. It is fine that
stock market fluctuates over time. At present as far as the world economy is concerned it
is on a boom. As soon as globalization and liberalization has come into act it has well
shaped the economy. India has turned out to be the hot destination for the money
investors and this has resulted growth in the sensex .It was never hoped before that BSE
will ever touch the mark of 16000 points. But only due to the new economic
opportunities and the confidence of people in India’s economic future it has been
successful .Investing in equity is the way to earn money and to fulfill the dreams. The
risk involved with investing in equity can be moderated by careful stock selection and
close monitoring.

INVESTMENT AVENUES AND ALTERNATIVES

Investment alternatives vary from fixed income to variable income which includes RBI
bonds, government securities, fixed deposit, equity investments, property and so on.

In recent years the 6.5 percent tax-free RBI Bonds have become a very popular saving
instrument -- especially amongst individuals. Till 1996, these bonds gave returns of 10
per cent. This came down to 9 per cent and then 8 percent and then in 2003 it was
reduced to 6.5 per cent (tax free). Nowadays, 8 percent taxable Government of India
bonds are also doing well to attract investors who want safe and higher yield.

However, with inflation at nearly 4.5%, the return offered by these instruments were still
attractive. However, with the scrapping of the tax-free bonds, safe investment options for
individuals have become very limited and people are now choosing to go with either post
office saving schemes or equity related instruments.
Take a look at what is happening. Debt funds, which were said to be relatively risk-free,
are giving very less returns. Monthly Income Plans offered by mutual funds are also not
attractive as their portfolio is made up of 80 percent debt and 20 percent equity. With debt
giving very less returns and returns from equity becoming stagnant, the returns from
MIPs are also very attractive. The returns offered by MIPs are totally dependant upon the
type of security and debt instruments held by the fund But with recent rally in the stock
market, very few people are now going for MIPs and have a very positive sentiment
about the market and would like to stay with the market for long. But continuously we
still have a single question in mind:

The person in the 30 percent tax bracket, the 8 per cent RBI bonds will give returns of
approximately 5.6 per cent. Though this is much lower than the previous 6.5 percent, it is
still a better than most other options. If you are a senior citizen, the Senior Citizens
Savings scheme offering a 9 Percent yearly interest is a good investment option. The
scheme was announced in the Budget 2006-2007 and was meant for people above the age
of 60. However, this scheme has a maximum deposit limit of Rs. 15 lacs while RBI
Bonds do not have any limit. In this case, the term for deposit is five years with a facility
for premature withdrawal. The 9 percent returns are subject to tax, so if you are in the 30
percent tax bracket, you will effectively get returns of 6.3 per cent.

Another option can be Floating Rate Bond Fund offered by mutual funds. Basically, these
funds invest in floating rate instruments and therefore have a direct correlation to interest
rates. If interest rates go up the returns from these funds rise and returns fall with a fall in
interest rates. This is unlike debt funds, where there is a reverse relationship between
interest rates and returns. A rise in interest rates results in a fall in returns. In the current
scenario, these funds are likely to give returns of 5 percent to 5.5 percent. The dividends
are tax-free in the hands of the investor and most importantly, there is complete liquidity.
Again, there is no limit on the amount that can be deposited. Also, there is hardly any
volatility making it a safe option. If you are willing to take a bit of risk, you can divide
your portfolio in such a way that 60 percent is invested in floating rate bond funds and
the remaining 40 percent in equity. That's like having an MIP except that instead of 80
percent in debt and 20 percent in equity, here the 60 percent is in floating rate bond funds.
Such a portfolio can give you returns of aprox. 8.5 % to 9.5 %.

The NSCs and the Kisan Vikas Patras give returns of 8 percent so for those in the 30
percent tax bracket, it works out to 5.6 percent. Here too there is no limit on the amount
of deposit. However, here the interest is posted only at the time of maturity. So it is not a
good option if you want regular returns. On the other hand, RBI Bonds give returns every
six months or half yearly. So, depending upon their risk profile and need for liquidity,
one will have to decide on their portfolio. For anyone below 35 years, it is recommend
that one should invest some part of there portfolio in RBI Bonds and in NSCs, KVPs as a
long term investments and the remaining in combination of floating rate bond funds and
equity But for those above 35, it is advocate that one should look at nearly 40 percent in
RBI Bonds, 30 percent in NSCs, KVPs, hence giving safe and regular income. And the
remaining 30 per cent in floating rate bond funds and equity. For those above the age of
60, 40 percent must be put in the Senior Citizens Scheme (of course, this is up to a
maximum limit of Rs 15 lakh), another 40 percent in RBI Bonds and the remaining 20
percent in floating rate bond funds, so that one has some liquidity.As an investor one has
a wide array of investment avenues available to one

Investment
Avenues

Non-Marketable Equity Shares

Financial Assets

Life Insurance
Bonds
Policies

Mutual Fund Money

Schemes Market
Instruments

Real Estate Precious

Objects

Financial Derivatives

Non-marketable Financial Assets - A good portion of financial assets is represented by

non-marketable financial assets. These can be classified into the following broad
categories:

• Bank deposits

• Post office deposits

 • Company deposits

• Provident fund deposits

Equity Shares - Equity shares represent ownership capital. As an equity shareholder, you
have an ownership stake in the company. This essentially means that you have a residual
interest in income and wealth. Perhaps, the most romantic among various investment
avenues, equity shares are classified into the following broad categories by stock market
analysts:
• Blue chip shares

• Growth shares

• Income shares

• Cyclical shares

• Speculative shares

Bonds - Bonds or debentures represent long-term debt instruments. The issuer of a bond
promises to pay a stipulated steam of cash flow. Bonds may be classified into the
following categories:
• Government securities

• Government of India relief bonds

• Government agency securities

• PSU bonds

• Debentures of private sector companies

• Preference shares
Money Market Instruments - Debt instruments which have a maturity of less than one
year at the time of issue are called money market instruments. The important money
market instruments are:

• Treasury bills

• Commercial paper

• Certificates of deposits
Mutual Funds - Instead of directly buying equity shares and/or fixed income
instruments, you can participate in various schemes floated by mutual funds which, in
turn, invest in equity shares and fixed income securities. There are three broad types of
mutual fund schemes:

• Equity schemes

• Debt schemes

• Balanced schemes
Life Insurance - In a broad sense, life insurance may be viewed as an investment.
Insurance premiums represent the sacrifice and the assured sum the benefit. The
important types of insurance policies in India are:
• Endowment assurance policy

• Money back policy

• Whole life policy

• Term assurance policy

Real Estate - For the bulk of the investors the most important asset in their portfolio is a
residential house. In addition to a residential house, the more affluent investors are likely
to be interested in the following types of real estate:
• Agricultural land

• Semi-urban land

• Time share in a holiday resort

Precious Objects - Precious objects are items that are generally small in size but highly
valuable in monetary terms. Some important precious objects are:

• Gold and silver

• Precious stones

• Art objects
Financial Derivatives - A financial derivative is an instrument whose value is derived
from the value of an underlying asset. It may be viewed as a side bet on the asset. The
most important financial derivatives from the point of view of investors are:
 • Options

• Futures

Since every individual would like to earn return on their investment but where to invest
has always been a problem. There has always been a confusion as to which instrument to
invest, which instrument will give me higher returns, etc. Even now nuclear families are
in and so are longer life spans. Even inflation is increasing and so do the standard of life,
medical costs, and other things. In such a scenario, one need to think as to how he will
take care of all his future needs and build up a corpus that will not only take care of
routine expenses but also provide for extra costs, especially of health care. One need to
have a corpus of funds, post-retirement, which will give him close to 100% of the salary
to preserve the lifestyle he has grown to enjoy.
Commodity Market
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.
Indian 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.

Commodity exchange
A commodity exchange is an association or a company or any other body
corporate organizing futures trading in commodities for which license has been granted
by regulating authority.

Commodity Futures
A Commodity futures is an agreement between two parties to buy or sell a
specified and standardized quantity of a commodity at a certain time in future at a price
agreed upon at the time of entering into the contract on the commodity futures exchange.
The need for a futures market arises mainly due to the hedging function that it can
perform. Commodity markets, like any other financial instrument, involve risk associated
with frequent price volatility. The loss due to price volatility can be attributed to the
following reasons:

Consumer Preferences: - In the short-term, their influence on price volatility is small

since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their
inventory in advance.
Changes in supply: - They are abrupt and unpredictable bringing about wild
fluctuations in prices. This can especially noticed in agricultural commodities where the
weather plays a major role in affecting the fortunes of people involved in this industry.
The futures market has evolved to neutralize such risks through a mechanism; namely
hedging.

The objectives of Commodity futures: -

• Hedging with the objective of transferring risk related to the possession of

physical assets through any adverse moments in price. Liquidity and Price
discovery to ensure base minimum volume in trading of a commodity through
market information and demand supply factors that facilitates a regular and
authentic price discovery mechanism.
• Maintaining buffer stock and better allocation of resources as it augments
reduction in inventory requirement and thus the exposure to risks related with
price fluctuation declines. Resources can thus be diversified for investments.
• Price stabilization along with balancing demand and supply position. Futures
trading leads to predictability in assessing the domestic prices, which maintains
stability, thus safeguarding against any short term adverse price movements.
Liquidity in Contracts of the commodities traded also ensures in maintaining the
equilibrium between demand and supply.
• Flexibility, certainty and transparency in purchasing commodities facilitate bank
financing. Predictability in prices of commodity would lead to stability, which in
turn would eliminate the risks associated with running the business of trading
commodities. This would make funding easier and less stringent for banks to
commodity market players.

Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic price discovery and
an efficient price risk management. The beneficiaries include those who trade in the
commodities being offered in the exchange as well as those who have nothing to do with
futures trading. It is because of price discovery and risk management through the
existence of futures exchanges that a lot of businesses and services are able to function
smoothly.

1. Price Discovery:-Based on inputs regarding specific market information, the

demand and supply equilibrium, weather forecasts, expert views and comments,
inflation rates, Government policies, market dynamics, hopes and fears, buyers
and sellers conduct trading at futures exchanges. This transforms in to continuous
price discovery mechanism. The execution of trade between buyers and sellers
 leads to assessment of fair value of a particular commodity that is immediately
disseminated on the trading terminal.
2. Price Risk Management: - Hedging is the most common method of price risk
management. It is strategy of offering price risk that is inherent in spot market by
taking an equal but opposite position in the futures market. Futures markets are
used as a mode by hedgers to protect their business from adverse price change.
This could dent the profitability of their business. Hedging benefits who are
involved in trading of commodities like farmers, processors, merchandisers,
manufacturers, exporters, importers etc.
3. Import- Export competitiveness: - The exporters can hedge their price risk and
improve their competitiveness by making use of futures market. A majority of
traders which are involved in physical trade internationally intend to buy forwards.
The purchases made from the physical market might expose them to the risk of
price risk resulting to losses. The existence of futures market would allow the
exporters to hedge their proposed purchase by temporarily substituting for actual
purchase till the time is ripe to buy in physical market. In the absence of futures
market it will be meticulous, time consuming and costly physical transactions.
4. Predictable Pricing: - The demand for certain commodities is highly price elastic.
The manufacturers have to ensure that the prices should be stable in order to
protect their market share with the free entry of imports. Futures contracts will
enable predictability in domestic prices. The manufacturers can, as a result,
smooth out the influence of changes in their input prices very easily. With no
futures market, the manufacturer can be caught between severe short-term price
movements of oils and necessity to maintain price stability, which could only be
possible through sufficient financial reserves that could otherwise be utilized for
making other profitable investments.

5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on

farmers in the absence of futures market. There would be no need to have large
reserves to cover against unfavorable price fluctuations. This would reduce the
risk premiums associated with the marketing or processing margins enabling more
returns on produce. Storing more and being more active in the markets. The price
information accessible to the farmers determines the extent to which
traders/processors increase price to them. Since one of the objectives of futures
exchange is to make available these prices as far as possible, it is very likely to
benefit the farmers. Also, due to the time lag between planning and production, the
market-determined price information disseminated by futures exchanges would be
crucial for their production decisions.
6. Credit accessibility: - The absence of proper risk management tools would attract
the marketing and processing of commodities to high-risk exposure making it
risky business activity to fund. Even a small movement in prices can eat up a huge
proportion of capital owned by traders, at times making it virtually impossible to
 payback the loan. There is a high degree of reluctance among banks to fund
commodity traders, especially those who do not manage price risks. If in case they
do, the interest rate is likely to be high and terms and conditions very stringent.
This posses a huge obstacle in the smooth functioning and competition of
commodities market. Hedging, which is possible through futures markets, would
cut down the discount rate in commodity lending.
7. Improved product quality: - The existence of warehouses for facilitating
delivery with grading facilities along with other related benefits provides a very
strong reason to upgrade and enhance the quality of the commodity to grade that is
acceptable by the exchange. It ensures uniform standardization of commodity
trade, including the terms of quality standard: the quality certificates that are
issued by the exchange-certified warehouses have the potential to become the
norm for physical trade.
History of Evolution of commodity markets
Commodities future trading was evolved from need of assured continuous supply
of seasonal agricultural crops. The concept of organized trading in commodities evolved
in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store
Rice in warehouses for future use. To raise cash warehouse holders sold receipts against
the stored rice. These were known as “rice tickets”. Eventually, these rice tickets become
accepted as a kind of commercial currency. Latter on rules came in to being, to
standardize the trading in rice tickets. In 19th century Chicago in United States had
emerged as a major commercial hub. So that wheat producers from Mid-west attracted
here to sell their produce to dealers & distributors. Due to lack of organized storage
facilities, absence of uniform weighing & grading mechanisms producers often confined
to the mercy of dealers discretion. These situations lead to need of establishing a common
meeting place for farmers and dealers to transact in spot grain to deliver wheat and
receive cash in return.

Gradually sellers & buyers started making commitments to exchange the produce
for cash in future and thus contract for “futures trading” evolved. Where the producer
would agree to sell his produce to the buyer at a future delivery date at an agreed upon
price. In this way producer was aware of what price he would fetch for his produce and
dealer would know about his cost involved, in advance. This kind of agreement proved
beneficial to both of them. As if dealer is not interested in taking delivery of the produce,
he could sell his contract to someone who needs the same. Similarly producer who not
intended to deliver his produce to dealer could pass on the same responsibility to
someone else. The price of such contract would dependent on the price movements in
the wheat market. Latter on by making some modifications these contracts transformed in
to an instrument to protect involved parties against adverse factors such as unexpected
price movements and unfavorable climatic factors. This promoted traders entry in futures
market, which had no intentions to buy or sell wheat but would purely speculate on price
movements in market to earn profit.

Trading of wheat in futures became very profitable which encouraged the entry
of other commodities in futures market. This created a platform for establishment of a
body to regulate and supervise these contracts. That’s why Chicago Board of Trade
(CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and
Produce Exchanges were born. Agricultural commodities were mostly traded but as long
as there are buyers and sellers, any commodity can be traded. In 1872, a group of
Manhattan dairy merchants got together to bring chaotic condition in New York market to
a system in terms of storage, pricing, and transfer of agricultural products. In 1933,
during the Great Depression, the Commodity Exchange, Inc. was established in New
York through the merger of four small exchanges – the National Metal Exchange, the
Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide
Exchange.

The largest commodity exchange in USA is Chicago Board of Trade, The

Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York
Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide
there are major futures trading exchanges in over twenty countries including Canada,
England, India, France, Singapore, Japan, Australia and New Zealand.
History of Commodity Market in India
The history of organized commodity derivatives in India goes back to the
nineteenth century when Cotton Trade Association started futures trading in 1875, about a
decade after they started in Chicago. Over the time datives market developed in several
commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay
(1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in
Bombay (1920).

However many feared that derivatives fuelled unnecessary speculation and

were detrimental to the healthy functioning of the market for the underlying
commodities, resulting in to banning of commodity options trading and cash settlement
of commodities futures after independence in 1952. The parliament passed the Forward
Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the
India. The act prohibited options trading in Goods along with cash settlement of forward
trades, rendering a crushing blow to the commodity derivatives market. Under the act
only those associations/exchanges, which are granted reorganization from the
Government, are allowed to organize forward trading in regulated commodities. The act
envisages three tire regulations: (i) Exchange which organizes forward trading in
commodities can regulate trading on day-to-day basis; (ii) Forward Markets Commission
provides regulatory oversight under the powers delegated to it by the central
Government. (iii) The Central Government- Department of Consumer Affairs, Ministry
of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority.

The commodities future market remained dismantled and remained dormant

for about four decades until the new millennium when the Government, in a complete
change in a policy, started actively encouraging commodity market. After Liberalization
and Globalization in 1990, the Government set up a committee (1993) to examine the
role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended
allowing futures trading in 17 commodity groups. It also recommended strengthening
Forward Markets Commission, and certain amendments to Forward Contracts
(Regulation) Act 1952, particularly allowing option trading in goods and registration of
brokers with Forward Markets Commission. The Government accepted most of these
recommendations and futures’ trading was permitted in all recommended commodities. It
is timely decision since internationally the commodity cycle is on upswing and the next
decade being touched as the decade of Commodities.
Commodity exchange in India plays an important role where the prices of any
commodity are not fixed, in an organized way. Earlier only the buyer of produce and its
seller in the market judged upon the prices. Others never had a say.

Today, commodity exchanges are purely speculative in nature. Before

discovering the price, they reach to the producers, end-users, and even the retail
investors, at a grassroots level. It brings a price transparency and risk management in the
vital market. A big difference between a typical auction, where a single auctioneer
announces the bids and the Exchange is that people are not only competing to buy but
also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one
can offer to sell higher than someone else’s lower offer. That keeps the market as efficient
as possible, and keeps the traders on their toes to make sure no one gets the purchase or
sale before they do. Since 2002, the commodities future market in India has experienced
an unexpected boom in terms of modern exchanges, number of commodities allowed for
derivatives trading as well as the value of futures trading in commodities, which crossed
$ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually
non- existent, except some negligible activities on OTC basis.

In India there are 25 recognized future exchanges, of which there are three
national level multi-commodity exchanges. After a gap of almost three decades,
Government of India has allowed forward transactions in commodities through Online
Commodity Exchanges, a modification of traditional business known as Adhat and Vayda
Vyapar to facilitate better risk coverage and delivery of commodities. The three
exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX)
Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National
Multi-Commodity Exchange of India Limited (NMCEIL) Ahmedabad.There are other
regional commodity exchanges situated in different parts of India.

Legal framework for regulating commodity futures in India

The commodity futures traded in commodity exchanges are regulated by the
Government under the Forward Contracts Regulations Act, 1952 and the Rules framed
there under. The regulator for the commodities trading is the Forward Markets
Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs
Food and Public Distribution
Forward Markets Commission (FMC)

It is statutory institution set up in 1953 under Forward Contracts (Regulation)

Act, 1952. Commission consists of minimum two and maximum four members appointed
by Central Govt. Out of these members there is one nominated chairman. All the
exchanges have been set up under overall control of Forward Market Commission (FMC)
of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX)

National Commodities & Derivatives Exchange Limited (NCDEX)

promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India
(LIC), National Bank of Agriculture and Rural Development (NABARD) and National
Stock Exchange of India Limited (NSC). Punjab National Bank (PNB), Credit Ratting
Information Service of India Limited (CRISIL), Indian Farmers Fertilizer Cooperative
Limited (IFFCO), Canara Bank and Goldman Sachs by subscribing to the equity shares
have joined the promoters as a share holder of exchange. NCDEX is the only Commodity
Exchange in the country promoted by national level institutions.

NCDEX is a public limited company incorporated on 23 April 2003.

NCDEX is a national level technology driven on line Commodity Exchange with an
independent Board of Directors and professionals not having any vested interest in
Commodity Markets. It is committed to provide a world class commodity exchange
platform for market participants to trade in a wide spectrum of commodity derivatives
driven by best global practices, professionalism and transparency.

NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is

also subjected to the various laws of land like the Companies Act, Stamp Act, Contracts
Act, Forward Contracts Regulation Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members in more than 550
centers through out India. NCDEX currently facilitates trading of 57 commodities.

Commodities Traded at NCDEX:-

• Bullion
 Silver, Brent

 Gold KG
• Minerals
 Electrolytic Copper Cathode,

 Aluminum Ingot,

 Nickel

 Cathode,

 Zinc Metal Ingot,

 Mild steel Ingots

• Oil and Oil seeds:-

 Cotton seed,

 Oil cake,

 Crude Palm Oil,

 Groundnut (in shell),

 Groundnut expeller Oil,

 Cotton,

 Mentha oil,

 RBD Pamolein, RM

 seed oil cake,

 Refined soya oil,

 Rape seeds,

 Mustard seeds,

 Caster seed,

 Yellow soybean,

 Meal

• Pulses
 Urad,
  Yellow peas,

 Chana,

 Tur,

 Masoor,

• Grain
 Wheat,

 Indian Pusa Basmati Rice,

 Indian parboiled Rice (IR-36/IR-64),

 Indian raw Rice (ParmalPR-106),

 Barley,
 Yellow red maize

• Spices
 Jeera,

 Turmeric,

 Pepper

• Plantation
 Cashew,

 Coffee Arabica,

 Coffee Robusta

• Fibers and other

 Guar Gum,

 Guar seeds,

 Guar,

 Jute sacking bags,

 Indian 28

 cotton,
  Indian 31mm cotton,

 Lemon, Grain Bold,

 Medium Staple,

 Mulberry,

 Green Cottons,

 Potato,

 Raw Jute,

 Mulberry raw Silk,

 V-797 Kapas,

 Sugar,

 Chilli LCA334

• Energy
 Crude Oil,

 Furnace oil

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange of India Limited (MCX) is an independent and de-
mutulized exchange with permanent reorganization from Government of India, having
Head Quarter in Mumbai. Key share holders of MCX are Financial Technologies (India)
Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of
India and Cnnara Bank. MCX facilitates online trading, clearing and settlement
operations for commodity futures market across the country. MCX started of trade in Nov
2003 and has built strategic alliance with Bombay Bullion Association, Bombay Metal
Exchange, Solvent Extractors Association of India, pulses Importers Association and
Shetkari Sanghatana.

National Multi Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-
mutualised Electronic Multi Commodity Exchange in India. On 25th July 2001 it was
granted approval by Government to organize trading in edible oil complex. It is being
supported by Central warehousing Corporation Limited, Gujarat State Agricultural
Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002.
NMCEIL Head Quarter is at Ahmedabad.
INTERNATIONAL COMMODITY EXCHANGES
Futures’ trading is a result of solution to a problem related to the
maintenance of a year round supply of commodities/ products that are seasonal as is the
case of agricultural produce. The United States, Japan, United Kingdom, Brazil,
Australia, Singapore are homes to leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX)

The New York Mercantile Exchange is the world’s biggest exchange for
trading in physical commodity futures. It is a primary trading forum for energy products
and precious metals. The exchange is in existence since last 132 years and performs
trades trough two divisions, the NYMEX division, which deals in energy and platinum
and the COMEX division, which trades in all the other metals.

Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline,
RBOB Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum,
Palladium, etc.

London Metal Exchange

The London Metal Exchange (LME) is the world’s premier non-ferrous
market, with highly liquid contracts. The exchange was formed in 1877 as a direct
consequence of the industrial revolution witnessed in the 19th century. The primary focus
of LME is in providing a market for participants from non-ferrous based metals related
industry to safeguard against risk due to movement in base metal prices and also arrive at
a price that sets the benchmark globally. The exchange trades 24 hours a day through an
inter office telephone market and also through a electronic trading platform. It is famous
for its open-outcry trading between ring dealing members that takes place on the market
floor.

Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy,
North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low
Density Polyethylene, etc.
The Chicago Board of Trade
The first commodity exchange established in the world was the Chicago
Board of Trade (CBOT) during 1848 by group of Chicago merchants who were keen to
establish a central market place for trade. Presently, the Chicago Board of Trade is one of
the leading exchanges in the world for trading futures and options. More than 50
contracts on futures and options are being offered by CBOT currently through open
outcry and/or electronically. CBOT initially dealt only in Agricultural commodities like
corn, wheat, non storable agricultural commodities and non-agricultural products like
gold and silver.

Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol,
Rough Rice, Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM)

The Tokyo Commodity Exchange (TOCOM) is the second largest commodity
futures exchange in the world. It trades in to metals and energy contracts. It has made
rapid advancement in commodity trading globally since its inception 20 years back. One
of the biggest reasons for that is the initiative TOCOM took towards establishing Asia as
the benchmark for price discovery and risk management in commodities like the Middle
East Crude Oil. TOCOM’s recent tie up with the MCX to explore cooperation and
business opportunities is seen as one of the steps towards providing platform for futures
price discovery in Asia for Asian players in Crude Oil since the demand-supply situation
in U.S. that drives NYMEX is different from demand-supply situation in Asia. In Jan
2003, in a major overhaul of its computerized trading system, TOCOM fortified its
clearing system in June by being first commodity exchange in Japan to introduce an in-
house clearing system. TOCOM launched options on gold futures, the first option
contract in Japanese market, in May 2004.

Commodities traded:- Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum,

Aluminum, Rubber, etc

Chicago Mercantile Exchange:-

The Chicago Mercantile Exchange (CME) is the largest futures exchange in
the US and the largest futures clearing house in the world for futures and options trading.
Formed in 1898 primarily to trade in Agricultural commodities, the CME introduced the
world’s first financial futures more than 30 years ago. Today it trades heavily in interest
rates futures, stock indices and foreign exchange futures. Its products often serves as a
financial benchmark and witnesses the largest open interest in futures profile of CME
consists of livestock, dairy and forest products and enables small family farms to large
Agri-business to manage their price risks. Trading in CME can be done either through pit
trading or electronically.

Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen

pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate,
etc
Working of commodity market
There are two kinds of trades in commodities. The first is the spot trade, in which
one pays cash and carries away the goods. The second is futures trade. The underpinning
for futures is the warehouse receipt. A person deposits certain amount of say, good X in a
ware house and gets a warehouse receipt. Which allows him to ask for physical delivery
of the good from the warehouse. But some one trading in commodity futures need not
necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity
future on an exchange based on his expectation of where the price will go. Futures have
something called an expiry date, by when the buyer or seller either closes (square off) his
account or give/take delivery of the commodity. The broker maintains an account of all
dealing parties in which the daily profit or loss due to changes in the futures price is
recorded. Squiring off is done by taking an opposite contract so that the net outstanding is
nil.

For commodity futures to work, the seller should be able to deposit the
commodity at warehouse nearest to him and collect the warehouse receipt. The buyer
should be able to take physical delivery at a location of his choice on presenting the
warehouse receipt. But at present in India very few warehouses provide delivery for
specific commodities.

Following diagram gives a fair idea about working of the Commodity market.
 Today Commodity trading system is fully computerized. Traders need not
visit a commodity market to speculate. With online commodity trading they could sit in
the confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages

as follows:

I. Trading: - At this stage the following is the system implemented-

- Order receiving
- Execution
- Matching
- Reporting
- Surveillance
- Price limits
- Position limits
II. Clearing: - This stage has following system in place-

- Matching
- Registration
- Clearing
- Clearing limits
- Notation
- Margining
- Price limits
- Position limits
- Clearing house.
III. Settlement: - This stage has following system followed as follows-

- Marking to market
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.
Current Scenario in Indian Commodity Market
Need of Commodity Derivatives for India

India is among top 5 producers of most of the Commodities, in addition to being a

major consumer of bullion and energy products. Agriculture contributes about 22% GDP
of Indian economy. It employees around 57% of the labor force on total of 163 million
hectors of land Agriculture sector is an important factor in achieving a GDP growth of 8-
10%. All this indicates that India can be promoted as a major centre for trading of
commodity derivatives.

Trends in volume contribution on the three National Exchanges:-

Pattern on Multi Commodity Exchange (MCX)

MCX is currently largest commodity exchange in the country in terms of trade

volumes, further it has even become the third largest in bullion and second largest in
silver future trading in the world. Coming to trade pattern, though there are about 100
commodities traded on MCX, only 3 or 4 commodities contribute for more than 80
percent of total trade volume. As per recent data the largely traded commodities are Gold,
Silver, Energy and base Metals. Incidentally the futures’ trends of these commodities are
mainly driven by international futures prices rather than the changes in domestic demand-
supply and hence, the price signals largely reflect international scenario.

Among Agricultural commodities major volume contributors include Gur, Urad,

Mentha Oil etc. Whose market sizes are considerably small making then vulnerable to
manipulations.

Pattern on National Commodity & Derivatives Exchange (NCDEX)

NCDEX is the second largest commodity exchange in the country after MCX.
However the major volume contributors on NCDEX are agricultural commodities. But,
most of them have common inherent problem of small market size, which is making them
vulnerable to market manipulations and over speculation. About 60 percent trade on
NCDEX comes from guar seed, chana and Urad (narrow commodities as specified by
FMC).
Pattern on National Multi Commodity Exchange (NMCE)

NMCE is third national level futures exchange that has been largely trading in
Agricultural Commodities. Trade on NMCE had considerable proportion of commodities
with big market size as jute rubber etc. But, in subsequent period, the pattern has changed
and slowly moved towards commodities with small market size or narrow commodities.
Analysis of volume contributions on three major national commodity exchanges reveled
the following pattern, Major volume contributors: - Majority of trade has been
concentrated in few commodities that are

• Non Agricultural Commodities (bullion, metals and energy)

• Agricultural commodities with small market size (or narrow commodities) like
guar, Urad, Mentha etc.

Trade strategy
It appears that speculators or operators choose commodities or contracts where the
market could be influenced and extreme speculations possible. In view of extreme
volatilities, the FMC directs the exchanges to impose restrictions on positions and raise
margins on those commodities. Consequently, the operators/speculators chose another
commodity and start operating in a similar pattern. When FMC brings restrictions on
those commodities, the operators once again move to the other commodities. Likewise,
the speculators are moving from one commodity to other (from methane to Urad to guar
etc) where the market could be influenced either individually or with a group.

Beneficiaries: - So far the beneficiaries from the current nature of trading are

 Exchangers: - making profit from mounting volumes

 Arbitragers

 Operators

In order to understand the extent of progress the trading the trading in Commodity
Derivatives has made towards its specified objectives (price discovery and price risk
management), the current trends are juxtaposed against the specification
Specified and actual pattern of futures trade:-

Process Aught to be Actual

Commodities There should be large Largely Traded are
demand for and supply of
the commodity- no • Bullion, Metals and
individual or a group of • Commodities with small
persons acting in concert market size (or narrow
should be in a position to Commodities) like guar,
influence the demand or Burmese Urad, Mentha etc.
supply, and consequently
the price substantially
Towards this, the major
Produced or consumed
Commodities in the
Country such as wheat,
rice, jute etc. and India is the
top first or second
producer of these
Commodities.

Trade Hedging together with Over speculation and

Strategy Moderate speculation to
Smoothen the price
Fluctuations.
Beneficiaries Farmers/producers,,
Consumers and traders
Either through direct
Participation or through
Price signals.
Manipulation leading to wide
Fluctuations.
So far exchangers, arbitrageurs,
Operators etc.,
Further there were instances of
Wrong price signals accruing
losses to farmers in case of
menthe, and to traders in case
Of imported pulses.
 Price Discovery • Pure replication of
International trends not
Taking in account of
Domestic D-S in case of
Non-agril. Commodities
• Wide fluctuations from
Objectives Over speculation and
Manipulation in case of
Largely traded agril.
commodities
Risk Management No such evidences and contrarily, the
extreme volatilities in certain
commodities are making futures
More risky for participants.

Thus it is evident that the realization of specified objectives is still a distinct

destination. It is further, evident from the nature of the commodities largely traded on
national exchanges that the factors driving the current pattern of futures trade are purely
speculative.

Reasons for prevailing trade pattern:-

No wide spread participation of all stake holders of commodity markets. The actual
benefits may be realized only when all the stake holders in commodity market including
producers, traders, consumers etc trade actively in all major commodities like rice, wheat,
cotton etc.

Some Suggestions to make futures market as a level playing field for all stake
holders:-

• Creation of awareness among farmers and other rural participants to use the
futures trading platform for risk mitigation.
• Contract specifications should have wider coverage, so that a large number of
varieties produced across the country could be included.
• Development of warehousing and facilities to use the warehouse receipt as a
financial instrument to encourage participation farmers.
• Development of physical market through uniform grading and
standardization and more transparent price mechanisms.
• Delivery system of exchanges is not good enough to attract investors. E.g.- In
many commodities NCDEX forces the delivery on people with long position
and when they tend to give back the delivery in next month contract the
exchange simply refuses to accept the delivery on pretext of quality
difference and also auctions the product. The traders have to take a delivery
or book losses at settlement as there are huge differences between two
contracts and also sometimes few contracts are not available for trading for
no reason at all.
• Contract sizes should have an adequate range so that smaller traders can
participate and can avoid control of trading by few big parties.
• Setting of state level or district level commodities trading helpdesk run by
independent organization such as reputed NGO for educating farmers.
• Warehousing and logistics management structure also needs to be created at
state or area level whenever commodity production is above a certain share of
national level.
• Though over 100 commodities are allowed for Derivatives trading, in
practice only a few commodities derivatives are popular for trading. Again
most of the trade takes place only on few exchanges. This problem can
possibly solved by consolidating some exchanges.
• Only about 1% to 5% of total commodity derivatives traded in country are
settled in physical delivery due to insufficiencies in present warehousing
system. As good delivery system is the back bone of any Commodity trade,
warehousing problem has to be handled on a war footing.
• At present there are restrictions in movement of certain goods from one state
to another. These needs to be removed so that a truly national market could
develop for commodities and derivatives.
• Regulatory changes are required to bring about uniformity in Octri and sales
tax etc. VAT has been introduced in country in 2005, but, has not yet been
uniformly implemented by all states.
• A difficult problem in Cash settlement of Commodities Derivatives contract
is that, under Forward Contracts Regulation Act 1952 cash settlement of
outstanding contracts at maturity is not allowed. That means outstanding
contracts at maturity should be settled in physical delivery. To avoid this
participants square off their their positions before maturity. So in practice
contracts are settled in Cash but before maturity. There is need to modify the
law to bring it closer to the wide spread practice and save participants from
unnecessary hassle.
 1. Investing in Commodity Market
Suppose An investor want to invest in the commodity Market and he/she wants to
purchase steel from the market then he/she will go through following stages-

1. He/she must know general characteristics of steel

2. Categories of steel

3. He/she should be aware of global as well as Indian scenario

4. After considering the factor he/she should know which factor will affect the
demand and supply of steel.

The duty imposed on import of steel and its fractions also have an impact on steel prices.
The price trend in steel in Indian markets has been a function of World’s economic
activity. Prices of input materials of iron and steel such as power tariff, fright rates and
coal prices, also contribute to the rise in the input costs for steel making.

Monthly Variations in Steel Prices from Feb 2005- Dec 2006: -

Percentage Change > 5% 2-5% < 2%

No. of Times
Ingots- Mandi 2 10 10
HRC 2.5 Mumbai 8 3 11
HRC 2.0 Imported 12 4 6
HRC fob- Europe 5 9 8
Contract specifications of Steel Flat
Symbol STEELFLAT
Description STEELFLATMMMYY
Trading Period Mondays through Saturdays
Trading session Monday to Friday:

1st session: 10.00 am to 5.00 pm

2nd session: 5.30 pm to 8.00 pm

Saturday: 10.00 am to 2.00 pm

No. of contracts a year 12
Contact Duration 4 months
Trading
Trading unit 25 MT
Price Quote Rs./ton, Ex-Taloj Kalambo

(excluding execise duty and sales tax).

Maximum order size 200 MT
Tick size (minimum Rs. 10

Price movement)
Daily price limits 4%
Initial margin 5%
Special margin In case of additional volatility, a special margin of 2%
or such other percentage, as deemed fit, will be
imposed immediately on, both buy and sale side in
respect of all outstanding position, which will remain in
force of next three days, after which the special margin
will be relaxed.
Maximum Allowable For individual clients: 1,00,000 MT
Open Position
For a member collectively for all clients:

25% of open market position.

Delivery
Delivery unit 25 MT with tolerance limit

Between 23.5 MT to 26.5 MT

Delivery Center(s) Warehouses at Taloja/ Kalamboli
2. Investment in Equity Market
Suppose an investor want to invest in the equity market then he/she will have to
purchase share from the market. As he/ she purchase share from the market they
want to know that weather the share of SBI is doing well in the market or not.
Investors those who have invested in the equity market want to buy at lower price
and want to sell their share at maximum possible price. Suppose an investor have
taken shares of SBI then return on that share every year will be-
 S&P
CNX ROR R=X- T=Y-
years Month NIFTY (X) PRICE ROR(Y) X*X Y*Y X*Y Avg(X) Avg(Y) R^2 T^2

2003 Jan 1154.67 0.0208 284.55 0.0197 0.00043 0.00039 0.00041 0.0037 -0.0052 0.00001 0.00003

-0.0001
Feb 1178.72 -0.0798 290.15 0.0014 0.00637 0.00000 1 -0.0970 -0.0235 0.00940 0.00055

Mar 1084.64 -0.0430 290.55 -0.0587 0.00185 0.00344 0.00252 -0.0602 -0.0835 0.00362 0.00698

Apr 1038 0.0812 273.5 0.0294 0.00660 0.00087 0.00239 0.0641 0.0046 0.00410 0.00002

May 1122.32 0.1336 281.55 0.2270 0.01784 0.05151 0.03031 0.1164 0.2021 0.01355 0.04085

Jun 1272.21 0.0516 345.45 0.1073 0.00266 0.01150 0.00553 0.0344 0.0824 0.00119 0.00679

July 1337.86 0.1497 382.5 0.0941 0.02240 0.00886 0.01409 0.1325 0.0693 0.01755 0.00480

Aug 1538.08 0.0469 418.5 0.0468 0.00220 0.00219 0.00220 0.0297 0.0220 0.00088 0.00048

Sep 1610.21 0.0993 438.1 0.0180 0.00986 0.00033 0.00179 0.0821 -0.0068 0.00674 0.00005

Oct 1770.08 0.0384 446 0.0670 0.00147 0.00449 0.00257 0.0212 0.0422 0.00045 0.00178

-0.0019
Nov 1837.98 0.1643 475.9 -0.0116 0.02699 0.00013 0 0.1471 -0.0364 0.02164 0.00133

-0.0072
Dec 2139.93 -0.0362 470.4 0.2004 0.00131 0.04014 6 -0.0534 0.1755 0.00285 0.03080

-2.3E-
2004 Jan 2062.42 -0.0049 564.65 0.0047 2.4E-05 2.2E-05 05 -0.0220 -0.0202 4.8E-04 4.1E-04

-0.0009
Feb 2052.4 -0.0157 567.3 0.0581 0.00025 0.00337 1 -0.0328 0.0332 0.00108 0.00110

Mar 2020.25 0.0138 600.25 0.0301 0.00019 0.00090 0.00042 -0.0033 0.0052 0.00001 0.00003

-0.0002
Apr 2048.22 -0.1709 618.3 0.0012 0.02921 0.00000 1 -0.1881 -0.0236 0.03537 0.00056

-0.0042
May 1698.16 0.0175 619.05 -0.2419 0.00031 0.05852 4 0.0004 -0.2668 0.00000 0.07116

-0.0049
Jun 1727.93 0.0872 469.3 -0.0563 0.00761 0.00316 1 0.0700 -0.0811 0.00491 0.00658

-2.5E-
July 1878.62 0.0018 442.9 -0.0014 3.4E-06 0.00000 06 -0.0153 -0.0262 2.3E-04 0.00069

Aug 1882.09 0.0736 442.3 0.0190 0.00542 0.00036 0.00140 0.0564 -0.0059 0.00319 0.00003

Sep 2020.62 0.0241 450.7 0.0625 0.00058 0.00390 0.00151 0.0070 0.0376 0.00005 0.00141

-0.0020
Oct 2069.39 0.0965 478.85 -0.0213 0.00930 0.00045 5 0.0793 -0.0462 0.00629 0.00213

Nov 2268.99 0.0661 468.65 0.1544 0.00436 0.02383 0.01020 0.0489 0.1295 0.00239 0.01678
 -0.0022
Dec 2418.88 -0.0104 541 0.2121 0.00011 0.04499 0 -0.0275 0.1873 0.00076 0.03506
 2 -0.033 -0.0007
005 Jan 2393.76 0.0226 655.75 1 0.00051 0.00110 5 0.0055 -0.0579 0.00003 0.00336

-0.0031 -0.049
Feb 2447.94 -0.0320 634.05 0.0971 0.00102 0.00942 0 1 0.0722 0.00241 0.00522

-0.036 -0.082
Mar 2369.69 -0.0653 695.6 7 0.00426 0.00134 0.00239 5 -0.0615 0.00680 0.00378

-0.120 -0.0119
Apr 2214.96 0.0988 670.1 5 0.00976 0.01452 0 0.0816 -0.1454 0.00666 0.02113

May 2433.73 0.0683 589.35 0.1202 0.00466 0.01445 0.00821 0.0511 0.0954 0.00261 0.00909

Jun 2599.93 0.0428 660.2 0.0698 0.00183 0.00487 0.00299 0.0256 0.0449 0.00066 0.00202

July 2711.24 0.0335 706.25 0.1185 0.00112 0.01405 0.00397 0.0163 0.0937 0.00027 0.00877

Aug 2801.99 0.0943 789.95 0.0122 0.00889 0.00015 0.00115 0.0771 -0.0126 0.00595 0.00016

-0.0160 -0.105
Sep 3066.15 -0.0881 799.6 0.1823 0.00777 0.03323 7 3 0.1574 0.01109 0.02478

-0.112 -0.0133
Oct 2795.89 0.1187 945.35 7 0.01409 0.01269 7 0.1016 -0.1375 0.01031 0.01891

Nov 3127.8 0.0721 838.85 0.0888 0.00520 0.00789 0.00640 0.0550 0.0640 0.00302 0.00409

-0.009 -0.0005
Dec 3353.37 0.0586 913.35 3 0.00344 0.00009 4 0.0414 -0.0341 0.00172 0.00116

2 -0.039 -0.0009
006 Jan 3549.92 0.0252 904.9 4 0.00064 0.00155 9 0.0081 -0.0642 0.00006 0.00413

Feb 3639.43 0.1070 869.25 0.0137 0.01145 0.00019 0.00147 0.0898 -0.0111 0.00807 0.00012

Mar 4028.82 0.0459 881.2 0.1159 0.00211 0.01344 0.00532 0.0288 0.0911 0.00083 0.00829

-0.022 -0.152
Apr 4213.88 -0.1356 983.35 0 0.01840 0.00048 0.00299 8 -0.0469 0.02335 0.00220

-0.148 -0.0032
May 3642.31 0.0218 961.7 6 0.00048 0.02209 4 0.0046 -0.1735 0.00002 0.03010

-0.093 -5.9E- -0.010

Jun 3721.71 0.0064 818.75 0 4.1E-05 0.00865 04 8 -0.1179 1.2E-04 0.01389

July 3745.46 0.0876 742.6 0.0931 0.00767 0.00867 0.00816 0.0704 0.0683 0.00496 0.00466

Aug 4073.55 0.0529 811.75 0.1472 0.00280 0.02167 0.00778 0.0357 0.1224 0.00128 0.01497

Sep 4288.97 0.0437 931.25 0.1096 0.00191 0.01202 0.00479 0.0266 0.0848 0.00071 0.00719

Oct 4476.5 0.0564 1033.35 0.0779 0.00318 0.00606 0.00439 0.0393 0.0530 0.00154 0.00281

-0.011
Nov 4729.13 0.0062 1113.8 0.2234 3.8E-05 5.0E-02 1.4E-03 0 0.1986 1.2E-04 3.9E-02

-0.080 -0.0023
Dec 4758.45 0.0296 1362.65 1 0.00088 0.00641 7 0.0125 -0.1049 0.00016 0.01101

2 -0.040 -0.097
007 Jan 4899.39 -0.0806 1253.55 3 0.00649 0.00163 0.00325 7 -0.0652 0.00955 0.00425

-0.122 -0.0027
Feb 4504.73 0.0225 1203 5 0.00050 0.01500 5 0.0053 -0.1473 0.00003 0.02171

-0.118 -0.0084
Mar 4605.89 0.0713 1055.65 6 0.00509 0.01405 6 0.0542 -0.1434 0.00293 0.02056

Apr 4934.46 0.0510 930.5 0.4819 0.00260 0.23222 0.02456 0.0338 0.4570 0.00114 0.20888

-0.009
May 5185.95 0.0073 1378.9 0.1101 5.3E-05 1.2E-02 8.0E-04 9 0.0853 9.7E-05 7.3E-03

Jun 5223.82 0.0497 1530.75 0.0113 0.00247 0.00013 0.00056 0.0325 -0.0136 0.00106 0.00018

-0.0005 -0.030
July 5483.25 -0.0131 1548.05 0.0379 0.00017 0.00143 0 3 0.0130 0.00092 0.00017
1 Beta
Σxy 1.114

Σx 1.0298

Σy 1.4911

Σx2 1.3385

N 60

Σy2 2.2235

Β 0.824

2 Alpha

Avg(X) 0.0172

Avg(Y) 0.0249

β 0.824

α 0.0107272

3 Coef.Correlation

0.64047

Coef of
4 Determination

0.4102
 Standard
5 Devition

SDx 0.07152

SDy 0.18619

6 Variance

Vx 0.005115

Vy 0.03466
Average rate of return of SBI is lesser than that of its market returns. So, the returns are
better than the market returns. Since standard deviation of SBI equity is less than its
market, the risk is likely less compared to that of market.

Lower the beta and higher the funds performance is the better equity for investment. One
might expect the best performance by funds with low diversification because they
apparently are attempting to beat the market by being unique in their selection or timing.
Considering only the rate of return, all the equities outperformed the market.

3. Investment in Mutual fund

When an investor wants to invest in the mutual fund he/she can go to Investment
Company which they prefer. When an investor put give their money to investment
company inventors money are converted into NAV. Therefore their

NAV growth

NAV is the total asset value (net of expenses) per unit of the fund and is calculated
by the Asset Management Company (AMC) at the end of every business day. Net
asset value on a particular date reflects the realizable value that the investor will
get for each unit that he is holding if the scheme is liquidated on that date

NAV per share = Current value of fund holdings / No. of fund shares
Eg: Rs.100, 000 / 3,333 = 30
The NAV is calculated by dividing the current value of the portfolio by the number
of fund shares outstanding. For open-ended mutual funds, new shares are issued as
money flows into the fund. Likewise, the number of shares outstanding is reduced
as investments are redeemed. The NAV increases as the value of the portfolio's
holdings increase. For example, if a share of a stock fund costs Rs.30 today and
Rs.18 one year ago, there has been a gain (or profit) of Rs.12 a share, or about
66%, before fund expenses. The change in a fund's NAV determines its
performance. Comparing NAV performance enables investors to differentiate
funds on a relative basis.
 4. Investment in Derivatives
A few basis strategies which investor can take into consideration while investing into the
market-

A view on the market

A. Assumption: Bullish on the market over the short term
Possible Action by investors: Buy Nifty calls
Example:
Current Nifty is 1880. You buy one contract of Nifty near month calls for Rs.20 each. The
strike price is 1900, i.e. 1.06% out of the money. The premium paid by you will be (Rs.20
* 200) Rs.4000.Given these, your break-even level Nifty is 1920 (1900+20). If at
expiration Nifty advances by 5%, i.e. 1974, then
Nifty expiration level 1974.00
Less Strike Price 1900.00
Option value 74.00 (1974-1900)
Less Purchase price 20.00
Profit per Nifty 54.00
Profit on the contract Rs.10800 (Rs. 54* 200)

1) If Nifty is at or below 1900 at expiration, the call holder would not find it
profitable to exercise the option and would loose the entire premium, i.e. Rs.4000
in this example. If at expiration, Nifty is between 1900 (the strike price) and 1920
(breakeven), the holder could exercise the calls and receive the amount by which
the index level exceeds the strike price. This would offset some of the cost.
2) The holder, depending on the market condition and his perception, may sell the
call even before expiry.

B. Assumption: Bearish on the market over the short term

Possible Action by Investors: Buy Nifty puts
Example:
Nifty in the cash market is 1880. You buy one contract of Nifty near month puts for Rs.17
each. The strike price is 1840, i.e. 2.12% out of the money. The premium paid by you will
be Rs.3400 (17*200). Given these, your break-even level Nifty is 1823 (i.e. strike price
less the premium). If at expiration Nifty declines by 5%, i.e.1786, then
Put Strike Price 1840
Nifty expiration level 1786
 Option value 54 (1840-1786)
Less Purchase price 17
Profit per Nifty 37
Profit on the contract Rs.7400 (Rs.37* 200)

1) If Nifty is at or above the strike price 1840 at expiration, the put holder would not
find it profitable to exercise the option and would loose the entire premium, i.e.
Rs.3400 in this example. If at expiration, Nifty is between 1840 (the strike price)
and 1823 (breakeven), the holder could exercise the puts and receive the amount
by which the strike price exceeds the index level.
2) The holder, depending on the market condition and his perception, may sell the put
even before expiry.

Put as a portfolio Hedge

Assumption: Investors are concerned about a downturn in the short term in
the market and its effect on your portfolio. The portfolio has performed well
and you expect it to continue to appreciate over the long term but would like
to protect existing profits or prevent further losses.
Possible Action by Investor: Buy Nifty puts.
Example:
You held a portfolio with say, a single stock, HLL valued at Rs.10 Lakhs (@ Rs.200 each
share). Beta of HLL is 1.13. Current Nifty is at 1880. Nifty near month puts of strike
price 1870 is trading at Rs.15. To hedge, you bought 3 puts 600{Nifties, equivalent to
Rs.10 lakhs*1.13 (Beta of HLL) or Rs.1130000}. The premium paid by you is Rs.9000,
(i.e.600 * 15). If at expiration Nifty declines to 1800, and Hindustan Lever falls to
Rs.195, then
Put Strike Price 1870
Nifty expiration level 1800
Option value 70 (1870-1800)
Less Purchase price 15
Profit per Nifty 55
Profit on the contract Rs.33000 (Rs.55* 600)
Loss on Hindustan Lever Rs.25000
Net profit Rs. 8000
Hypothesis:

Null hypothesis: Most of people invest in commodity market.

H¹ Hypothesis: Most of people invest in other investment such as Equity, mutual

fund, Debt securities, bonds etc.

METHODOLOGY OF THE STUDY

Data collection instrument:
Primary Data:
1. Collection of data through Questionnaires:

The data collected for the study purpose is through questionnaires. One hundred
customers and non consumer were selected randomly for the study purpose and then the
information revealed from the customers is analyzed and interpreted in the study.

2. Organization of field work:

Initial field work has to be done for testing tools for data collection. The data was
collected through the direct interaction with the customers & non consumers through
questionnaires answered by them.

Secondary Data:

The data that is used in this project is also in the form of secondary nature.
The data is collected from secondary sources such as various websites, journals,
newspapers, books, etc. the analysis used in this project has been done using selective
technical tools. In Equity market, risk is analyzed and trading decisions are taken on basis
of technical analysis. It is collecting share prices of selected companies for a period of
five years.

Sampling plan
 Sampling: Since I have selected commodities segment to do market research. 100%
coverage was difficult within the limited period of time. Hence sampling survey
method was adopted for the purpose of the study.
 Population: Since this survey has to be completed in 3 months that’s why total no of
customers those who are investing in the market can’t be taken.

 Sampling size: I am taking sample of hundred for the purpose of the study. Sample
consisted of small investors, large investors and traders.

 Sampling Methods: Probability sampling requires complete knowledge about all

sampling units in the universe. Due to time constraint non-probability sampling was
chosen for the study.

 Sampling procedure: From large number of customers & non consumers sample lot,
I am selecting particular area churchgate were through my questionnaire I will do my
survey and as churchgate is one of the area where I will get mixture of the traders.

 Field Study: Directly approached respondents (businessmen, small shopkeepers,

physical commodities traders and service class people).
TOOLS & TECHNIQUES:
The following statistical techniques were used for measuring the performance of the
company’s funds.

1. Rate of Return (ROR)

N2-N1

ROR =

N1
Where, N1 is Close period at period1
N2 is Close period at
period

2. Standard Deviation (SD)

Σ [R-AVG(R)]

SD =

N
Where, R is rate of return

N is total number of months

3. Beta
n Σxy – Σx * Σy

Beta =

n Σx2 – (Σx)2

4. Alpha
Alpha = Avg (y) – (beta*Avg (x))

5. Coefficient of Correlation
n Σxy – Σx * Σy

Coefficient of Correlation =

[(n Σy2 – (Σy) 2) (n Σx2 – (Σx) 2)] ½

 6. Coefficient of Correlation
Coefficient of determination = (Coefficient of Correlation) 2

FORMULAS

1. EXPECTED RISK CALCULATION:

PORTFOLIO RISK = SQRT ((XX2*SDX2) + (XY2*SDY2) + (2*XX*XY*

(rXY*SDX2*SDY2)))]

Where,

Xx, Xy = proportion of total portfolio invested in security X& Y respectively

sdx, sdy = standard deviation of stock X & stock Y respectively

rxy = correlation coefficient of x & y

2. EXPECTED RETURN OF A PORTFOLIO CALCULATION:

PORTFOLIO RETURN =[(XX*RX)+(XY*RY)]

Where,

XX = proportion of total portfolio invested in security X

XY = proportion of total portfolio invested in security Y

RX = expected return to security X

RY = expected return to security Y

3. ARITHMETIC RETURN

Where

• Vi is the initial investment value and

• Vf is the final investment value

4. STANDARD DEVIATION
 σ = Square root ((∑mean return -expected return)^2/N)

5. COVARIANCE - COV (X, Y)=1/N∑[(RX-RX)(RY-RY)

6. BETA: The Beta coefficient, in terms of finance and investing, is a measure of a

stock (or portfolio)’s volatility in relation to the rest of the market. Beta is
calculated for individual companies using regression analysis.

The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It
measures the part of the asset's statistical variance that cannot be mitigated by the
diversification provided by the portfolio of many risky assets, because it is correlated
with the return of the other assets that are in the portfolio.

The formula for the Beta of an asset within a portfolio is

Where, ra measures the rate of return of the asset,

rp measures the rate of return of the portfolio of which the asset is a part
And Cov (ra, rp) is the covariance between the rates of return.
The beta movement should be distinguished from the actual returns of the stocks. For
example, a sector may be performing well and may have good prospects, but the fact that
its movement does not correlate well with the broader market index may decrease its
beta. Beta is a measure of risk and not to be confused with the attractiveness of the
investment.
 BIBILOGRAPHY

Website:-
1. www.nseindia.com
2. www.scribd.com
3. www.moneycontrol.com
4. www.mutualfundindia.com

Books:-
1. COMMODITY MARKET- AN INTRODUTION (Edited by N Janaradhan Rao)

2. COMMODITY MARKET- RECENT DEVELOPMENT (Edited by Dhanapani Alagiri)

3. INDIAN STOCK MARKET-A EMPIRICAL STUDY (Edited by O.P.Gupta, Amitabh

Gupta, Chandrima Sikadar, Tapas Mahapatra)

4. OPTIONS, FUTURES, AND OTHER DERIVATIVES- 5TH EDITION (By John C. hull)

References: -
1. Presentation on Futures Market: How do the Farmers fit in?
- (Presented By - P H RAVIKUMAR, MD & CEO, NCDEX LTD)

2. Presentation on Commodity Markets-Business Potential & Strategy

- www.scribd.com