Vedant Finalproject

VEDANT UPADHYAYA 4105214214 1
1.1 ABOUT THE PROJECT
In this project I have studied about the possible opportunities of arbitrage

available between MCX and NCDEX in the commodity gold.
There exist price differences between the same commodity in two

different exchanges. This difference gives rise to arbitraging opportunities in
the commodity.
An arbitrager buys from the exchange where the price is less and sells in
the exchange where the price is more. But he should also consider the cost of
transaction. If the cost of transaction is more than the spread then arbitrage
opportunity is not available. Only if the cost of transaction is less than that of
spread arbitrage is possible.
I have calculated the NET SPREAD keeping in mind the cost of transaction
and found out whether arbitrage opportunities exist or not.
Analysis of Arbitrage opportunities in Gold ee

between MCX and NCDEX
1.2 WHY COMMODITY GOLD WAS CHOSEN
Gold is the indicator of an economy. A country’s economy is rated by the

gold reserves it has. The supply of money in the economy of India is backed
up by gold.
Moreover gold is considered as the best hedge against inflation. In an

economy where the inflation is rising and the value of money is falling, one
should invest in gold. The value of gold rises with the rise in inflation and
hence provide for hedging against inflation.
The prices of gold depend on a large number of factors and hence it is an

important commodity. The prices rise during the marriage and festival
season due to heavy demand and they fall after the season is over.
Gold is valued in India as a savings and investment vehicle and is the second
preferred investment after bank deposits. The gold hoarding tendency is well
ingrained in Indian society

1.3 COMPANY PROFILE
Jaypee Commodities PVT LTD.
Our Mission
At Jaypee, our mission is to provide the investors, traders with
trading opportunities in multiple markets across the globe and proprietary
research and knowledge for effective decision making.
It is our commitment to partner with each of our clients, offer

them personalized service with 24-hour execution using the latest technology
and help in achieving their financial goals using various exchange traded
financial products like stocks, options, futures, ETFs, commodities, foreign
currency on all major securities and futures exchange worldwide. We service
a global network of brokers, investors (new or experienced), and high
volume traders, financial, industrial and agricultural institutions.
Our Beliefs
“Knowledge…Awareness… Opportunities”
We believe that by keeping our clients aware about the markets
and providing them with value added trade information and financial
knowledge we would be able to help them in identifying and taking
advantage of opportunities and achieve their financial return objectives. We
strive to realize the value of a split second for our valued clients, which
furnish exceptional trading opportunities

Our Dedication
“Market are always right….and we respect that”
We are dedicated to provide our clients with the latest in
financial trading tools available and adapt ourselves and offer new trading
strategies and opportunities enabling our clients to be successful investors
and traders. We are dedicated to work with you in bull and bear markets,
market ups and downs. We are committed to our people, our clients and our
beliefs.
Unlike a huge conglomerate where a client is only a number at

Jaypee our clients receive personal attention. Our people are dedicated to
providing its clients with best financial brokerage services.
Our Services
The investment philosophy of Jaypee focuses on recommending
buy in companies/sectors that have a growth potential and are technically
strong and recommending to sell in companies/sectors that have lost the
steam or are technically weak. We advise our clients on a daily basis on how
to maximize their returns on the stocks bought/sold by suggesting exit/stop-
loss or re-entry points in the respective stocks/positions of its clients while
keeping in mind their investment objectives, personal financial situation,
time horizon and risk taking ability.
At Jaypee , teams of skilled financial professionals constantly

monitor a whole gamut of investment opportunities in companies so as to
recommend buy/sell on the basis of their analysis and research. The
companies are selected on the basis of various quantitative and qualitative

factors. Order Execution is our main strength; our endeavor is to get the
"deals done" as soon as you place them. We want our clients to take
advantage of each and every tick movement.
Markets are Always Right! And we respect that…

We also believe that the difference between a great investor and
a poor investor is not essentially that the poor investor makes more mistakes
but the difference in their ability to maximize the return from winning trades
and minimize the losses from the mistakes. Through our market research and
analysis we ensure that we are in line with the market, both on the bull and
the bear side, enabling us to maximize returns from winning trades and
minimizing from the mistakes.
Jaypee has the following service areas: -
We provide real-time quotes to our clients ensuring that they do
not miss the bus and have access to reliable data quickly.
· Capital Markets Segment
Our firm's operations started in this segment. We have a rich
experience of dealing in this segment.
· Derivatives Segment
Our continuous efforts to understand this segment have enabled
us to provide innovative strategies to our clients from which they can
benefit.
· Equity Research
We synergize our experience in the trade with expertise of our
research analysts to provide our clients with adequate information.
Client Relations

We believe in keeping our clients satisfied all the time. We are

known to provide prompt service to our clients. We ensure that clients get a
personalized service that enables them to meet their investment objectives.
Call us for up to date facts and figures on all the stocks before you make
your investment decision. One of our experienced executives will be pleased
to give you an advisory service when you require it.
We offer two types of Broking/Dealing Services: -

Dealing Service
It is our standard level of service where clients can telephone or
Email their orders to us. A trader will confirm the order. The clients can
check back at any time to confirm whether the trade has been executed or
not. A confirmation of the trades will be sent at the end of the trading
session. Payments / deliveries etc. should be sent or picked up by clients.
Advisory Service
A personal trader assigned to you will be responsible for all
your orders and for confirming trades executed. The trader will update you
on any significant movements in the market and your shares. You will be
given our advice on a daily basis to maximize your returns either by buying
or selling or holding the scrips, if you desire. Confirmations may be faxed,
emailed or given on the telephone. We will collect deliveries, cheques and
all other documents for our local clients.
The Jaypee Advantage

Professional Support
Every Tick Counts !

We are there with you at every step. If you have any questions please feel
free to call or email us.
Direct Access
We provide our clients with 24/7 direct access trading and order routing
platform systems and online account view.
Global Presence
We can assist Traders, Institutions and Individual Clients to trade

global equity and commodities markets and Asian exchanges in India and
Dubai.
Multiple Markets
A basket of financial instruments to choose from!
Equities, Options, Commodities, Futures, Metals & Energy etc.

2.1 INTRODUCTION TO COMMODITY MARKET
Over the modern age of investing, commodity trading has emerged as an

important player in the way that people invest in and speculate. It was
developed as a reaction to the way that business is conducted, and it
continues today in the form of commodities trading online. Many different

people turn their business know how into a profitable venture, and it is
commodities and futures trading that helps them get there. It might sound
like a strange term, but simply put, commodities are items like, wheat, corn,
gold and silver, and Cattle and Pork Bellies, and Crude Oil. When farmers
take their crop to "market", they are selling commodities. Trading
commodities is the world's one perfect business. The upside potential is
unlimited and you can control the downside. You can trade commodities on
a part time basis or a full-time basis. You can spend as little as an hour or
two a day yet earn a full-time income.I've met people who have started with
a small account and in a short period of time, six months to a year, built their
account up to the point that they have been able to quit their jobs and trade
commodities full-time providing themselves with a very comfortable
lifestyle. Commodities are fascinating. Most people who become traders,
even with a very small account, really never quit following the markets.
Most of the people who trade commodities are just average hard working
people, probably a lot like you who are just trying to supplement their
income and trade on a part time basis.
CommodityBasics:
Commodities are raw materials used to create the products consumers buy, from food to
furniture to gasoline. Commodities include agricultural products such as wheat and
cattle, energy products such as oil and gasoline, and metals such as gold, silver and
aluminum. There are also soft commodities, or those that cannot be stored for long

periods of time. Soft commodities are sugar, cotton, cocoa and coffee.The commodity
market has evolved significantly from the days when farmers hauled bushels of wheat
and corn to the local market. In the 1800’s, demand for standardized contracts for
trading agricultural products led to the development of commodity futures exchanges.
Today, futures and options contracts on a huge array of agricultural products, metals,
energy products and soft commodities can be traded on exchanges all over the
world.Commodities have also evolved as an asset class with the development of
commodity futures indexes and, more recently, the introduction of investment vehicles
that track commodity indexes.
Investor interest in commodities has increased dramatically in recent years as the asset
class has outperformed traditional assets such as stocks and bonds. The performance of
commodities as an asset class is usually measured by the returns on a commodity index,
such as the Dow Jones-AIG Commodity Index, which tracks the return from a passive
investment in 19 different commodity futures contracts. Over a five year period ended
March 31, 2006, the Dow Jones AIG Commodity Index has returned 10.6%, versus
2.6% for the S&P 500. Commodity prices have been driven higher by a number of
factors, including increased demand from China, India and other emerging countries
that need oil, steel and other commodities to support manufacturing and infrastructure
development. The commodity supply chain has also suffered from a lack of investment,
creating bottlenecks and adding an insurance premium and/or a convenience yield to the
returns of many commodity futures. Over the long term, these economic factors are
likely to support continued gains in commodity index returns.The potential for attractive
returns is probably the most obvious reason for increased investor interest in
commodities, but it isn't the only factor. Commodities may offer investors other
significant benefits, including enhanced portfolio diversification and a hedge against
inflation and event risk.Commodities are real assets, unlike stocks and bonds, which are

financial assets. Commodities, therefore, tend to react to changing economic

fundamentals in different ways than traditional financial assets. For example,
commodities are one of the few asset classes that tend to benefit from rising inflation.
As demand for goods and services increases, the price of those goods and services
usually goes up as well, as do the prices of the commodities used to produce those
goods and services. Because commodity prices usually rise when inflation is
accelerating, investing in commodities may provide portfolios with a hedge against
inflation.Leverage is very important to the commodities markets. Unlike the stock
market, where you might have to invest 10,000 dollars to leverage 10,000 dollars. A
commodities trader can leverage tens of thousands of dollars worth of a commodity for
pennies on the dollar. Also unlike stocks, commodities have intrinsic value and will not
go bankrupt.The futures markets are so crucial to the well being of our nation, that the
government established the Commodity Futures Trading Commission (CFTC) to
oversee the industry. There is also a self-regulatory body, the National Futures
Association (NFA), who monitor the activities of all futures market professionals to
ensure the integrity of the futures markets.Commodities also give the investor the
ability to participate in virtually all sectors of the world economy and have the potential
to produce returns that tend to be independent of other markets. In fact portfolios that
add commodity investments can actually lower the overall portfolio risk by
diversification.
Just about every product that you consume would likely cost dramatically
more without the commodities futures markets. Because of the intrinsic risks
associated to being in business, lacking the ability to shift risk, a
manufacturer/producer of goods or services would be forced to charge
higher prices, and the consumer would have to pay those higher prices. This

shifting of risk to someone willing to accept it is called hedging.

Manufacturers could effectively lock in a sales price by going short an
equivalent amount of goods with futures contracts. If a mining company
knew that they were going to sell 1000 ounces of gold in several months,
they could protect themselves for a future price decline by going short 10
gold futures contracts today. If the price of gold fell by $30 in the following
months, they would receive that much less in the cash marketplace for their
gold, but earn that much back when they offset their short gold futures
position. The futures price will eventually become the cash price. A user or
buyer of goods can use the futures market in the same manner. They would
need to protect themselves from a future price increase, and therefore go
long futures contracts.The person willingly accepting a risk does so because
of the opportunity to profit from price movements, this is known as
speculating. The cotton in your shirt, the orange juice, cereal and coffee you
had for breakfast, the lumber, copper and mortgage for your home, the gas or
ethanol that you put in your car all would be priced many times higher
without the participation of speculators in the futures markets. Through
supply and demand market forces, equilibrium prices are reached in an
orderly and equitable manner within the exchanges, and world economies,
and you, benefit tremendously from futures trading.
Many new commodity traders mistakenly believe that commission rates will
have a greater impact on their trading success than the markets themselves.
Reasonable full service rates are not usually the cause for losses. Bad trades
are the cause for most losses. Many new traders begin trading commodities
with a discount account and rationalize that their trading accounts are
discount so why not do the same for their commodity account.The most
important question to ask is, “Will a discount broker monitor your account to

make sure you don’t make a costly mistake?” Other questions to ask are:
"Will they let you know that your sell order you are trying to place will
initiate another short future because you meant to offset a short with a buy
not a sell to exit your trade? Will they alert you to the fact that there is a
major USDA grain report coming out before you place your grain order?
Will they call you and let you know that your options have just 1 week
before they expire?" All of the examples above can be very costly to the new
trader. The answers to all of the questions above is no, because discount
brokers are not paid enough to do so.
What qualities do you want your commodity broker to have?
1. Experience- Always make sure that your commodity broker has

seen both bull and bear commodity markets. Also make sure that your
commodity broker does not have a habit of being in trouble with the
National Futures Association.
2. Honest dialogue- Does your commodity broker call you when
you are down in a trade as readily as when you are in a winner? Does
your broker only call to ask you to send in more risk capital?
3. Availability during market hours- Is your commodity broker
very often in a meeting or on the other line when you are trying to
reach them during the trading day? Are your calls returned in a prompt
and
professional manner?
There are many variables to consider when opening an account with a new
commodity broker.

First you should fully research and understand the inherent risks involved in
commodity investments and decide how much risk capital is appropriate for
your financial situation. Second, you must decide what type of commodity
broker services you will need to achieve your trading objectives. Then you
must decide what type of account will be appropriate for you.
There are several types of services and accounts to choose from:
Full service account. A full service account is where a professional

commodity broker suggests trades for your account, monitors your account,
services your account and lets you know if it’s time to cut losses or lock
in profits on a particular trade. These are non discretionary which means that
the commodity broker will not buy or sell at their own discretion or without
your approval. Because of the additional time and effort involved
in these accounts commissions are usually highest for full service accounts.
Check the commission schedule before trading. This type of account is for
investors that want to participate in commodities but lack the time and
inclination to trade based on their own research and opinions.
Broker assisted account. This type of account is for an investor that knows
what they want to trade but want to call it into a commodity broker to place
the trade just so there are no order mistakes and to have brief dialogue with a
commodity broker. Order errors can be costly. This type of service also
allows for brief conversations with your commodity broker. This account is
the happy median between using a full service commodity broker or a
discount commodity broker.

Discount online account. This account is for commodity investors who do

their own research and simply need a conduit for their trades. These
investors are uninterested in the opinion of a commodity broker, are
absolutely confident in placing their own orders and require little or no
contact and therefore pay the least commissions per trade.
Commodities are traded constantly on commodity exchanges around the

world such as the Chicago Mercantile Exchange, Winnipeg Commodities
Exchange (WCE) and the New York Mercantile Exchange (NYMEX).
Since commodities are traded on exchanges, their prices are not set by a
single individual or entity. On the exchanges, commodities are traded via
futures contracts. These contracts obligate the holder to buy or sell a
commodity at a predetermined price on a delivery date in the future. Not all
futures contracts are the same - their specifics will differ depending on the
respective commodity being traded.
The market price of a commodity that is quoted in the news is often the
market futures price for that respective commodity. As with equity
securities, a commodities futures price is determined primarily by the supply
and demand for the commodity in the market. For example, let's look at oil.
If the supply of oil increases, the price of one barrel of oil will decrease.
Conversely, if the demand for oil increases, which often happens during the
summer, the price of oil will increase.There are many economic factors that
will have an effect on the price of a commodity. Although commodities
are traded using futures contracts and futures prices, events that occur now
will affect the futures prices. This can be seen in the volatility of oil prices
during the Gulf War in Iraq. The price of oil constantly changed in respect to

what was going on in the war, and was also affected by the likelihood that
Saddam Hussein would be able to retain control of Iraq. For other
commodities such as crops, weather plays an extremely significant
role in price changes. If the weather in a certain region is going to affect the
supply of a commodity, the price of that commodity will be affected irectly.
As with other securities, many traders use commodity futures to speculate on
future price movements. These investors analyze various events in the
market to speculate on future supply and demand. They subsequently
enter long or short futures positions depending on which direction they
believe supply and demand will move.
Most traders when asked, say that they generally use Daily Commodity price
charts. Maybe out of habit, or because most end up trading at that time level
that this has become popular. Because most traders focus on the Daily or
Intraday Commodity charts by a much larger margin than the Weekly or
higher time frames, you can see this in the more erratic pattern formations
found in these lower time frame charts as traders place their buy and sell
orders to make market. The Weekly chart is a much more concentrated look
of mass psychology as opposed to the Daily chart. For the sake of example
only, say each day brings 100,000 traders to the market and each only makes
one trading act per day. That would mean that each price Daily price bar
represents the mass psychology of 100,000 minds making 100,000 market
actions. In contrast, a single Weekly price bar then would represent 500,000
minds making 500,000 market actions. Now, if you consider that 1 inch of a
price chart may hold about 10 price bars, that 1 inch of market patterns is
representing 1,000,000 minds and market actions for the Daily price pattern,
but 5,000,000 for the same amount of space on the Weekly chart. When you

consider the word 'Mass', which has more of it? The Weekly chart of course!
If you find yourself spending more time using the Daily charts to analyze the
commodity markets for trading, and you are not daytrading, it is advisable
that you consider seeing the bigger and more accurate picture of market
direction by using the Weekly commodity chart.
Capturing the full benefits of commodity exposure has been a challenge in

the past. Investing in physical commodities such as a barrel of oil, a herd of
cattle or a bushel of wheat is of course, quite impractical, so investors have
tended to look for commodity exposure either by purchasing commodity
related equities or through actively managed futures accounts.
The onset of investment vehicles that track commodity futures indices has
provided investors with another option for gaining exposure to commodities
that may offer better potential to capture the full benefits of the asset class.
Investment vehicles that track commodity futures indices are not the same as
actively managed futures accounts. Instead, commodity index returns
provide passive exposure to a broad range of commodities. For example, the
Dow Jones AIG Commodity Index tracks the futures price of 19 different
commodities, including energy, livestock, grains, industrial metals, precious
metals and soft commodities. Changes to the composition of the index are
determined by preset rules rather than a manager’s discretion.One advantage
of commodity exposure that tracks a broad index is that commodities are not
highly correlated with each other and index returns should be less volatile
than the returns on an individual commodity. Another advantage is that
commodity indexes themselves have existed for decades, providing ample
historic data for asset allocation studies and research.

Commodities markets have gained wide popularity among investors because

of their enormous size and transparencies turn over of commodities market is
many times to that of the securities of securities essential because the
commodities traded in commoditymarket are essential and are of daily use
Also it is not false in case of Indian financial market. Commodity trading

and commodity markets are not new to India and its all hundred years old in
India. Earlier years we have used forward contract trading at regional level
in the commodity market. Introduction of innovative derivative products like
Futures and Option in this market gives newer face to commodity market.
In Indian commodity market a future trading was introduced from year 2003
by starting of national level Commodity exchanges. A future trading is
defined as a futures contract is an agreement between two parties to buy or
sell an asset at a certain time in the future at a certain price. Futures contracts
are special types of forward contracts in the sense that the former are
standardized exchange-traded contracts. The following three broad
categories of participants - Hedgers are interested in transferring risk
associated with transacting or carrying underlying physical asset. They use
commodity futures to reduce or limit the price risk of transacting underlying
physical asset. Speculators are interested in making money by taking view
on future price movements. Commodity futures allow speculators to create
high leveraged position to undertake calculative risk with the objective of
correctly predicting the market movement.s Arbitrager are interested in
locking in a minimum risk less profit by simultaneously entering into
transactions in two or more markets. Arbitragers lock in profit when they

spot cash and carry arbitrage opportunity or reverse cash and carry arbitrage
opportunity.
In this project report I mainly concentrated towards the Arbitragers. Initially

by studying the commodities trading in the Indian commodity futures market
or exchanges especially agri commodity. For the arbitragers arbitrage
opportunity may exist in different way like mis-pricing in the spot and future
exchange, inter exchanges (Between the two exchanges).
Conclusion
Commodities are a distinct asset class with returns that are for the most part
independent of stock and bond returns. Therefore, investing in commodities
can help diversify a portfolio of stocks and bonds, lowering risk and possibly
boosting returns. Reaching this level of diversification has been made easier
with the development of investment products that passively track a broad
range of commodities.
2.2 INTRODUCTION TO DERIVATIVE MARKET
Introduction to Derivatives

The emergence of the market for derivative products, most notably forwards,
futures and options, can be traced back to the willingness of risk-averse
economic agents to guard themselves against uncertainties arising out of
fluctuations in asset prices. By their very nature, the financial markets are
marked by a very high degree of volatility. Through the use of derivative
products, it is possible to partially or fully transfer price risks by locking–in
asset prices. As instruments of risk management, these generally do not
influence the fluctuations in the underlying asset prices. However, by
locking-in asset prices, derivative products minimize the impact of
fluctuations in asset prices on the profitability and cash flow situation of
risk-averse investors.
Definition of Derivatives
Derivative is a product whose value is derived from the value of one or more
basic variables, called bases (underlying asset, index, or reference rate), in a
contractual manner. The underlying asset can be equity, Forex, commodity
or any other asset.
For example, wheat farmers may wish to sell their harvest at a future date to
eliminate the risk of a change in prices by that date. Such a transaction is an
example of a derivative. The price of this derivative is driven by the spot
price of wheat which is the “underlying”.
In the Indian context of the Securities Contracts (Regulation) Act, 1956

(SC(R) A) defines “derivative” to include –

1. A security derived from a debt instrument, share, loan whether

secured or unsecured, risk instrument or contract for differences or any other
form of security.
2. A contract which derives its value from the prices, or index of

prices, of underlying securities.
Derivatives are securities under the SC(R) A and hence the trading of
derivatives is governed by the regulatory framework under the SC(R) A.
Derivatives Markets
Derivatives have probably been around for as long as people have been
trading with one another. Forward contracting dates back at least to the 12th
century, and well have been around before then. Merchants entered into
contracts with one another for future delivery of specified amount of
commodities at specified price. A primary motivation for pre-arranging a
buyer or seller for a stock of commodities in early forward contracts was to
lessen the possibility that large swings would inhibit marketing the
commodity after a harvest.
Types Derivatives Market
Derivative markets can broadly be classified as commodity derivative

market and financial derivatives markets. As the name suggest, commodity
derivatives markets trade contracts for which the underlying asset is a
commodity. It can be an agricultural commodity like wheat, soybeans,
rapeseed, cotton, etc or precious metals like gold, silver, etc.

Financial derivatives markets trade contracts that have a financial asset or

variable as the underlying. The most popular financial derivatives are those,
which have equity, interest rates and exchange rates as the underlying.
Financial derivatives are used to hedge the exposure to market risk.
The commodity derivatives differ from the financial derivatives mainly in

the following two aspects
Firstly, due to the bulky nature of the underlying assets, physical

settlement in commodity derivatives creates the need for warehousing.
Secondly, in the case of commodities, the quality of the asset

underlying a contract can vary largely.
Products, Participants and Functions
Products
Derivative contracts have several variants. The most common variants are
 Forwards
 Futures
 Options
 Swaps
Forwards

A forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the future at today’s pre-agreed
price.
Futures
A futures contract is an agreement between two parties to buy or sell an asset

at a certain time in the future at a certain price. Futures contracts are special
types of forward contracts in the sense that the former are standardized
exchange-traded contracts.
Options
Options are of two types - calls and puts. Calls give the buyer the right but
not the obligation to buy a given quantity of the underlying asset, at a given
price on or before a given future date. Puts give the buyer the right, but not
the obligation to sell a given quantity of the underlying asset at a given price
on or before a given date.
Swaps
Swaps are private agreements between two parties to exchange cash flows
in the future according to a prearranged formula. They can be regarded as
portfolios of forward contracts. The two commonly used swaps are
Interest rate swaps: These entail swapping only the interest related
cash flows between the parties in the same currency.

Currency swaps: These entail swapping both principal and interest

between the parties, with the cash flows in one direction being in a different
currency than those in the opposite direction.
Swaptions
Swaptions are options to buy or sell a swap that will become operative at the
expiry of the options. Thus a swaption is an option on a forward swap.
Rather than have calls and puts, the swaptions market has receiver swaptions
and payer swaptions. A receiver swaption is an option to receive fixed and
pay floating. A payer swaption is an option to pay fixed and receive floating.
Other variants of Derivative Contracts are
 Warrants
 Leaps
 Baskets
Warrants
Options generally have lives of up to one year the majority of options traded
on options exchanges having a maximum maturity of nine months. Longer-
dated options are called warrants and are generally traded over-the-counter.
Leaps
The acronym LEAPS means Long-Term Equity Anticipation Securities.

These are options having a maturity of up to three years.

Baskets
Basket options are options on portfolios of underlying assets. The underlying

asset is usually a moving average of a basket of assets. Equity index options
are a form of basket options.
Participants
The following three broad categories of participants –
 Hedgers
 Speculators
 Arbitrageurs
Hedgers
Hedgers are interested in transferring risk associated with transacting or

carrying underlying physical asset. They use commodity futures to reduce or
limit the price risk of transacting underlying physical asset.
Speculators
Speculators are interested in making money by taking view on future price

movements. Commodity futures allow speculators to create high leveraged
position to undertake calculative risk with the objective of correctly
predicting the market movement.

Arbitragers
Arbitragers are interested in locking in a minimum risk less profit by

simultaneously entering into transactions in two or more markets.
Arbitragers lock in profit when they spot cash and carry arbitrage
opportunity or reverse cash and carry arbitrage opportunity.
Function
Hedgers face risk associated with the price of an asset. They use futures or
options markets to reduce or eliminate this risk. Speculators wish to bet on
future movements in the price of an asset. Futures and options contracts can
give them an extra leverage; that is, they can increase both the potential
gains and potential losses in a speculative venture.
Arbitrageurs are in business to take advantage of a discrepancy between

prices in two different markets. If, for example, they see the futures price of
an asset getting out of line with the cash price, they will take offsetting
positions in the two markets to lock in a profit.
The derivatives market performs a number of economic functions.
First, prices in an organized derivatives market reflect the

perception of market participants about the future and lead the prices of

underlying to the perceived future level. The prices of derivatives converge

with the prices of the underlying at the expiration of the derivative contract.
Thus derivatives help in discovery of future as well as current prices.
Second, the derivatives market helps to transfer risks from those

who have them but may not like them to those who have an appetite for
them.
Third, derivatives, due to their inherent nature, are linked to the

underlying cash markets. The underlying market witnesses higher trading
volumes because of participation by more players who would not otherwise
participate for lack of an arrangement to transfer risk.
Fourth, speculative trades shift to a more controlled

environment of derivatives market. In the absence of an organized
derivatives market, speculators trade in the underlying cash markets.
Margining, monitoring and surveillance of the activities of various
participants become extremely difficult in these kinds of mixed markets.
Fifth, an important incidental benefit that flows from

derivatives trading is that it acts as a catalyst for new entrepreneurial
activity.
The derivatives have a history of attracting many bright, creative, well-

educated people with an entrepreneurial attitude. They often energize others
to create new businesses, new products and new employment opportunities,
the benefit of which are immense. Finally, derivatives markets help increase
savings and investment in the long run. Transfer of risk enables market
participants to expand their volume of activity.

Derivatives trading in India
The first step towards introduction of derivatives trading in India was the
promulgation of the Securities Laws (Amendment) Ordinance, 1995, which
withdrew the prohibition on options in securities. The market for derivatives,
however, did not take off, as there was no regulatory framework to govern
trading of derivatives.
SEBI set up a 24–member committee under the Chairmanship of

Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory
framework for derivatives trading in India. The committee submitted its
report on March 17, 1998 prescribing necessary pre–conditions for
introduction of derivatives trading in India. The committee recommended
that derivatives should be declared as ‘securities’ so that regulatory
framework applicable to trading of ‘securities’ could also govern trading of
securities.
SEBI also set up a group in June 1998 under the Chairmanship of

Prof.J.R.Varma, to recommend measures for risk containment in derivatives
market in India. The report, which was submitted in October 1998, worked
out the operational details of margining system, methodology for charging
initial margins, broker net worth, deposit requirement and real–time
monitoring requirements.
The SCRA was amended in December 1999 to include derivatives within the
ambit of ‘securities’ and the regulatory framework were developed for
governing derivatives trading. The act also made it clear that derivatives

shall be legal and valid only if such contracts are traded on a recognized
stock exchange, thus precluding OTC derivatives. The government also
rescinded in March 2000, the three–decade old notification, which prohibited
forward trading in securities.
Derivatives trading commenced in India in June 2000 after SEBI granted

the final approval to this effect in May 2000. SEBI permitted the derivative
segments of two stock exchanges, NSE and BSE, and their clearing
house/corporation to commence trading and settlement in approved
derivatives contracts. To begin with, SEBI approved trading in index futures
contracts based on S&P CNX Nifty and BSE–30 (Sensex) index. This was
followed by approval for trading in options based on these two indexes and
options on individual securities.
The trading in index options commenced in June 2001 and the trading in
options on individual securities commenced in July 2001. Futures contracts
on individual stocks were launched in November 2001. Trading and
settlement in derivative contracts is done in accordance with the rules,
byelaws, and regulations of the respective exchanges and their clearing
house/corporation duly approved by SEBI and notified in the official gazette.
Commodity Future Trading
Introduction to commodity futures

A commodity futures contract is an agreement between two parties to buy or

sell a specified quantity and quality of commodity at a certain time in future
at a certain price agreed at the time of entering into the contract on the
commodity futures exchange.
Objectives and benefits out of commodity futures are as follows
 Hedging - price risk management by risk mitigation

 Speculation - take advantage of favorable price movements
 Leverage - pay low margin to enjoy large exposure
 Liquidity - ease of entry and exit of market
 Price discovery - for making farming and business decisions
 Price stabilization along with balancing demand and supply position
 Facilitates integrated price structure
 Flexibility, certainty and transparency in purchasing commodities
facilitate bank financing.
 Facilitates 'informed' lending to the banks
Need for Futures Trading in Commodities
Commodity Futures, which forms an essential component of Commodity

Exchange, can be broadly classified into precious metals, agriculture, energy
and other metals. Current futures volumes are miniscule compared to
underlying spot market volumes and thus have a tremendous potential in the
near future.

1. Futures trading in commodities results in transparent and fair price

discovery on account of large-scale participations of entities
associated with different value chains. It reflects views and
expectations of a wider section of people related to a particular
commodity.
2. It also provides effective platform for price risk management for all
segments of players ranging from producers, traders and processors to
exporters/importers and end-users of a commodity.
3. It also helps in improving the cropping pattern for the farmers, thus
minimizing the losses to the farmers.
4. It acts as a smart investment choice by providing hedging, trading and

arbitrage opportunities to market players. Historically, pricing in
commodities futures has been less volatile compared with equity and
bonds, thus providing an efficient portfolio diversification option.
5. Raw materials form the most key element of most of the industries.
The significance of raw materials can further be strengthened by the
fact that the "increase in raw material cost means reduction in share
prices". In other words "Share prices mimic the commodity price
movements".

6. Industry in India today runs the raw material price risk; hence going
forward the industry can hedge this risk by trading in the commodities
market.
Commodities Suitable for Future Trading
The following are some of the key factors, which decide the suitability of the
commodities for future trading: -
1. The commodity should be competitive

There should be large demand for and supply of the commodity
- no individual or group of persons acting in concert should be in a position
to influence the demand or supply, and consequently the price
substantially.
2. There should be fluctuations in price.
3. The market for the commodity should be free from substantial
government control.
4. The commodity should have long shelf life and be capable of
standardization and gradation.
Pricing of Future Trading Commodity

Cost of carry Method
The relationship between cash price and futures price can be explained in
terms of cost of carry. Cost of storage, cost of insurance and cost of
financing constitute cost of carry. Cost of carry is an important element in
determining pricing relationship between spot and futures prices as well as
between prices of futures contracts of different expiry months.
When there is expected shortage of physical commodity in the future then

additional cost of holding the commodity is added to the spot price besides
cost of carry which is termed as Convenience Yield.
Basis and Spreads

Basis means difference between cash price of the asset and future price of
the underlying asset. Basis can be negative or positive depending upon
prices prevailing in cash market and future market.
If cash price is less than future price than basis is negative.
If cash price is more than future price than basis is positive.
Spread means difference in prices of two futures contracts. Spread can be

classified as intra commodity spreads and inter commodity spreads. Intra
commodity spreads means difference in price between two futures contracts
of different expiry months of the same commodity. Inter commodity spread
means difference in price of two different commodities with same expiry
month.

2.3 INTRODUCTION TO ARBITRAGE
A central idea in modern finance is the law of one price. This states that in a
competitive market, if two assets are equivalent from the point of view of
risk and return, they should sell at the same price. If the price of the same
asset is different in two markets, there will be operators who will buy in the
market where the asset sells cheap and sell in the market where it is costly.
This activity termed as arbitrage, involves the simultaneous purchase and
sale of the same or essentially similar security in two different markets for
advantageously different prices (Sharpe & Alexander 1990). The buying
cheap and selling expensive continues till prices in the two markets reach
equilibrium. Hence, arbitrage helps to equalize prices and restore market
efficiency. Theoretical arbitrage requires no capital, entails no risk and
appears to be an easy way of earning profits. However, real–world arbitrage
calls for large outlay of capital, entails some risk and is a lot more complex
than the textbook definition suggests.
The science of arbitrage
Arbitrage pricing is one of the most important concepts in modern finance.

The origins of this lie in the efficient market hypothesis. In this section we
take a look at some literature on arbitrage and discuss the theory, operational
aspects and impediments to arbitrage.

Efficient markets hypothesis
Efficient markets hypothesis states that the price of a security must be equal
to the expected present value of the future cash flows on that security. In
other words, it states that the price of a security must be equal to its
fundamental value. The two central assumptions of the efficient market
hypothesis are:
1. Investors hold rational expectations
2. Arbitrage brings prices towards fundamentals
In an efficient market there are no profitable arbitrage opportunities.

Proponents of the efficient markets hypothesis, like Fama (1965) and Ross
(2001) maintain that rational arbitrageurs will undo any mis-pricings in the
market. By buying under priced securities and selling overpriced ones,
arbitrageurs ensure that security prices converge to their fundamental values
thereby restoring market efficiency. However, the efficient market
hypothesis assumes that arbitrage strategies are risk less and do not involve
capital outlay. Hence professional arbitrageurs are willing to take unbounded
positions in the market. In reality however, arbitrage involves risk. An
arbitrage strategy is risky even if rational traders care only about the final
payoff of the arbitrage strategy. In other words, an arbitrage trade is risk less
only if a perfect substitute for the mis-priced asset exists. Arbitrageurs can
rarely fully hedge their arbitrage strategies. Recent literature on the limits to
arbitrage has identified two broad categories of risk:
1. Fundamental risk and
2. Noise trader risk.

An arbitrage strategy can be risky because the fundamental value of a

partially hedged portfolio might change over time. Besides, the arbitrageur’s
model may often not coincide with the true data–generating process. Thus,
arbitrageurs have to bear fundamental risk even if they can sustain the
arbitrage strategy until the final payoff is realized.
In addition to this, the activity of behavioral noise traders might lead to

temporary price movements. These price changes temporarily reduce the
value of the arbitrage portfolio as prices move even further from
fundamental values. If arbitrageurs are compelled to liquidate their positions
in the intermediate term, then they are forced to take losses when the
arbitrage opportunity is greatest. This is called the noise trader risk.
In Shleifer & Vishny (1997), fund managers limit their arbitrage out of fear
of a drawdown. Fund managers are afraid that their investors will withdraw
their money if they suffer intermediate short–term losses even though the
arbitrage provides a risk less positive payoff in the long–run. This paper
builds on the insight that distorted prices might become even more distorted
in the short run before eventually returning to their normal long run values.
Impediments to arbitrage
In its purest form, arbitrage requires no capital and is risk free (Dybvig &
Ross 1992). By simultaneously selling and purchasing identical assets at
different prices, the arbitrageur captures a profit with no upfront capital.
Unfortunately, pure arbitrage exists only in perfect capital markets. In the
real world, imperfect information and market frictions make arbitrage both
capitals intensive and risky. They impede arbitrage in two ways.

1. When there is uncertainty over the nature of an apparent mis-

pricing, and additional learning involves a cost, arbitrageurs may be
reluctant to incur the potentially large fixed costs of entering the business of
exploiting the arbitrage opportunity (Merton 1987). Uncertainty over the
distribution of arbitrage returns, especially over the mean, will deter
arbitrage activity until would–be arbitrageurs learn enough about the
distribution to decide whether the expected payoff from the arbitrage is large
enough to cover the fixed costs of setting up shop. Even with active
arbitrageurs, opportunities may persist while the arbitrageurs learn to exploit
them.
2. Once the fixed costs of implementing the arbitrage strategy are
borne, imperfect information and market frictions often encourage
specialization. Specialization limits the degree of diversification in the
arbitrageur’s portfolio and causes him to bear idiosyncratic risks for which
he must be rewarded. For instance, if there is a purely random chance that
prices will not converge to fundamental value, a highly specialized
arbitrageur who cannot diversify away this risk will invest less than one who
can. Even if prices eventually converge to fundamental values, the path of
convergence may be long and bumpy. While waiting for the prices of the
mis-priced securities to converge, they may temporarily diverge. If the
arbitrageur does not have access to additional capital when the security
prices diverge, he may be forced to prematurely unwind the position and
incur a loss (DeLong, Shleifer, Summers &Waldmann 1990), (Shleifer &
Summers 1990), (Shleifer & Vishny 1997). The prospect of incurring this
loss will further limit the amount that a specialized arbitrageur is willing to
invest.

Capital intensive nature of arbitrage
Real–world arbitrage requires putting up huge capital for a short period of

time. Take the case of cash and carry arbitrage. In order to capture the mis-
pricing, the arbitrageur sells the overpriced futures, buys the underlying
stocks and holds them till the maturity of the futures contract. Buying the
underlying stock requires huge amount of capital. Very often due to lack of
capital, it is not possible for the arbitrageur to take delivery and hold stocks.
Hence small arbitrageurs are forced into intra-day arbitrage.
Arbitrage hinges on capturing profits due to mis-pricing on the market. The
underlying assumptions are that at some stage the mis-pricing will be wiped
out and prices will return to their fair value. This is when the arbitrageur
receives his profits. However it may often happen that prices do not correct
themselves immediately. There could be situations where the mis-pricing
worsens, in which case the arbitrageur would be required to bring in more
capital by way of margins. Even if eventually the prices of the two contracts
converge and the arbitrageur makes money, in the short run he loses money
and needs more capital. Arbitrageurs face difficulties in raising funds at
short notice. Very often an arbitrage strategy that is entered into is reversed
before the end of the contract. This is known as early unwind.
Operational issues in arbitrage

In situations where it is possible to exploit mispricing risklessly by
generating perfectly hedged positions and holding on to them till the final
payoff, the following operational aspects need be noted before entering into
an arbitrage.

1. For the arbitrage to be a risk–free process, the arbitrageur must

trade simultaneously across two markets. In efficient markets, arbitrage
opportunities last for very short periods. As arbitrageurs spot these
opportunities and act upon them, the arbitrage gets wiped out. The fastest
instances of arbitrage opportunities being wiped out, are those seen in the
foreign exchange market. This market trades currency in large volumes, so
what seems like a small mispricing can often translate into huge profits.
2. Trading involves transactions costs. These transactions costs and other

market imperfections create a no– arbitrage band around the fair value of an
asset. Hence the arbitrage opportunity must be sizeable enough to generate a
profit over and above the costs involved. Not all mispricings are profitable
arbitrage opportunities. However the potential returns net of transportation
costs and other overheads were clearly not attractive enough for arbitrageurs
to step in. Risks in arbitrage in India
The basic principles of an arbitrage strategy are straightforward – if an asset
trades at two different prices across two markets, buy where it trades cheap
and sell where it trades expensive. This textbook arbitrage assumes a
frictionless world where arbitrage profits can be made without putting up
capital and without bearing any risk. In reality however, almost all arbitrage
requires capital and carries some risk. Shleifer & Vishny (1997) argue that
the textbook notion of arbitrage does not describe realistic arbitrage trades.
These discrepancies become particularly important when arbitrageurs
manage other people money. In India the risks become even more
pronounced due to existing market frictions.

Arbitrage is an often-used term in share markets. The arbitrager is an

important intermediary that helps in price discovery mechanism in all
markets be it equity, money forex or derivatives. There are three important
participants that are important in a cash market, the speculator, arbitrager
and an investor. In futures market the investor is replaced by a hedger.
Arbitrager and Speculator are often confused and both are termed as
Speculators. In this article I wish to explain the difference between the two
and show how arbitrage works in the market and its influence on market
volatility. Arbitraging in India has been going on for several years. Initially
arbitrage activity was between Stock Exchange Mumbai and all other
regional exchanges. Mr. Babulal Bagri the founder of BLB Securities and
Mr. Manubhai Maneklal were legendary arbitragers of that era. They traded
between Mumbai, Delhi and Kolkatta markets. Arbitraging in those days
was done manually and not on any online system. The way the fingers of
these brokers flew on telex machines giving trade instructions was an
experience by itself. Then it shifted to cashing on price difference between
NSE and BSE limited. Today large amount of arbitrage happens between
cash and derivative markets. Arbitrage is also possible between the current
month and near or far month contracts. In case of Commodity exchanges
also there is an arbitrage opportunity between the local cash markets or
mandis and the future markets which are popularly known as National
Commodity Exchanges. Speculator is one who gives liquidity to the markets.
The buyers and sellers may not often decide at the same time to buy or sell a
security. There is a time gap as well as a difference in price and quantity at
which the buyer and seller intend to do a transaction. The speculator fills this
time gap and gives quotes to buyers as well as sellers on

a continuous basis. This imparts liquidity to the market since each order has
a counter offer from a speculator even if there is no counter party to match
the order. The arbitrager is one who plays the role of balancing the price
differences across the markets. The markets may be two exchanges trading
in the same product or two segments such as cash and derivatives or across
international markets and local markets. The arbitrager continuously tracks
prices across the chosen segment are momentary price differences in two
markets due to difference in level of information as well as demand supply
situation in the market. These price differences are an opportunity for the
arbitrager. The arbitrager has money power at his disposal. He takes
deliveries in a particular market segment and is able to give deliveries in
another market segment. There is a time gap between giving and taking
deliveries. He holds the stock for this time and earns an interest on the funds
invested which comes by way of price differential between buy and sell
rates. The arbitrager has a particular interest return as his target. He does not
have any open positions and all his purchases or sells in a particular market
segment have a counter position in another market segment. At the net level
his position is always zero. This is how the arbitrager earns a risk free return.
The arbitrager does not always wait for the expiry of the contract or the
settlement of the transaction. They may reverse the position before the
actual settlement date even if they have to compromise on some percentage
of the price difference earned by them. Lesser return is acceptable if it is
earned with smaller or no investment. All decisions are taken with
reference to a benchmark targeted return To give example of an arbitrage
transaction, assume that the arbitrager has Rs.10 lacs available for doing
arbitrage activity. His targeted return is say 18% p.a. which works to about
1.5% p.m. We will take a simplistic transaction where he does just one trade

to earn the return. If some share is quoting at Rs.1000 in one cash market he
will look for opportunity to buy at Rs.1000/- and sell at Rs.1015/- or more
in another cash market simultaneously. These markets must have different
settlement dates otherwise in current rolling settlement scenario it is not
possible to give and receive delivery since both happen on the same day.
Now the same example can be extended to cash and derivative segment.
Shares are purchased in cash market; and sold in futures market. Delivery of
the shares is received in the rolling settlement. Since deliveries are not
permitted in futures market a reversal pportunity is looked for before the
expiry of contract, otherwise the arbitrager will be left with the delivery of
shares. Hence if he gained say Rs.25 per share on the first leg he will reverse
the trade upto a loss of Rs.10 in order to achieve his benchmark return of
Rs.15. The returns are not often as fantastic but opportunities are many. We
also have to deduct from this the cost of brokerage, Securities transaction
tax, stock exchange charges and stamp duty. Hence it becomes unviable for
an investor unless the transaction costs are very low. The price difference is
only for a few minutes or seconds hence it must be captured instantly
through a speedy trading system. It should not so happen that one transaction
is done and the other one does not go through i.e. if the arbitrager buys and
is unable to sell and the market falls then instead of making a profit he will
end up with a loss. Automated trading programs are used in order to release
both orders so that both the prices are captured simultaneously.
Arbitrage activity thus adds to liquidity in the markets and also helps in
balancing the prices of same shares across various markets. Prices
continuously balance out once the differences are cash upon. Arbitrage helps
in reducing volatility in markets since continuous flow of orders reduces

impact cost and more depth means less volatility. A small investor may not
always be able to capture small differences in prices. They are not constantly
in front of the trading screen nor do they have sophisticated trading systems
to execute the orders. They are often linked to Internet or a network
connection that is not direct feed into the stock exchange system i.e. BOLT
or NEAT. Streaming quotes on online trading is closest that is available for
such trading. Best strategy is to look for difference in shares prices of stocks
that you already have, hence delivery is not a problem. Otherwise it is a
volume game, small returns over thousands of transactions is the name of the
game.
Arbitrage by definition is a financial transaction that makes an immediate

profit without involving any risk. Technically it consists of purchasing a
commodity or security in one market for immediate sale in another market
(deterministic arbitrage). However popular usage has expanded the meaning
of the term to include any activity which attempts to buy a relatively
underpriced item and sell a similar, relatively overpriced item, expecting to
profit when the prices resume a more appropriate theoretical or historical
relationship (statistical arbitrage).
The recently introduced futures index by the BSE and NSE is an instrument
which can be used for arbitrage. Arbitrage opportunities are said to exist
whenever the futures price moves away from the fair value. Fair value is the
summation of spot price and the holding cost . Holding costs could be Cost
of financing plus Storage costs plus Insurance purchased, etc.(In case of
commodities) and holding cost = Cost of financing minus Dividend returns,
which could be in the form of dividends in case of equities futures.

For example, suppose a futures contract is traded on two different

exchanges. If, Futures price = Spot price + Holding
F=S+C
However if
If F> (S + C) or F< (S + C), then arbitrage opportunity exists.
The futures price is calculated as follows:-
Example
Futures price of 100 gms of silver one-month down the line i.e. a contract
expiring 30th November is computed as follows:
What is the spot price of silver? The spot price of silver, S= Rs. 7000/kg
What is the cost of financing for a month? rT, cost of financing for a
month, 15% annualized = ln(1.15)*30/365
What are the holding costs? Assume storage cost, C = 0
The fair value of futures price, F=S*exp(rT) + C = 700 *

exp(ln(1.15)*30/365) = Rs. 708
If the contract was for a three-month period i.e. expiring on 30th January, the
cost of financing would increase the futures price. Therefore, the futures
price would be

F = 700 * exp(ln (1.15)*90/365) = Rs. 725
In case of calculation of the price of future contracts on equities there is no

cost of storage considered in holding paper, however equity paper comes
with a dividend stream, which is a negative cost if you are long on the stock,
and a positive cost if you are short the stock.
C = financing cost - dividends
Thus, a crucial aspect of dealing with equity futures as opposed to

commodity futures is an accurate forecasting of dividends. The better the
forecast of dividend offered by a security, the better is the estimate of the
futures price.
For example
What is the fair value of a two-month S&P CNX Nifty futures contract
expiring on April 25?
What is the annual dividend yield on S&P CNX Nifty index? The dividend
yield on S&P CNX Nifty, 2% annualized = ln(1.02)*60/365
What is the spot value of S&P CNX Nifty? Current value of S&P CNX
Nifty is 910
What is the cost of financing for two months? RT, cost of financing for a
month, 15% annualized = ln(1.15)*60/365
What are the holdings costs? Assume storage cost, C=0

The fair value of futures price, F=S*exp(ln(1+r-q))*T + C = 910 *

exp(ln(1.13)*60/365) = Rs. 928.47
Arbitrage helps investors to lend funds into the stock market, without
suffering the slightest risk. In the traditional methods of loaning money into
the stock market there is a price risk or credit risk involved. But through the
index futures market an investor can hedge both the price and credit risk.
The basic idea is simple. The lender buys all 50 stocks of S&P CNX Nifty
on the cash market, and simultaneously sells them at a future date on the
futures market. There is no price risk since the position is perfectly hedged.
There is no credit risk since the counter party on both legs is the National
Securities Clearing Corporation (NSCC) which supplies clearing services on
NSE. It is an ideal lending vehicle for entities which are shy of price risk and
credit
risk, such as traditional banks and the most conservative corporate treasuries.
Hedging the Price Risk
One buys a portfolio in which all the 50 stocks in S&P CNX Nifty are in
correct proportion, (i.e. where the money invested in each stock is
proportional to its market capitalization.) on the cash market. Simultaneously
sell S&P CNX Nifty futures of equal value. Now you are completely
hedged, so fluctuations in S&P CNX Nifty do not affect you.A few days
later, you will have to take delivery of the 50 stocks and pay for them. This
is the point at which you are "loaning money to the market".Some sell your
portfolio and reverse your future position. A few days later, you will have to

make delivery of the 50 stocks and receive money for them. This is the point
at which "your money is repaid to you".The interest rate that you will
receive is the difference between the futures price and the cash S&P CNX
Nifty plus any dividends earned minus the transactions costs (impact cost,
brokerage) in doing these trades.
Suppose the S&P CNX Nifty spot is at 1000 and the two-month futures are
at 1040. Suppose the transactions costs involved are 0.4% per month and
dividends over the two months are nil. Then the rate of return in loaning
money to the market is 1.5% (1040/1000 over two months is near 1.9% per
month. Subtract out 0.4% as transaction costs to get 1.5% per month.
On 1 August, S&P CNX Nifty is at 1200. A futures contract is trading with

27 August expiration for 1230. Ashish wants to earn this return (30/1200 for
27 days).
He buys Rs. 3 million of S&P CNX Nifty on the spot market. In doing this,
he places 50 market orders and ends up paying slightly more. His average
cost of purchase is 0.3% higher, i.e. he has obtained the S&P CNX Nifty
spot for 1204.
He sells Rs. 3 million of the futures at 1230. The futures market is extremely
liquid so the market order for Rs. 3 million goes through at near-zero impact
cost. He takes delivery of the shares and waits.
While waiting; a few dividends come into his hands. The dividends work out
to Rs. 7,000.

On 27 August, at 3:15, Ashish puts in market orders to sell off his S&P CNX
Nifty portfolio, putting 50 market orders to sell off all the shares. S&P CNX
Nifty happens to have closed at 1210 and his sell orders (which suffer impact
cost) goes through at 1207.
The futures position spontaneously expires on 27 August at 1210 (the value

of the futures on the last day is always equal to the S&P CNX Nifty spot).
Ashish has gained Rs. 3 (0.255) on the spot S&P CNX Nifty and Rs. 20
(1.63%) on the futures for a return of near 1.88%. In addition, he has gained
Rs. 7,000 or 0.23% owing to the dividends for a total return of 2.11% for 27
days, risk free.
Arbitrage also offers an investor the opportunity to lend securities to the

market and earn revenues. The mechanism is simple -you sell off your
certificates and contract to buy them back in the future at a fixed price. The
basic idea is quite simple. You would sell all 50 stocks in S&P CNX Nifty
and buy them back at a future date using the index futures. You would soon
receive money for the shares you have sold. You can deploy this money as
you like until futures expiration. On this date, you would buy back your
shares, and pay for them.
Suppose you have Rs. 5 million of the S&P CNX Nifty portfolio (in their
correct proportion, with each share being present in the portfolio with a
weight that is proportional to its market capitalization).
Sell off all 50 shares on the cash market. This can be done using a single
keystroke (offline order entry) using the NEAT software.

Buy index futures of an equal value.
A few days later, you will receive money and have to make delivery of the
50 shares.
Deploy this money at the riskless interest rate.
On the date that the futures expire, at 3:15 PM, put in 50 orders (using
NEAT again) to buy the entire S&P CNX Nifty portfolio.
A few days later, you will need to pay in the money and get back your
shares.
This is possible when the spot-futures basis (the difference between spot
S&P CNX Nifty and the futures S&P CNX Nifty) is smaller than the riskless
interest rate that you can find in the economy. If the spot-futures basis is
2.5% per month and you are loaning out the money at 1.5% per month, it is
not profitable. Conversely, if the spot-futures basis is 1% per month and you
are loaning out money at 1.2% per month, this stocklending could be
profitable.The stock lending rate is calculated as follows:- we assume that
transactions cost account for 0.4%. Suppose the spot-futures basis is x% and
suppose the rate at which funds can be invested is y%. Then the total return
is y - x - 0.4%, over the time that the position is held.
Example
Suppose Akash has Rs. 4 million of the S&P CNX Nifty portfolio which he
would like to lend to the market.

Akash puts in sell orders for Rs. 4 million of S&P CNX Nifty using the
feature in NEAT to rapidly place 50 market orders, in quick succession. The
seller always suffers impact cost; suppose he contains an actual execution at
1098.
A moment later, Akash puts in a market order to buy Rs. 4 million of the
S&P CNX Nifty futures. The order executes at 1110. At this point, he is
completely hedged.
A few days later, Akash makes delivery of shares and receives Rs. 3.99
million (assuming an impact cost of 2/1100)
Suppose Akash lends this out at 1% per month for two months.
At the end of two months, the money comes back to him as Rs. 4,072,981.
Translated in terms of S&P CNX Nifty, this is1098 * 1.012 or 1120.
On the expiration date of the futures, he puts in 50 orders, using NEAT,

placing market orders to buy back his S&P CNX Nifty portfolio. Suppose
S&P CNX Nifty has moved up to 1150 by this time. This makes shares
costlier in buying back, but the difference is exactly offset by profits on the
futures contract.
When the market order is placed, suppose he ends up paying 1153 and not
1150, owing to impact cost. He has funds in hands of 1120, and the futures
contract pays 40 (1150-1110) so he ends up with a clean profit, on the entire
transaction, of 1120+40-1153 = 7. On a base of Rs. 4 million, this is Rs.
25,400

Some of the risks associated with arbitrage
Risks in arbitrage in India
The basic principles of an arbitrage strategy are straightforward – if an asset

trades at two different prices across two markets, buy where it trades cheap
and sell where it trades expensive. This textbook arbitrage assumes a
frictionless world where arbitrage profits can be made without putting up
capital and without bearing any risk. In reality however, almost all arbitrage
requires capital and carries some risk. Shleifer & Vishny (1997) argue that
the textbook notion of arbitrage does not describe realistic arbitrage trades.
These discrepancies become particularly important when arbitrageurs
manage other people money. In India the risks become even more
pronounced due to existing market frictions.
Some of the risks associated with arbitrage
Execution lags
In the ideal world, trades placed to capture an arbitrage opportunity would be

instantaneously executed. However, in the real world, execution takes time.
Very often, there can be variations in price between the time an arbitrage
opportunity is entered into and the time the trade is actually executed on the
market. There could be a slow down or halt in trading due to illiquidity or
market congestion. This slippage naturally increases when markets are
volatile.
Interest rate uncertainty

An arbitrageur who enters into an arbitrage trade assumes that a particular

level of interest rate will remain constant. In the cash–and–carry strategy, the
arbitrageur assumes that he will be able to borrow at a certain rate till the
expiration of the futures contract. Similarly, in the reverse–cash–and–carry
strategy, he assumes that he will be able to invest the proceeds from the sale
of stocks at a particular rate of interest. However, the uncertainty about the
interest rate that will be charged on the capital that is deployed and the
returns that would be generated from the free funds deployed in the money
market, have a direct bearing on the profits generated from arbitrage
positions undertaken.
Futures spread
A futures spread position is constructed by purchasing a long position in

futures contract and selling a short position in another one simultaneously to
exploit the temporary disequilibrium between them. A spread trader
anticipates making a profit from correctly predicting the relative price
movements between two futures contracts. In general, trading spread is less
risky than trading straight positions because both contracts tend to move in
the same direction, so most of the market risk is offset by opposite positions.
Futures spreads can be divided into three varieties:

Inter - month,

Inter - commodity
Inter month or calendar spread consists of offsetting positions in two or more

maturities of the same futures contract..
For example, a spreader buys a March and sells June Chana futures. Such
spreads represent speculation on the basis which is the difference between
the futures price and the cash price.
Inter market spread is made up of offsetting positions in different futures

markets but the same commodity, usually in the same delivery month. An
inter market spread, for instance, can be constructed between the Chana
futures in MCX and NCDEX.
As the two futures have the same delivery date, they must both have the
same value of the underlying commodity at delivery. In fact, such spread
trading results in a risk less arbitrage, called spread arbitrage (Board and
Sutcliffe, 1996).
Inter commodity spread involves different commodities, whether in the same

delivery month or not. Not all such combinations can be considered as
spreads. There must be a reasonable linkage in the prices of the two
commodities, and the linkage must be direct for a spread to be a recognized
spread. Recognized inter commodity spreads include corn versus wheat,
soybeans versus end products (oil and meal), and gold versus silver.
The common thread running through such spreads is that each set of long
and short positions are affected by the same factors of supply and demand
(Herbst, 1992, p.31). The literature on inter commodity spreading trading is
not extensive owing to the complexity of the inter commodity spread

relationships. Inter commodity futures spreads are often constructed through

a production process. Refiners and processors use these spreads to deal with
operating risk, while arbitrageurs use them to get profits when the
commodity prices falls outside the no-arbitrage conditions implied by the
production process.
2.4 INTRODUCTION TO COMMODITY GOLD
In the last 6,000 years a little over125,000 tonnes of gold has been mined.
But this history is clearly divided into two eras - before and after the
California gold rush of 1848. Some calculations suggest that up until then

scarcely 10,000 tonnes of gold had been excavated since the beginning of
time. Thus more than 90% of the world’s gold has been produced since
1848. Early gold mining by the Egyptians, from around 2000 BC, (in the
areas which are now Egypt, the Sudan and Saudi Arabia), is thought to have
produced no more than 1 tonne annually. Perhaps 5-10 were produced
during the time of the Roman Empire, (mainly from Spain, Portugal and
Africa), but in the Dark and Middle Ages (500-1400 AD) production, from
the mountains of central Europe, probably fell back to less than a tonne.
Throughout all this time gold was also being mined and worked in South
America, where the goldsmith’s art reached very high standards. From the
middle of the 15th century the Gold Coast of West Africa (now known as
Ghana) became an important source of gold, providing perhaps 5-8 tonnes
per year. In the early 16th century the Spanish conquests of Mexico and Peru
opened up a further source of gold. By the close of the 17th century, 10-12
tonnes a year were provided by the Gold Coast and South America together.
Gold was first discovered in Brazil in the mid-16th century but significant
output did not emerge until the early 18th century. Towards the end of that
century, considerable supplies began to come from Russia as well, and
annual world production was up to 25 tonnes. By 1847, the year before the
Californian gold rush, Russian output accounted for 30-35 tonnes of the
world total of about 75 tonnes. The gold rushes, and later the South African
discoveries, radically altered the picture but Russian production continued to
rise, reaching around 60 tonnes in 1914. The crucial turning point in the
history of the gold mining industry came with the discovery at Sutter’s Mill
on the American River in January 1848, which ushered in a new age of gold.
Gold mining now took on a quite different dimension. Output from
California soared, reaching 77 tonnes in 1851 (the year gold was also

discovered in Australia) and peaked in 1853 at 93 tonnes. The Australian

find triggered a gold rush there, which reached a climax in 1856 with 95
tonnes. World production at this time climbed to 280 tonnes in 1852 and
thence to almost 300 tonnes as Australia flourished. Production was lifted on
to an even higher plane in 1886 with the discovery of the huge gold reefs in
the Witwatersrand Basin of South Africa. Gold had first been found in
eastern Transvaal in 1873, but from the outset it was obvious that the
Witwatersrand deposits were of a completely different order. South Africa
ousted the United States as the world’s premier producer in 1898, a position
it has held almost continuously ever since. From 1884, the first year of
recorded output, South Africa has been the source of close to 40% of all the
gold ever produced. The most productive year was 1970 when over 1,000
tonnes were mined, representing more than three-quarters of western world
output. While the South African gold mining industry was taking off, two
further gold rushes occurred. In 1893 gold was found at Kalgoorlie in
Western Australia, since when over 1,300 tonnes have been extracted from
Kalgoorlie’s "Golden Mile" alone. Australian output peaked in 1903 at 119
tonnes, a level not reached again until 1988. And in 1896, alluvial deposits
were found in the Yukon territories of Canada, initiating the Klondike gold
rush, which yielded 75 tonnes over the next three years. By the turn of the
century, world production was averaging 400 tonnes annually.
Through much of the twentieth century the gold mining industry was in
decline in many countries. There was a brief revival after the rise in the price
of gold in the late 1930s; in 1940 United States production was 155 tonnes
and the following year, Canadian output reached 172 tonnes, a record which
stood until 1991. However, it was not until the dramatic price rise of 1980
that the industry experienced another transformation. Old mines were

revived and exploration activity exploded. Western world production almost

doubled during the 1980s, rising from 962 tonnes in 1980 to around 1,744
tonnes ten years later. A new era of gold rushes occurred, with prospectors
swarming to alluvial deposits in various countries including Brazil,
Venezuela and the Philippines. Serra Pelada in Brazil proved to be one of the
richest placer deposits ever found, yielding 13 tonnes in 1983 alone.
The introduction of new technologies such as heap leaching, carbon-in-pulp
recovery and mobile milling plants also contributed to the boom. They
enabled the development of orebodies that would previously have been
considered uneconomic, notably in Nevada, USA, which accounted for over
60% of US production in the late 1980s, and in Western Australia.
Australian output is over 240 tonnes a year, 70% coming from Western
Australia, and is forecast to increase further by the end of the century.
Canadian output trebled in the years following the gold price rise, from 51.6
tonnes in 1980 to peak at 176.7 tonnes in 1991. The industry there is more
traditional with underground operations rather than open pits. The most
significant new discovery was the Hemlo field in northern Ontario whose
three mines produce nearly 35 tonnes annually. The potential for the
development of future mines is promising, particularly low-grade epithermal
deposits on the Pacific "rim of fire", in the greenstone belt of South America,
in sub-Saharan Africa (especially Ghana) and in such CI S republics as
Kazakhstan and Uzbekistan. Although the industry faced major challenges in
the early 1990s, with a lower gold price and tighter environmental controls,
improved prices after 1993 provided new incentives. The period of rapid
growth is over, but with less South African output, worldwide production is
expected to remain fairly stable for the rest of the century

Frequently Asked Questions

1. What is Gold and why is its chemical symbol Au?
Gold is a rare metallic element with a melting point of 1064 degrees
centigrade and a boiling point of 2808 degrees centigrade. Its chemical
symbol, Au, is short for the Latin word for gold, 'Aurum', which literally
means 'Glowing Dawn'. It has several properties that have made it very
useful to mankind over the years, notably its excellent conductive properties
and its inability to react with water or oxygen.
2. Where does the word Gold come from?
The word gold appears to be derived from the Indo-European root 'yellow',
reflecting one of the most obvious properties of gold. This is reflected in the
similarities of the word gold in various languages: Gold (English), Gold
(German), Guld (Danish), Gulden (Dutch), Goud (Afrikaans), Gull
(Norwegian) and Kulta (Finnish).
3. How much gold is there in the world?
At the end of 2001, it is estimated that all the gold ever mined amounts to
about 145,000 tonnes.
4. Why is gold measured in carats?
This stems back to ancient times in the Mediterranean /Middle East, when a
carat became used as a measure of the purity of gold alloys (see next
Question 5). The purity of gold is now measured also in terms if fineness, i.
e. parts per thousand. Thus 18 carats is 18/24th of 1000 parts = 750 fineness.
5. What is a Carat?
A Carat (Karat in USA & Germany) was originally a unit of mass (weight)
based on the Carob seed or bean used by ancient merchants in the Middle
East. The Carob seed is from the Carob or locust bean tree. The carat is still
used as such for the weight of gem stones (1 carat is about 200 mg). For

gold, it has come to be used for measuring the purity of gold where pure
gold is defined as 24 carats. How and when this change occurred is not clear.
It does involve the Romans who also used the name Siliqua Graeca
(Keration in Greek, Qirat in Arabic, now Carat in modern times) for the bean
of the Carob tree. The Romans also used the name Siliqua for a small silver
coin, which was one-twentyfourth of the golden solidus of Constantine. This
latter had a mass of about 4.54 grammes, so the Siliqua was approximately
equivalent in value to the mass of 1 Keration or Siliqua Graeca of gold, i.e
the value of 1/24th of a Solidus is about 1 Keration of gold, i.e 1 carat.
6. Who owns most gold?
If we take national gold reserves, then most gold is owned by the USA
followed by Germany and the IMF. If we include jewellery ownership, then
India is the largest repository of gold in terms of total gold within the
national boundaries. In terms of personal ownership, it is not known who
owns the most, but is possibly a member of a ruling royal family in the East.
7. If all the gold was laid around the world, how far would it stretch?
If we make all the gold ever produced into a thin wire of 5 microns
(millionths of a metre) diameter – the finest one can draw a gold wire, then
all the gold would stretch around the circumference of the world an
astounding 72 million times approximately!
8. How much new gold is produced per year?
In 2001, mine production amounted to 2,604 tonnes or 67% of total gold
demand in that year. Gold production has been growing for years, but the

real acceleration took place after the late 1970s, when output was in the
region of 1,500tpa. This year output will fall short of production levels in
2001. This is partly for specific operational reasons at some of the larger
mines (Grasberg and Porgera), along with lower grades at some of the
operations in Nevada. The reduction in exploration and development
expenditure over the past five years is leading a number of analysts to
suggest that, with other operations nearing the end of their lives, global
production is likely to drop slightly over the next two to three years subject
always of course to price.
9. How much does it cost to run a gold mine?
Gold mining is very capital intensive, particularly in the deep mines of South
Africa where mining is carried out at depths of 3000 meters and proposals to
mine even deeper at 4,500 meters are being pursued. Typical mining costs
are US $238/troy ounce gold average but these can vary widely depending
on mining type and ore quality. Richer ores mined at the surface (open cast
mining) is considerably cheaper to mine than underground mining at depth.
Such mining requires expensive sinking of shafts deep into the ground.
10. How does a gold mine work?

The gold-containing ore has to be dug from the surface or blasted from the
rock face underground. This is then hauled to the surface and milled to
release the gold. The gold is then separated from the rock (gangue) by
techniques such as flotation, smelted to a gold-rich doré and cast into bars.
These are then refined to gold bars by the Miller chlorination process to a
purity of 99.5%. If higher purity is needed or platinum group metal
contaminants are present, this gold is further refined by the Wohlwill

electrolytic process to 99.9% purity. Mine tailings containing low amounts

of gold may be treated with cyanide to dissolve the gold and this is then
extracted by the carbon in pulp technique before smelting and refining.
12. How big is a tonne of gold?
Gold is traditionally weighed in Troy Ounces (31.1035 grammes). With the
density of gold at 19.32 g/cm3, a troy ounce of gold would have a volume of
1.64 cm3. A tonne of gold would therefore have a volume of 51, 760 cm3,
which would be equivalent to a cube of side 37.27cm (Approx. 1' 3'').
Indian Government Policy for Bullion

• 1947 - Complete ban on Import of Bullion
• 1956 - Mysore Government controlled production of Gold
• 1962 - Govt. floated 15 years 6.5% Gold Bond by which around 16.30 MT
Gold was collected
• 1962 - Ban on Forwarding Trading
• 1963 - Declaration of Gold holding made compulsory for individual.
Restriction on manufacturing of jewellery above 14 Ct.
• 1964 - Restriction on private trade, Gold handling canalised by Govt only
• 1965 - Floating of 15 years 7% Gold Bonds (6.1 MT Gold Collected)
• 1965 - Floating of 15 years 6.5% National Defence Gold Bond (13.7 MT
Gold Collected)
• 1966 - Restriction on manufacturing of jewellery above 14 Ct removed
• 1966 - Ceiling on holding of Gold by individual
• 1966 - Control imposed on refinery & dealer
• 1968 - Formulation of Gold Control Act, 1968

• 1975 - Introduction of Voluntary disclosure of Income and Wealth

(amendment) Ordinance 1975 for declaration of income and wealth in the
form of Gold
• 1978 - Govt. auctioned Gold through RBI to control inflation and banned
further auction
• 1991 - Amendment brought into Gold Control Act permitting holding of
Gold not only in the form of jewellery but also in the form of bars
• 1991 - Import of Gold against SIL permitted
• 1991 - NRI to bring 5-Kgs Gold against payment of Custom duty @
Rs.220/= per 10 Gram
• 1992 - Recommendation by RBI to Govt for Formation of Gold
Management corporation
• 1992 - Proposal of formation of Gold Bank rejected
• 1992 - Formation of Gold Standing committee to keep track of movement
of Gold and other precious metals
• 1993 - 41 MT of Gold mobilised under gold Bond Scheme
• 1997 - Gold Import put under OGL through nominated agencies
• 1997 - Gold import by NRI increased to 10 Kgs.
• 1998 – Custom duty increased to Rs.250/- per 10 Gram of Gold against
Rs.220/=
• 1999 - Gold Bond Scheme announced by RBI (15/9/99)
• 2003 – Custom duty reduced to Rs.100/- per 10 Gram on Gold bearing
engraved serial number and weight expressed in metric units and gold coins.
TTB and ornaments continue to attract higher duty of Rs.250/= per 10
Grams
Fifteen Fundamental Reasons for bullish run of Gold

1. Global Currency Debasement:

The US dollar is fundamentally & technically very weak and should fall
dramatically. However, other countries are very reluctant to see their
currencies appreciate and are resisting the fall of the US dollar.
Thus, we are in the early stages of a massive global currency debasement,
which will see tangibles, and most particularly gold, rise significantly in
price.
2. Investment Demand for Gold is Accelerating:
When the crowd recognizes what is unfolding, they will seek an alternative
to paper currencies and financial assets and this will create an enormous
investment demand for gold. To facilitate this demand, a number of new
vehicles like Central Gold Trust and gold Exchange Traded Funds (Elf's) are
being created.
3. Alarming Financial Deterioration in the US:
In the space of two years, the federal government budget surplus has been
transformed into a yawning deficit, which will persist as far as the eye can
see. At the same time, the current account deficit has reached levels which
have portended currency collapse in virtually every other instance in history.
4. Negative Real Interest Rates in Reserve Currency (US dollar):
To combat the deteriorating financial conditions in the US, interest rates
have been dropped to rock bottom levels, real interest rates are now negative
and, according to statements from the Fed spokesmen, are expected to
remain so for some time. There has been a very strong historical relationship
between negative real interest rates and stronger gold prices.
5. Dramatic Increases in Money Supply in the US and Other Nations:
US authorities are terrified about the prospects for deflation given the
unprecedented debt burden at all levels of society in the US. Fed Governor

Ben Bernanke is on record as saying the Fed has a printing press and will use
it to combat deflation if necessary. Other nations are following in the US's
footsteps and global money supply is accelerating. This is very gold friendly.
6. Existence of a Huge and Growing Gap between Mine Supply and
Traditional Demand:
Gold mine supply is roughly 2500 tonnes per annum and traditional demand
(jewellery, industrial users, etc.) has exceeded this by a considerable margin
for a number of years. Some of this gap has been filled by recycled scrap but
central bank gold has been the primary source of above-ground supply.
7. Mine Supply is Anticipated to Decline in the next Three to Four
Years:
Even if traditional demand continues to erode due to ongoing worldwide
economic weakness, the supplydemand imbalance is expected to persist due
to a decline in mine supply. Mine supply will contract in the next several
years, irrespective of gold prices, due to a dearth of exploration in the post
Bre-X era, a shift away from high grading which was necessary for survival
in the sub-economic gold price environment of the past five years and the
natural exhaustion of existing mines.
8. Large Short Positions:

To fill the gap between mine supply and demand, central bank gold has been
mobilized primarily through the leasing mechanism, which facilitated
producer hedging and financial speculation. Strong evidence suggests that
between 10,000 and 16,000 tonnes (30- 50% of all central bank gold) is
currently in the market. This is owed to the central banks by the bullion
banks, which are the counter party in the transactions.

9. Low Interest Rates Discourage Hedging:

Rates are low and falling. With low rates, there isn't sufficient contango to
create higher prices in the out years. Thus there is little incentive to hedge,
and gold producers are not only hedging, they are reducing their existing
hedge positions, thus removing gold from the market.
10. Rising Gold Prices and Low Interest Rates Discourage Financial
Speculation on the Short Side:
When gold prices were continuously falling and financial speculators could
access central bank gold at a minimal leasing rate (0.5 - 1% per annum), sell
it and reinvest the proceeds in a high yielding bond or Treasury bill, the trade
was viewed as a lay up. Everyone did it and now there are numerous stale
short positions. However, these trades now make no sense with a rising gold
price and declining interest rates.
11. The Central Banks are Nearing an Inflection Point when they will be
Reluctant to Provide more Gold to the Market:
The central banks have supplied too much already via the leasing
mechanism. In addition, Far Eastern central banks who are accumulating
enormous quantities of US dollars are rumored to be buyers of gold
to diversify away from the US dollar.
12. Gold is Increasing in Popularity:

Gold is seen in a much more positive light in countries beginning to come to
the forefront on the world scene. Prominent developing countries such as
China, India and Russia have been accumulating gold. In fact, China with its
1.3 billion people recently established a National Gold Exchange and relaxed
control over the asset. Demand in China is expected to rise sharply and could
reach 500 tonnes in the next few years.

13. Gold as Money is Gaining Credence:

Islamic nations are investigating a currency backed by gold (the Gold
Dinar), the new President of Argentina proposed, during his campaign, a
gold backed peso as an antidote for the financial catastrophe which his
country has experienced and Russia is talking about a fully convertible
currency with gold backing.
14. Rising Geopolitical Tensions:
The deteriorating conditions in the Middle East, the US occupation of Iraq,
the nuclear ambitions of North Korea and the growing conflict between the
US and China due to China's refusal to allow its currency to appreciate
against the US dollar headline the geopolitical issues, which could explode
at anytime. A fearful public has a tendency to gravitate towards gold.
15. Limited Size of the Total Gold Market Provides Tremendous

Leverage:
All the physical gold in existence is worth somewhat more than $1 trillion
US dollars while the value of all the publicly traded gold companies in the
world is less than $100 billion US dollars. When the fundamentals
ultimately encourage a strong flow of capital towards gold and gold equities,
the trillions upon trillions worth of paper money could propel both to
unfathomably high levels.



Domestic Scenario
India is the world's largest consumer of gold. According to Gold Field
Minerals Service, in 2001 it absorbed around 700 tons from the world
market, compared to just 320 tons in 1994; that is without taking into
account the recycling of scrap from the immense stock of close to 10,000

tons built up on the sub-continent in the last few hundred years, or gold
imported for jewellery manufacture and re-export.
Background
An historical perspective is useful in understanding why India has been for
so long, and still is, a great market for gold – and also for silver. India, the
saying goes, has always been 'a sink for precious metals'. Both metals are
closely woven into the social fabric, especially in the rural areas where they
are the basic form of saving. Ever since Roman times the 'east' has been a
source of silk and spices, and later diamonds, tea and cotton, sought by
Mediterranean and European merchants. The first gold ducats struck by the
mint in Venice in 1285, which became a staple form of international
payment for over three hundred years, went to the Levant and on to India.
The gold and silver from the Americas, after Columbus discoveries, mostly
just passed through Spain on its way to the east. In the 17th century the
Dutch and English East India companies sent gold and silver to India and
Java to pay for goods. The English East India Company shipped 20 tons,
almost three years' world output then, to India between 1660 and 1690.
Mocatta, the oldest member of the London gold market, first sent gold to
India in 1676 to pay for diamonds, the beginning of a long relationship
between London and Bombay (now Mumbai) merchants. During the
American Civil War in the 1860s India imported almost 420 tons in payment
for cotton exports because of disrupted American cotton crops. Only once
has India been a significant dishoarder, when 1,244 tons was shipped out in
the 1930s due to distress selling from famine and the new high price for gold
(up from $20.67 to $35). In recent times India has remained faithful to gold.
While demand has increased substantially since the early 1980s due to

general economic growth, annual consumption is dictated both by the

monsoon, with its effect on the harvest, and the marriage season. In an
auspicious year there are upwards of ten million marriages, at which
between 20 and 200 grams may be worn by the bride. The status of a family
in its community is still often judged by the gold exchanged as the bride's
dowry. The official import of gold into India, however, was banned from
1947. The Gold Control Act of 1962 also forbade private holding of gold
bars. With local production of less than two tons from two small mines,
Bharat and Hutti, together with recycling, the main demand was met by
smuggling from the regional markets of Dubai, Singapore, and Hong Kong,
usually as ten tola bars, uniquely preferred in India. The smuggling was a
highly professional business, involving up to 200 tons, encouraged by a
premium of 30 per cent over the London price. Over 3,000 tons has entered
India unofficially since 1947. Until 1990, the Gold Control Act forbade the
private holding of gold bars in India. There was physical investment in
smuggled ten tola bars, but it was limited and often amounted to keeping a
few bars ready to be made into jewellery for a family wedding. Gold
investment essentially was in 22 carat jewellery. In the 1990s, however,
deregulation of the market has finally taken place, ushering in the modern
market of today. Since 1990, investment in small bars, both imported ten
tolas and locally-made small bars, which have proliferated from local
refineries, has increased substantially. GFMS estimate that investment has
exceeded 100 tons in some years, although it is hard to segregate true
investment from stocks held by the 16,000 or more gold dealers spread
across India. Certainly gold has been used to conceal wealth, especially
during the mid-1990s, when the local rupee price increased steadily. It was

also augmented in 1998 when over 40 tons of gold from bonds originally
issued by the Reserve Bank of India were restituted to the public.
India and Global Gold Economy
Estimates vary, but it is believed that at least 13,000 tons of gold rest in
India – or approximately nine per cent of the world’s cumulative mine
production. This should be viewed against our share in land area at 2.4 per
cent, in population at 16.4 per cent and in GDP at 1.2 per cent. Mining and
production of gold in India is negligible, now placed around 2 tons as against
a total world production of about 2,272 tons in 1995. During 1990-95,
India’s share in global gold demand is placed at about 402 tons (16.4 per
cent) a year, including imports into India. This should be viewed against its
share of 0.6 per cent in world trade. On the other hand, India exported about
23 tons in 1995 accounting for a negligible part of world trade. The world
gold trading is concentrated in the U.K., Switzerland, Dubai, Hong Kong,
etc. and India does not figure among them. Facilities for refining, assaying,
making them into standard bars in India, as compared to the rest of the
world, are insignificant, both qualitatively and quantitatively. Of the total
gold reserves estimated to be on the books of the Central Banks (subject to
some Banks not declaring them) of 28,225.4 tons, the holdings of Reserve
Bank of India are only a modest 397.5 tons. Government of India has in its
possession some amount of gold mainly out of confiscation of smuggled
gold remaining after transferring it to the Reserve Bank of India from time to
time. RBI is neither a speaking purchaser nor a seller of gold reserves,
unlike many other countries including some developing economies,

especially in Asia. A part of gold was used by RBI (in parallel with gold
with Government) for raising foreign currency resources during the balance
of payments crisis in the early 'nineties. These overseas gold holdings are
being used as part of reserve management to yield a return.
Use of gold as a financial product is virtually non-existent in India except to

a limited extent of issuing ‘Gold Bonds’ by Government of India from time
to time coupled with occasional tax amnesty. Commercial banks, however,
accept gold as security, but no advances are permitted for purchase of gold
by their customers for non-productive use.
Gold as Investment Vehicle
preferred investment behind bank deposits. India is the world’s largest
consumer of gold in jewellery (much of which is purchased as investment).
The hoarding tendency is well ingrained in Indian society, not least because
inheritance laws in the middle of the twentieth century lent a great
desirability to anonymity. Indian people are renowned for saving for the
future and the financial savings ratio is strong, with a ratio of financial
assets-to-GDP of 93%. Gold’s circulates within the system and roughly 30%
of gold jewellery fabrication is from recycled pieces. India is typically also
the largest purchaser of coins and bars for investment (>80tpa), although last
year it had to concede first place to Japan in the wake of the heavy buying in
the first quarter due to fears for the stability of the Japanese banking system.
In 1998-2001 inclusive, annual Indian demand for gold in jewellery
exceeded 600 tons; in 2002, however, due to rising and volatile prices and a

poor monsoon season, this dropped back to 490 tons, and coin and bar
demand dropped to 67 tons. Indian jewellery offtake is sensitive to price
increases and even more so to volatility, although this decline in tonnage
since 1998 is also due in part to increasing competition from white and
brown goods and alternative investment vehicles, but is also a reflection of
the increase in price. The Indian bride’s “Streedhan”, the wealth she takes
with her when she marries and which remains hers, is still gold, however
(thus giving gold an important role in the “empowerment” of women in
India). Local expenditure, in terms of the value of the gold content
purchased, peaked at Rs 302 billion (Rs 311 per capita) in 1998, when total
Indian demand was almost 775 tons, and since then has dropped to Rs 279
Bn in 2002 (Rs 284 per capita), a decline of almost 9%. This peak in 1998
came in the wake of the main liberalisation step, which was the freeing of
imports in November 1997. Typically, India accounts for 20% of global gold
offtake in any one year. Its GDP (as measured by the World Bank) in 2001
was 1.5% of the world’s total, ranking twelfth – although if this is measured
on Purchasing Power Parity, then India ranks fourth with 6.4% of the world
total. While changes in total demand per capita, in terms both of tonnage and
expenditure show how Indian jewellery demand in 2002 compared with the
rest of the world in terms of offtake per capita and against GDP. Offtake per
capita is still very low, reflecting the widespread distribution of the rural
population and the social infrastructure of the country (the rural population
accounts for approximately 70% of national gold demand), but offtake in
terms of GDP is high. At just over one gramme of demand per thousand
dollars of GDP, India stands third in the world, behind only the UAE (just
over two grammes) and Bahrain (almost 1.5g) – although these two are both
enhanced by tourist purchases. It was not always thus. As recently as 1991,

Indian gold demand was a little over 230 tons, or only 8% of world offtake.
The deregulation of the market during the 1990s brought about a dramatic
change. Jewellery demand increased from 208 tons in 1991 to peak at 658
tons in 1998, while demand for investment bars grew from ten tons in 1991
to 116 tons in 1998, and registered 85 tons in 2002. These figures reflect
average growth rates of 16% and 30% per annum respectively between 1991
and 1998. While both have eased since 1998, there is still a fascination in
India for gold and there is significant scope for the development of further
demand in the country. In the cities, however, gold is having to compete
with the stock market, investment in internet industries, and a wide range of
consumer goods. In the rural areas 22 carat jewellery remains the basic
investment. The World Gold Council, which was involved in the
deregulation of the market in the 1990s, continues to work closely with
Indian gold market stakeholders to foster increased demand, partly through
the development of new gold instruments that can be bought through banks,
as an additional set of distribution channels, although the rural community
does still tend to prefer to use jewelers.
Jewellery
India is the world's foremost gold jewellery fabricator and consumer with
fabricator and consumption annually of over 600 tons according to GFMS.
Measures of consumption and fabrication are made more difficult because
Indian jewellery often involves the re-making by goldsmiths of old family
ornaments into lighter or fashionable designs and the amount of gold thus
recycled is impossible to gauge. Estimates for this recycled jewellery vary
between 80 tons and 300 tons a year. GFMS estimates are that official gold
bullion imports in 2001 were 654 tons.

Graph 6: Indian Gold Jewellery Exports
Exports have increased dramatically since 1996, and in 2001 stood at over
60 tons. The US accounted for about one third of total official exports.
Manufacturers located in Special Export Zones can import gold tax-free
through various registered banks under an Export Replenishment scheme.
Recent Developments in India
World Gold Council (WGC) has estimated that the annual Indian demand for
the precious metal in recent years has been in excess of 800 tons. Most of it

appears to be meant for jewellery fabrication, and the rest, estimated at 10 to

15 percent, is possibly meant to meet demand on account of investment and
industrial processes. A major step in the development of gold markets in
India was the authorization in July 1997 by the RBI to commercial banks to
import gold for sale or loan to jewellers and exporters. Initially, 7 banks
were selected for this purpose on the basis of certain specified criteria like
minimum capital adequacy, profitability, risk management
expertise,previous experience in this area, etc. The number of banks later
went upto 18. On a review, since five banks had not evinced adequate
interest in this business in terms of activity, the RBI did not find it
appropriate to renew their licences for this purpose. At present, 13 banks are
active in the import of gold. The quantum of gold imported through these
banks has been in the range of 500 tons per year. Import of gold by banks
authorised by the RBI has succeeded to a large extent in curbing illegal
operations in gold and in foreign exchange markets. It has also resulted in
reducing the disparity between international and domestic prices of gold
from 57 per cent during 1986 to 1991 to 8.5 per cent in 2001. The import
duty on gold, which was Rs.220 per ten grams upto January 1999, was
increased to Rs.400 per ten grams, and with effect from April 2001 has been
reduced to Rs.250 per ten grams. The estimates of duty realised from gold
imports indicate an annual amount varying from about Rs. 1,000 to Rs.
2,000 crore per annum since 1997.
Even though the country consumes more than 800 tons of the metal every
year, the system of assaying and hallmarking has not gained the desired
importance. The low quality of gold jewellery being sold in the country and
the resultant losses being incurred by the consumers are being recognized
now. Recent surveys conducted by the Bureau of Indian Standards (BIS)

jointly with Central Consumer Protection Council in 5 major cities reveal

that more than 80 per cent of the jewellery being sold in the market was of
lower purity than claimed and charged for. In some cases, the gold articles
sold were 38.6 per cent short in purity in monetary terms. The low purity
results in a loss of around 16 per cent to gold jewellery. In the recent past,
RBI has been actively pursuing the issue of upgrading the quality of trade
and products through a system of assaying and hallmarking with
Government of India and BIS. The major objectives of introducing a proper
assaying and hallmarking system in the country are enabling consumer
protection, developing export competitiveness of the gold jewellery industry,
introducing gold based financial products, which will help in mopping up the
vast dormant gold resources with the domestic sector and developing India
into a leading gold market centre in the world. The Government of India
announced the Gold Deposit Scheme in 1999 and RBI issued guidelines to
the banks intending to launch the scheme in October 1999. Five banks have
launched their schemes under the guidelines and the quantum of gold
mobilised so far has been about 7 tonnes. Unfortunately, the scheme has not
evoked the expected response. A number of reasons can be cited for the low
response, prominent among them being depositors’ losing the making
charges spent on jewellery (as the banks would convert them into primary
form before accepting as deposits), the low caratage of jewellery, low rate of
return on deposit (as seen by the depositors) and the absence of any amnesty.
Gold Futures in India
Why Gold Futures in India?

The Indian gold market has always been linked to international gold market
in view of large requirements of imported gold. Given the inevitable
integration between the global and local gold markets, there is considerable
merit in following the global practice of integration of gold markets with
financial markets and introducing forward trading.
Suitability of Gold Futures

Uncontrolled and uncertain supply
Besides new mining supply, the available supply of gold in the market is
made up of three major ‘above-ground sources’. In recent years, the growth
in gold supply has come from these ‘aboveground’ sources.
a. reclaimed scrap, or gold reclaimed from jewelry and other industries such
as electronics and dentistry;
b. official, or central-bank, sales
c. gold loans made to the market from official gold reserves for borrowing
and lending purposes.
Following the growing pattern of liberalisation of the gold trade since the
early 1990's the local markets and exchanges of countries like India and
Turkey can flourish legitimately. Consequently the pattern of gold flows
from mine to end-user, whether in jewellery, industry or investment, is in
1994; that is without taking into account the recycling of scrap. In India the
rural population accounts for approximately 70% of national gold demand.
Thus India’s annual gold consumption is dictated both by the monsoon, with
its effect on the harvest, and the marriage season. Between 1998-2001
annual Indian demand for gold in jewellery exceeded 600 tons, however in
2002, due to rising and volatile prices and a poor monsoon

season, this dropped back to 490 tons, and coin and bar demand dropped to
67 tons. Indian jewellery off-take is sensitive to price increases and even
more so to volatility, although this decline in tonnage since 1998 is also due
in part to increasing competition from white and brown goods and
alternative investment vehicles, but is also a reflection of the increase in
price. In the cities, however, gold is having to compete with the stock
market, investment in internet industries, and a wide range of consumer
goods. In the rural areas 22 carat jewellery remains the basic investment.
Indian gold jewellery exports have increased dramatically since 1996, and in
2001 stood at over 60 tons. The major factors influencing demand for gold in
India are,
a. generation of large market surplus in rural areas as a result of all round
increase in agricultural production
b. unaccounted income/wealth generated mainly in the service sector
c. domestic gold prices relative to those of ordinary shares and international
gold prices
Wide and unforeseen price variation
Economic forces that determine the price of gold are different from, and in
many cases opposed to, the forces that influence most financial assets.
Econometric studies indicate that the price of gold is determined by two sets
of factors: ‘supply’ and ‘macro-economic factors’. Supply and the gold price
are inversely related. In the case of ‘macro-economic factors’, the U.S. dollar
tends to be inversely related to gold, while inflation and gold tend to move in
tandem with each other. Also, high low-interest rates are generally a positive
factor for gold. Overall, the impact of all of these determinants on the gold
price is judged to be neutral-to-positive at this time. Also there is low to
negative correlation between returns on gold and those on stock

markets
India has always been a significant player in the international gold market
and had a thriving bullion spot and futures market till the enactment of the
Gold Control Act in 1963 which debarred the general public from holding or
trading in gold. Since 1990, the government has been taking a number of
steps to reform this sector and ensure that India benefits from the demand
influence it has on the gold business internationally. The liberalisation of the
gold sector has been in stages; first allowing a number of banks to import
gold – braking the monopoly of the State Trading Corporations; then
considerably reducing the import duty – destroying a lucrative parallel
smuggling channel and now allowing traders, manufacturers as well as
investors to trade in gold futures in India itself. Since the liberalization of the
gold market in India, Indians buy on an average of about 600 tonnes or Rs
40,000 crores worth of gold every year in the form of jewellery &
investments. In addition, another 200 tonnes of gold passes through the
hands of the Indian jeweller for conversion into new pieces of jewellery.
India, USA, Middle East, Japan, China account for 55 percent of the global
gold consumption.
The Indian public is in control of an estimated seven percent or 13,000

tonnes (Rs 780,000 crores) of the global stock of gold. This is equal to the

total savings by individuals in the Indian Banking sector! With the Indian
public allowed to invest in only Indian Rupee denominated asset, and with
limited alternate assets available to the general public for purposes of
investment, over the years gold has provided the Indian investor an excellent
asset to hedge against inflation and also to serve the purpose of a currency
hedge. Gold as an Inflation Hedge Analysis of Gold Price Index with the
Indian Wholesale Price Index, over a 30 years period, demonstrates the
maintenance of the purchasing power of gold during the high inflationary
environment that the Indian investor has passed through.
Analysis of the prices of gold in the developed countries such as USA,

Britain, Germany, France and Japan over very long period of time has shown
that gold’s value may fluctuate in the short term but consistently returns to
its historic purchasing power parity with respect to other goods.
GOLD – an Effective Currency Hedge

Gold is also a currency hedge – it can be shown statistically that a fall in

dollar against other key currencies tends to result in a rise in the dollar price
of gold. At a time when there is growing concern over the extent of the US
current account deficit and hence fears of further dollar depreciation, this is a
quality worth noting. Gold - Price Movements in 2003
Looking at the dollar price movements in the beginning of 2002 the price of
gold was $ 280 per ounce and by the beginning of 2003, the price moved up
by 25 percent to $ 350 per ounce. Over 2003, the gold prices have moved
up further by 17 percent and hasbeen nudging the $ 410 per ounce levels in
December 2003. In dollar terms the gold prices have moved up by over 42
percent in the last two years and by 47 percent over the last three years.
Theprimary contributor to the increase in the gold prices has been the
inverse correlation of the Gold prices to the value of the dollar. The
geopolitical
tensions have only added to the volatility and the firmingup of the gold
prices. In Rupee terms too Gold prices have firmed up by 24 percent during
the year 2002 and a further seven percent during the year 2003.

Gold is currently at crossroads. There is a growing interest in gold as an

alternative to mainstream financial assets. By no means all investors are
convinced that the US and World economies are in sustainable recovery
mode. Some of the most astute international financial managers are turning
to gold, as well as other currencies and commodities, as top investments
while inflation picks up and the dollar deteriorates in value. Low short-term
interest rates mean holding cash is an unattractive option and hence
supporting investments in alternate assets. Finally, the international political
environment continues to create a great deal of anxiety. This suggests the
external factors will remain supportive for gold investment.The supply side
is expected to remain fairly inelastic because new mine supply have long
gestation periods and the de-hedging of gold by the produces is expected to
continue. Gold sales by the Reserve Banks of various countries, is also
expected to remain regulated within the Central Bank Gold agreement Hence
the critical factor in the supply side of the equation will be the re-sale of
above the groundstockpile of gold held by household in countries such as
India, Middle East and some of the South East Asian countries. Price spikes
in 2002 and the first quarter of 2003 –during the Iraq war- had resulted in
increasing supply of old gold into the Indian & Middle East markets,
however such price related disinvestments behaviour has been absent during

the recent price spiral in November/December 2003. One of the strengths of

gold as an Asset class is that its price is not determined by the performance
of any company or economy and there is significant above the ground stocks
- estimated at 147,800 tonnes (present market value Rs 88,68,000 crores)
hence the gold prices move in a more orderly fashion as compared to any
other commodity or financial asset. Should Investors still Invest in Gold?
Gold as a Portfolio Diversifier Gold is an ideal diversifier because the
economic forces that determine the prices of gold are different from, and in
many cases opposed to the forces that influence most traditional financial
assets such as shares, bonds and even property.
A number of Professional Financial Planners have been using the Asset

Allocation Model to advise the clients on the quantum of investments that
should go into different asset classes such as Shares, Bonds, Cash, Gold,
Property etc. in order to maximise the invested portfolio’s return for a given
level of risk or volatility in the portfolio’s valuation. Ibbotson Associates –
an international financial consultant, have done some groundbreaking
research on the performance of an investment portfolio with an addition of
GOLD and other “hard assets”. By constructing a Global Hard Asset Index
based on gold mines, metals, timber and real estate, the researchers found

that Moderate or a Balanced investor would benefit from a 10 percent

allocation to “Hard Assets” while an Aggressive investor would benefit from
a 25 percent allocation. Reducing a portfolio’s volatility or risk by dding
gold (and other Hard Assets) allows the portfolio manager to rearrange the
asset mix to include a greater weighting in higherreturn, higher-volatility
assets hence enhancing the performance of the portfolio without increasing
the risk. Although the gold market is relatively small compared to the stock
and bond markets, it is a deep and liquid market and is active 24- hours per
day. In addition trading spreads are narrow and subject to market conditions,
tend not to widen until sizeable volume is being requested. In addition trades
of up to five tonnes ($ 65 million) have been executed through the market
without having any significant impact on price.
The much-hyped launch of gold futures after a long gap of four decades
brought many debates and forums to the disussion table. Such trading was
discontinued after the Indo-Chinese war of 1962 when the Gold Control Act
came into effect.
For centuries, gold has meant wealth, prestige, and power, and its rarity and
natural beauty have made it precious to more men and women alike. Often
when paper money has failed, we have turned to gold as the only true source
of monetary wealth. population. We are not giving the result of this study by
touting a bullish view for this ever-voluble yellow metal. Kindly take a dip
into it and revert back to us with your valuable queries and comments.
Gold has played a pivotal role in India's social fabric for as far back as man's
memory will stretch. Gold was acquired in India during Roman times as part
of the spice and silk trade. The first gold ducats struck by the Venice Mint in
1285 went into the Levant (i.e. the countries bordering the eastern
Mediterranean) and on into India. In the seventeenth century the Dutch and

English East India companies paid for goods with gold and silver. During the
American Civil war, India received gold from the US in return for the cotton
that it supplied to make up for the lost crops in America.
Estimates vary, but it is believed that at least 13,000t of gold rests in India -
or approximately nine per cent of the world's cumulative mine production.
preferred investment behind bank deposits.
India is the world's largest consumer of gold in jewellery and roughly 30%
of gold jewellery fabrication is from recycled pieces. India is typically also
the largest purchaser of coins and bars for investment (>80tpa).
In 1998-2001 (both inclusive), annual Indian demand for gold in jewellery

exceeded 600 tonnes; in 2002, however, due to rising and volatile prices and
a poor monsoon season, this dropped back to 490 tonnes. Indian jewellery
off-take is sensitive to price increases and even more so to volatility.
Although this decline in tonnage since 1998 is due in part to increasing
competition from white and brown goods and alternative investment
vehicles, it is also a reflection of the increase in price. The Indian bride's
"Streedhan", the wealth she takes with her when she marries and which
remains hers, is still gold albeit its religious significance.
Typically, India accounts for 20% of global gold off-take in any one-year. Its
GDP (as measured by the World Bank) in 2001 was 1.5% of the world's
total, ranking twelfth - although if this is measured on Purchasing Power
Parity, then India ranks fourth with 6.4% of the world total. The off-take per
capita is still very low, reflecting the widespread distribution of the rural
population (that accounts for 70% of national gold demand) and the social

infrastructure of the country. At just over one gram of demand per thousand
dollars of GDP, India stands third in the world, behind only the UAE (just
over two grams) and Bahrain (almost 1.5g) - although these two are both
enhanced by tourist purchases. In 1991, Indian gold demand was a little over
230 tonnes, or only 8% of world off-take. The deregulation of the market
during the 1990s brought about a dramatic change and jewellery demand
increased from 208t in 1991 to peak at 658t in 1998, while demand for
investment bars grew from ten tonnes in 1991 to 116t in 1998.
These figures reflect average growth rates of 16% and 30% per annum
respectively between 1991 and 1998. While both have eased since 1998,
there is still a fascination in India for gold and there is significant scope for
the development of further demand in the country. The World Gold Council,
which was involved in the deregulation of the market in the 1990s, continues
to work closely with Indian gold market stakeholders to foster increased
demand. This is partly through the development of new gold instruments that
can be bought through banks, as an additional set of distribution channels,
although the rural community still tends to prefer using jewellers. The recent
changes in the regulatory environment should be a major help in stimulating
fresh products and new demand; indeed some of the top mutual funds, along
with the World Gold Council offices in India, are working closely with the
regulators to introduce a gold fund into the Indian markets.
Perhaps no other market in the world has the universal appeal of the gold
market. For centuries, gold has been coveted for its unique blend of rarity,
beauty, and near indestructibility. Nations have embraced gold as a store of
wealth and a medium of international exchange; individuals have sought to

possess gold as insurance against the day-to-day uncertainties of paper

money.
MCX & NCDEX Division of gold futures provide an important alternative

to traditional means of investing in gold such as bullion, coins, and mining
stocks. Gold futures contracts are also valuable trading tools for commercial
producers and users of the metal. Commercial concentrations of gold are
found in widely distributed areas: in association with ores of copper and
lead, in quartz veins, in the gravel of streambeds, and with pyrites (iron
sulfide). Seawater contains astonishing quantities of gold, but its recovery is
not economical.
The United States first assigned a formal monetary role for gold in 1792,
when Congress put the nation's currency on a bimetallic standard, backing it
with gold and silver. During the Great Depression of the 1930s, most nations
were forced to sever their currency from gold in an attempt to stabilize their
economies. Gold formally reentered the world's monetary system in 1944,
when the Bretton Woods agreement fixed all the world's paper currencies in
relation to the U.S. dollar which in turn was tied to gold. The agreement was
in force until 1971, when President Nixon effectively cancelled it by ending
the convertibility of the dollar into gold. Today, gold prices float freely in
accordance with supply and demand, responding quickly to political and
economic events. The only two countries till date to fix their paper urrencies
in relation to gold outside United States are China and India.Gold is a vital
industrial commodity. It is an excellent conductor of electricity, is extremely
resistant to corrosion, and is one of the most chemically stable of the
elements, making it critically important in lectronics and other high-tech
applications. Futures trading in Gold in India was carried out till 1962

mainly via Bombay Bullion Association, but as the Gold Control Act came
into force this trading was debarred for around 41 long years. Today, a broad
cross-section of companies in the gold industry, from mining companies to
fabricators of finished products, can use the MCX & NCDEX Division of
gold futures and options contracts to hedge their price risks. Furthermore,
gold has traditionally been seen as an effective diversifier. For Gold contract
specifications, refer Annexure.
The Supply-Demand equation
The reform process started off with the abolition of the Gold Control Act in
1990. Thereafter, the supply side of the bullion trade (gold and silver) has
undergone a sea change. Imports of gold and then silver were first liberalised
in 1991 and 1992 and then the Gold Bond (1993) was floated (with the
immunity clause). Thereafter, gold was imported first under Special Import
Licence (SIL) and then under Open General Licence (OGL) and, finally the
Gold Deposit Scheme (GDS) in September 1999.
The pattern of gold demand in India in 2002 is a good demonstration of the

impact of price volatility on the price-sensitive markets of Asia and the
Middle East. Around 75% of gold consumed in India are normally provided
through official imports.
During the first half of the year when the price rose consistently, imports
were low. From August, the price entered a more stable period. By October,
the trade and consumers had regained confidence and imports for that month
were a record; for November, imports were just under the record. But in

December, when the price shot up again, imports fell sharply. In Asia and
the Middle East it is common for jewellery to be exchanged or for new
purchases to be funded by trading in other jewellery. In times of price
volatility the amount of trading-in increases.
The Indian demand for the year as a whole fell by 21% in tonnage terms
from 727 tonnes in 2001 to 576 tonnes in 2002. With a 14% increase in the
rupee price of gold this was a 9% fall in value terms. Data on S & D from
the WGC show a far smaller fall in demand of just 5% from 843 tonnes in
2001 to 797 tonnes in 2002, since the amount of gold funded by trading in is
thought to have near-doubled.
More than 82% of the Physical Gold is consumed in the form of jewellery
while bars and coins occupy not higher than 15% of the Gold consumed, as
on 2002. The jewellery demand, the official reserves, the strengthening
rupee and the macro economic factors together dictate the demand for the
yellow metal. The strong seasonal pattern and a relatively faster economic
recovery together project a demand figure of 880 tonnes this year (2003).

The global scenario

Total demand for gold in the third quarter is estimated to have risen by over
5% year-on-year.By far the largest contributor to this increase was implied
net investment which jumped more than 150 tonnes quarter-on-quarter.
Other gains were also seen in fabrication (chiefly from India and Turkey)
though bar hoarding fell. The other major change in the period was producer
hedging activity contributing a fraction to supply after seven consecutive
quarters of often hefty additions to demand through cuts in the delta adjusted
book. Official sector sales were markedly higher year-on-year due to the
very low level recorded in Q302, whilst old scrap managed a modest rise. In
contrast, mine production wasessentially flat, slipping just 0.2%.
Supply
Initial estimates for mine production suggest that third quarter levels
recorded a modest fall year-on-year to reach 699 tonnes. Lower output in
South Africa, the United States and Indonesia accounted for the bulk of the
decline. As regards the last of these, a drop in grades at Grasberg, the world's
largest gold producing mine, part explained the fall in Indonesia. In recent
news, a slippage of material in a section of the Grasberg open pit has caused
delays in mining and, as a result, full year production at the mine is expected
to fall some five tonnes short of previously forecast levels. Partly offsetting
the described output losses, Australia reported another strong quarter and
there was also higher output in Russia, where there were reports of a
successful start to the season in the main alluvial producing regions.
Official sector sales in the third quarter were up an apparently strong 54%
year-on-year but it should be borne in mind that July-September last year

was an unusually quiet period. Perhaps a fairer comparison is against the

first and second quarters of this year, both of which saw slightly higher net
sales. Banks within the Central Bank Gold Agreement (CBGA) again
dominated proceedings, accounting for over 80 of the 129 tonnes sold in the
third quarter. Switzerland was once more the largest seller within this group
at 73 tonnes. The only other significant sellers within the CBGA were the
Netherlands and Germany. Outside of the CBGA, a notable seller was
Greece, which disposed of 20 tonnes in August.
Old gold scrap rose a modest 5% year-on-yearthough it was noticeably lower
than the volumes recorded in the first and second quarters of 2003. This
quarter-on-quarter slowdown was common to many price sensitive markets
in the Middle East, south and east Asia but was most marked in Egypt, India,
Thailand and Indonesia. Perhaps the chief reason for this change is that these
markets are becoming accustomed to prices comfortably above $350; such
prices are therefore no longer as strong a signal to sell as they were earlier,
especially in the first quarter. The balance of producer hedging activity
isestimated to have contributed a fraction (just one tonne in fact) to supply in
the third quarter, the first time that this has done so in seven consecutive
quarters. This somewhat abrupt change, however, does not really represent
any shift in attitudes in favour of active hedging. Indeed, de-hedging
continued in the third quarter with nominal positions of forwards, options
and non-vanilla products all lower on a quarter-onquarter basis. A part of the
reason for the measured rise in the global book at the end of the September
quarter was the $42/oz increase in the valuation price compared to the end of
the previous quarter, which resulted in an increase in the delta against vanilla
options

Demand
The chief feature on the demand side in the third quarter was the jump in the
implied net investment figure to 185 tonnes from 34 tonnes in April-June.
This change and producer dehedging's abrupt deceleration means that the
third quarter can be viewed as the period in which dehedging handed over
the baton to investment as the chief supporter of prices. Although there have
been signs of a broader based interest in gold developing, investment in the
third quarter remained dominated by short term speculative players, as
witnessed by the sharp rise in the Comex fund long of over 150 tonnes from
early July to end September (using the non-commercial data as a proxy).
Jewellery fabrication rose a modest 5% year-onyear. This was chiefly due to

very strong gains in just India (thanks to a good monsoon, stable rupee
prices in July and August and healthy economy)and Turkey (where a
rebound in local consumption was boosted by improving exports). Indeed,
without these two countries, global jewellery fabrication fell. The vast
majority of the losses were accounted for by Italy, in part as a result of
market share loss in the United States to rival exporters. Other forms of
fabrication saw yet stronger gains, especially in the categories of electronics
(mainly in east Asia) and coins (nearly all Turkey).
Bar hoarding fell heavily on both a year-on-year and quarter-on-quarter
basis. The vast majority of the decline here was attributable to four
countries; India, Indonesia (which both saw sharply lower hoarding levels),
Japan (where selling back was concentrated in August as the yen price
approached the 1,400 yen/g level) and Brazil (which swung to active
disinvestment).The slight rise in global consumer demand is
overwhelmingly attributable to just two countries, India and Turkey. The

former saw buoyant offtake on the back of a better than average monsoon,
broadly stable rupee prices in July and August and good overall economic
growth whilst the latter gained from the release of pent-up demand in a more
economically and politically stable environment. Outside of these two,
increases were largely restricted to other areas of the Middle East where
benefits were derived from an end to the main Iraq war. Jewellery sales
elsewhere were invariably weak as a result of the sluggish state of the world
economy, the high gold price, patchy consumer confidence and unfavourable
shifts in fashion in some markets. The slump in retail investment was chiefly
a function of lower interest in India, Thailand and the United States plus
active dishoarding in Brazil and Japan. The picture, however, was quite
mixed elsewhere. The Middle East saw sizeable growth whilst the rate of
selling back in the perennial dishoarder, France, slowed noticeably.
Note: The gold supply and demand balance and other demand data in this
document have been compiled by GFMS for the World Gold Council.
GFMS is publishing the data for the third quarter.
Gold is the oldest precious metal known to man. Therefore, it is a timely
subject for several reasons. It is the opinion of the more objective market
experts that the traditional investment vehicles of stocks and bonds are in the
areas of their all-time highs and may be due for a severe correction.
To fully appreciate why 8,000 years of experience say " gold is forever", we
should review why the world reveres what England's most famous
economist, John Maynard Keynes, cynically called the "barbarous relic."
Why gold is "good as gold" is an intriguing question. However, we think that

the more pragmatic ancient Egyptians were perhaps more accurate in

observing that gold's value was a function of its pleasing physical
characteristics and its scarcity.
• Gold is primarily a monetary asset and partly a commodity.
• More than two thirds of gold's total accumulated holdings account as
'value for investment' with central bank reserves, private players and
high-carat Jewellery.
• Less than one third of gold's total accumulated holdings is as a
'commodity' for Jewellery in Western markets and usage in industry.
• The Gold market is highly liquid and gold held by central banks, other
major institutions and retail Jewellery keep coming back to the market.
• Due to large stocks of Gold as against its demand, it is argued that the
core driver of the real price of gold is stock equilibrium rather than flow
equilibrium.
• Economic forces that determine the price of gold are different from,
and in many cases opposed to the forces that influence most financial
assets.
• South Africa is the world's largest gold producer with 394 tons in
2001, followed by US and Australia.
India is the world's largest gold consumer with an annual demand of 800
tons.
World Gold Markets
• London as the great clearing house
• New York as the home of futures trading
• Zurich as a physical turntable

• Istanbul, Dubai, Singapore and Hong Kong as doorways to important

consuming regions
• Tokyo where TOCOM sets the mood of Japan
• Mumbai under India's liberalized gold regime
India in World Gold Industry

India (InWorld (In
(Rounded Figures) % Share
Tons) Tons)
Total Stocks 13000 145000 9
Central Bank holding 400 28000 1.4
Annual Production 2 2600 0.08
Annual Recycling 100-300 1100-1200 13
Annual Demand 800 3700 22
Annual Imports 600 --- ---
Annual Exports 60 --- ---
Indian Gold Market

• Gold is valued in India as a savings and investment vehicle and is the
second preferred investment after bank deposits.

• India is the world's largest consumer of gold in jewellery as

investment.
• In July 1997 the RBI authorized the commercial banks to import gold
for sale or loan to jewellers and exporters. At present, 13 banks are
active in the import of gold.
• This reduced the disparity between international and domestic prices
of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001.
• The gold hoarding tendency is well ingrained in Indian society.
• Domestic consumption is dictated by monsoon, harvest and marriage
season. Indian jewellery offtake is sensitive to price increases and even
more so to volatility.
• In the cities gold is facing competition from the stock market and a
wide range of consumer goods.
• Facilities for refining, assaying, making them into standard bars in

India, as compared to the rest of the world, are insignificant, both
qualitatively and quantitatively.
Market Moving Factors
• Above ground supply from sales by central banks, reclaimed scrap

and official gold loans
• Producer / miner hedging interest
• World macro-economic factors - US Dollar, Interest rate
• Comparative returns on stock markets

• Domestic demand based on monsoon and agricultural output
Seasonality pattern
The most basic elements of a seasonal pattern are its seasonal high, seasonal
low and seasonal trends in between. Traders must look further for consistent
behavior associated with annual events for profitable trades. Although
seasonal moves are for short-term traders who are seeking to profit from
short-term price swings, long-term investors would be interested in knowing
that when September ends, the price of gold will be higher, continuing till
early October.
These charts exhibit some exciting statistical data about gold price moves.
The graph shows that following the "September increase", prices decline on
the average into late November. However, as as can be seen from the graph,
seasonally, prices are higher at the November lows than in early August
lows. Further, from the November lows, prices rise through December to
peak out in mid - January.

The general observation of US Dollar Index and Gold Futures seasonal

reveals a negative correlation between them. As the Dollar Index fell from
August to mid - October, gold futures were on the rise during the same
period, substantiating an increase in volatility during July - September. It is
also noticed that volatility is on the rise whenever gold prices shoot up or the
dollar weakens. The reverse is also true; volatility drastically reduces if gold
prices fall or on dollar appreciation, as seen from the graph from mid -
January to July.
The Gold Seasonal 30 years charts confirm that gold prices rise, as assumed
by most, except during the brief period from mid - February to mid - March
and from mid - October to mid - November. This confirms that gold is a safe
haven to bet on over a period of time. Demand is usually weakest in the
Northern Hemisphere summer, especially during August when European
jewellery manufacturers are shut down. Demand is greatest from the start of
the fourth quarter during which consumption is highest as gift-giving peaks,
beginning with the Indian harvest and wedding festivals in autumn, and

carrying through US religious holidays and Chinese New Year. Seasonality

in India may differ slightly in demand terms, but as far as prices and
volatility is concerned, they exhibit a similar pattern due to high positive
correlation between the US and Indian gold and hence, the above discussion
is valid for Indian gold.
Price differential
The strong domestic demand for Gold and the restrictive policy stance are
reflected in the higher price of Gold in the domestic market compared to that
in the international market both at the official exchange rate and at the
"hawala" exchange rate.

During the 19-year period from 1977-78 to 1995-96, the average spread
between Mumbai and London market prices (Mumbai price less London
price in rupee terms) of Gold has been positive, except for a brief period
during 1980-81 when the international Gold price zoomed for a brief period
following the oil crisis, persistent weakening of dollar resulting in flight of
dollar resources into Gold, and accelerating world-wide inflationary trends.
The average spread was as high as 41.3 per cent during 1986-91. In the post-
liberalization period, with changes in exchange rate regime and some
relaxations on import regime of Gold, the average spread between domestic
and international prices has come down from 53.1 per cent in 1991 to 20.6
per cent in 1993, 20.1 per cent in 1994, 19.9 per cent in 1995. The spread
continued to move towards southward territory and reached almost below
7% with introduction of OGL in Oct'97 and removing SIL. The current
spread is as low as 3%.
Glossary of terms
Gold Demand Trends covers four categories of gold demand: jewellery;
retail investment; industrial and dental. Institutional investment (including
most purchases by high-net worth individuals) is not currently included. The
categories included cover at least 95% of overall gold demand.
Jewellery: All carat jewellery newly made from raw gold, including gem-set
jewellery. It excludes jewellery of other metals clad or plated with gold as
well as coins and bars used as jewellery. Second hand jewellery is also
excluded (unless re melted and sold for cash). Purchases funded by the
trading-in of existing jewellery are not considered to add to demand. This is

measured as close as is feasible to purchases by the ultimate consumer.
Retail investment: Bullion is deemed to be coins and bars defined according

to the standard adopted by the European Union for investment gold. These
are: coins minted after 1800 which are not less than 900 fineness, are or have
been legal tender in the country of origin and are not sold for more than 180
per cent of the value of their gold content; bars of one kilogram or less that
are purchased by investors. In addition the definition is extended to include
medallions, some times with a religious motif, of no less than 99% purity;
wires and lumps sold in small quantities in developing countries. In practice
this includes the initial sale of many coins destined ultimately to be
considered as numismatic rather than bullion. It excludes second hand coins,
which have not been re-melted and sold for cash. All bars and coins meeting
the above definitions are considered to be investment goods, including bars
with hooks or coins which are likely to be worn as jewellery in certain
countries. Retail investment is measured as net purchases by the ultimate
consumer.
Consumer demand: The sum of jewellery and retail investment purchases for
a country - i.e. the amount of gold acquired directly by individuals.
Industrial demand: The first transformation of raw gold (e.g. fine gold kilo
bars) into intermediate products destined for industrial use such as gold
potassium cyanide, gold bonding wire, sputtering targets. This includes gold
destined for plating jewellery.
Dental: The first transformation of raw gold into intermediate products
destined for dental applications such as dental alloys.

Tourist purchases and "luggage trade": Purchases by foreign visitors, which

are normally for their own use or for gifts, are included in demand in the
country of purchase. Bulk purchases by foreign visitors ("luggage trade")
which appear to be intended for resale in their country of origin or a third
country are attributed to the country in which they are resold.
The collapse of equity markets and the arrival of low interest rates have
increased the investor presence in alternative investments such as gold. In
India, gold has traditionally played a multi-faceted role. Apart from being
used for adornment purpose, it has also served as an asset of the last resort
and a hedge against inflation and currency depreciation. But most
importantly, it has most often been treated as an investment.
Gold supply primarily comes from mine production, official sector sales of
global central banks, old gold scrap and net disinvestments of invested gold.
Out of the total supply of 3870 tons last year, 66% was from mine
production, 20 % from old gold scrap and 14% from official sector sales.
Demand globally emanates from fabrication (jewellery and other
fabrication), Bar hoarding, Net producer hedging and Implied investment.
Gold continues to occupy a prominent part in rural Indian economy and a

significant part of the rural credit market revolves around bullion as security.
India is the largest consumer of gold in the world accounting for more than
23% of the total world demand annually. According to unofficial estimates,
India has more than 13,000 tonnes of hoarded gold, which translates to
around Rs 6,50,000 crore. Inspite of its predominant position, especially in

the gold market where India is the largest importer, India has traditionally
been a price seeker in the global bullion market.
Bullion trading in India received a major fillip. Following the changes in the
Gold Policy announced by the Government of India, in 1997 under export-
import Policy 1997-2002. As per the policy, scheduled commercial banks
are authorized by the Reserve Bank of India (RBI) to import gold and silver
for sale in domestic market without an Import license or surrendering the
Special Import License (SIL). Bullion is imported into India by banks and
four designated trading agencies acting as canalizing agents and consignees
for overseas suppliers, who in turn sell to domestic wholesale traders,
fabricators, etc. The price risk is borne either by the fabricator or the retail
consumer. The wholesale traders, fabricators and investors do not have any
effective tool to hedge their price risk in gold / silver.
India being the largest consumer of gold in the world, with minimal
domestic supply, the demand is met mainly from imports.


3.1 COLLECTION OF DATA
There prices of Gold in the National Commodity and Derivatives Exchange

(NCDEX) and Multi commodity Exchange (MCX) in India have been taken
from the contract ending june 2006 to april 2007. the following ponits have
been kept in mind
 Contract Duration
 Trading unit
 Quotation/Base Value
 Price Quote
 Quality Specifications
Assumptions
 Only three month contracts wise February-07, April-07 and
December-06 taken for analysis
 Daily closing price is considered as that days’ average price, it means
that at any point of time this closing price is considered as the trading
price.
 Average closing price of contracts is the trading price of the
commodity at any point of the contract duration.
 For net profit calculation one lot size of the contract is taken.

The descriptive statistics data analysis is carried out to the spread calculated
from the daily closing price of two exchanges wise Nation commodities and
Derivatives Exchange (NCDEX) and Multi commodity Exchanges (MCX)

3.2 METHODOLOGY
Calculation of Spread
The spread of commodity contracts trading between the two exchanges is the
absolute difference of the trading price of the commodity at any point of
time.
Spread (Between two Exchanges) = Closing price of MCX - Closing price of
NCDEX
Estimation of Net Spread per Lot of Transaction
Average spread of the commodity is the gross spread i.e. it includes the
transaction cost of commodities trading.
Net Spread = Gross Spread – Transaction cost
Net spread per lot shows the net profit or loss for the lot of transaction.

Liquidity of the commodity is evaluated by average trading volume and
average Open Interest (OI) of the commodities in the last three contracts,
because volume and open interest is the good indicator of liquidity.
Transaction cost calculation:
For an amount of Rs.500000
COM
Components NCDEX MCX
Transaction fee 22 25
Brokerage 250 250
Service tax 25.5(30.5) 25.5(30.5)
Total 297.5(302.5) 300.5(305.5)
(Source: Contact India Commodities Pvt. Ltd.)
Note: Amount in the parenthesis is form 1st April.

3.3 EXCHANGE PROFILES
Overview of Multi Commodity Exchange (MCX)
MCX an independent and de-mutinied multi commodity exchange has

permanent recognition from Government of India for facilitating online
trading, clearing and settlement operations for commodity futures markets
across the country.
Headquartered in Mumbai, MCX is led by an expert management team with

deep domain knowledge of the commodity futures markets. Through the
integration of dedicated resources, robust technology and scalable
infrastructure, since inception MCX has recorded many firsts to its credit.
Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman &

Managing Director, Reliance Industries Ltd, MCX offers futures trading in
the following commodity categories: Agri Commodities, Bullion, Metals-
Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices
and other soft commodities.
MCX has built strategic alliances with some of the largest players in
commodities eco-system, namely, Bombay Bullion Association, Bombay
Metal Exchange, Solvent Extractors' Association of India, Pulses Importers

Association, Shetkari Sanghatana, United Planters Association of India and

India Pepper and Spice Trade Association.
Today MCX is offering spectacular growth opportunities and advantages to

a large cross section of the participants including Producers / Processors,
Traders, Corporate, Regional Trading Centers, Importers, Exporters,
Cooperatives, Industry Associations, amongst others MCX being nation-
wide commodity exchange, offering multiple commodities for trading with
wide reach and penetration and robust infrastructure, is well placed to tap
this vast potential.
Products in MCX
 Bullion -Gold, Gold HNI, Gold M, I-Gold, Silver, Silver HNI, Silver
M
 Oil and Oil Seeds -Castor Oil, Castor Seeds, Cottonseed, Crude Palm
Oil, Groundnut Oil, Kapasia Khalli (Cottonseed Oilcake), Mustard

/Rapeseed Oil, RBD Palmolein, Refined Soy Oil, Sesame Seed, Soy
meal, Soy Seeds,
 Spices- Cardamom, Jeera, Pepper, Red Chilli
 Metals-Aluminium, Copper, Nickel, Sponge Iron, Steel Flat, Steel
Long (Bhavnagar), Steel Long (Gobindgarh), Tin, Zinc

 Fibres- Cotton Long Staple , Cotton Medium Staple, Cotton Short
Staple, Kapas
 Pulses- Chana, Masur, Tur, Urad, Yellow Peas, Basmati Rice, Maize,
Rice, Sarbati Rice, Wheat

 Energy-Brent Crude Oil, Crude Oil, Furnace Oil
 Plantations- Cashew Kernel, Rubber
 Petrochemicals-High Density Polyethylene (HDPE), Polypropylene
(PP), PVC
 Others-Guar Seed, Guar gum, Gurchaku, Mentha Oil, Potato, Sugar
M-30,
Sugar S-30,
The depository clearing system has revolutionized the way settlements are
effected at the Stock Exchanges. With the view to extend the benefits of
demat system, it has been introduced in the commodity sphere for the better
and efficient settlement system. Delivery of commodities can now be
effected through warehouse receipt in demat form.
Warehouse receipts are title documents issued by warehouses to depositors
against the commodities deposited in the warehouses. These documents are
transferred by endorsement and delivery. Either the original depositor or the
holder in due course (transferee) can claim the commodities from the
warehouse. Warehouse receipts in physical form suffer all the disadvantages
of the paper form of title documents. Some of these limitations are as
follows:
(1)Need for splitting the warehouse receipt in case the depositor has an
obligation to transfer only a part of the commodities.
(2)Need to move the warehouse receipts from one place to another with risk
of theft/loss in transit/mutilation, etc. if the transferor and transferee are at
two different locations.

RULES OF MCX
a. ‘Active Member of the Exchange’ means a member of the Exchange, who

is not an inactive member of the Exchange.
b. ‘Approved User’ means a person employed or engaged by a member of an
Exchange in his/their own exclusive arrangement with the permission of the
Exchange for trading in the automated trading system or any other trading
system approved by the Exchange.
c. ‘Articles’ means the Articles of Association of the Company.
d. ‘Associate’ in relation to a member of the Exchange, individual, body
corporate or firm or any other entity shall includeaperson: i who, directly or
indirectly, by himself, or in combination with other persons, exercises
control over the Member of the Exchange, whether individual, body
corporate or firm or holds substantial share of not less than 15 per cent in the
capital of such entities, or in respect of whom the broker, individual or body
corporate or firm, directly or indirectly, by itself or in combination with
other persons, exercise control; or ii whose director or partner is also a
director or partner of the broker, body corporate or the firm, as the case may
be.
e. ‘Authorised Representative’ is a person who represents a Member of the
Exchange in respect of his business and is duly approved by the Exchange
under these Rules.
f. ‘Base Capital’ means and includes the initial security deposit, additional
security deposit, margin money, any other credit amounts, bank guarantee,
and other collateral, by whatever name called, specified to be part of the base
capital.

g. ‘Board of Directors’ means and includes the 'Board of Directors” or the

“Council of Management” or “the Governing Board” or the “Board of Multi
Commodity Exchange of India Limited” or ‘Board’, by whatever name
called, vested with the general powers of management and superintendence
and complete jurisdiction over all members of the Exchange and all matters
contained in the various provisions under the Articles, Rules, Bye- Laws and
Regulations of the Exchange, and over the commodities or securities or any
other instruments and or derivatives thereof, which are traded on the
Exchange.
h. ‘Business Associate’ means any person employed or engaged by a
member of the Exchange for remuneration or sharing of brokerage or
otherwise for the purpose of soliciting business and/or carrying out
transactions in the market whether called a dealer, an approved user, an
authorised representative, an agent, a remisier, or an employee or by any
other name.
i. ‘Bye-Laws’ means the Bye-Laws of the Company made pursuant to the
Articles in force for the time being or under or by virtue of any law in force.
j. ‘Clearing House’ means the clearing house operating for clearing and
settlement of transactions/contracts in any commodity including derivatives
of such contracts, security or instrument and is approved by the Company/
Exchange.
k. ‘Clearing Member’ means a trading-cum-clearing member or an
institutional clearing member of the Exchange who has the right to clear
transactions in contracts that are executed in the trading system of the
Exchange.
l. ‘Company’ or ‘The Company’ or ‘This Company’ or ‘MCX’ means
MULTI COMMODITY EXCHANGE OF INDIA LIMITED.

m. ‘Commodity’ means any goods or commodity, as defined by or under the

Forward Contracts (Regulation) Act, 1952 (hereinafter referred to as FC (R)
Act) including securities or instruments representing any such commodity
permitted to be traded on the Exchange.
n. ‘Contract’ means a contract for or relating to the purchase and/or sale of a
commodity as prescribed by the Exchange and includes all types of forward,
futures and other derivative contracts, as may be permitted by FMC
for trading.
o. ‘Control’ shall include the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by
virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner
p. ‘Director’ means the Director for the time being of the Company.
q. ‘Exchange’ means Multi Commodity Exchange of India Limited and the
premises and/or the system for executing transactions in ready, forward or
futures delivery contracts in commodities that are permitted and/or approved
by the Forward Markets Commission.
r. ‘Executor’ or ‘Administrator’ in relation to a deceased Member of the
Company, means a person who has obtained probate or letter of
administration as the case may be, from a Court of competent jurisdiction
and shall include holder(s) of succession certificate authorizing the holder(s)
thereof to negotiate or transfer the share or shares of the deceased Member
of the Company and shall also include the holder of a certificate granted by
the Administrator General under Section 31 of the Administrator Generals
Act, 1963.

s. ‘Family Member’ of a member of the Exchange means, the member’s

father or mother or spouse or son or sons or unmarried daughter or daughters
or daughter-in-law or daughters-in-law or father’s brother or brothers or
son’s or sons’ son or sons or brother or brothers or unmarried sister or sisters
or brother’s or brothers’ son or sons.
t. ‘Forward Markets Commission’ or ‘Commission’ or ‘FMC’ shall mean the
Forward Markets Commission established by the Government of India in
accordance with the Forward Contracts (Regulation) Act, 1952.
u. ‘Inactive Member of the Exchange’ means a member of the Exchange
who has not traded in the Exchange even for a single day in a year.
v. ‘In writing’ or ‘Written” includes handwriting, typewriting, printing,
lithography, fax, downloading through computers, e-mail and/or other modes
of representing or reproducing words in visible form.
w. ‘Market Maker’ is a class of Member who will be designated as such and
be made obligated to provide liquidity in the Exchange in the relevant
commodity by giving two way quotes at all times on such terms and
conditions as may be prescribed by the Exchange from time to time.
x. ‘Member of the Exchange’ or ‘Exchange Member’ means a person, a sole
proprietary firm, joint Hindu family, a partnership firm, a company (as
defined under the Companies Act), a co-operative society, a body corporate
or public sector organization or statutory corporation or a government
department or non-government entity or any other entity admitted as such by
the Exchange for trading, clearing or settlement of contracts permitted in the
Exchange and shall not mean a shareholder of the Company unless expressly
stated. Membership of the Exchange in this context shall not mean or require
shareholding in the Company as a pre-condition.

y. ‘Multiple Trading Membership’ means an individual, or a partnership firm

or a company (as defined under the Companies Act) or a body corporate or
any other entity having either, directly or indirectly, or is in the process of
acquiring, control in another entity which is a member of the Exchange of
either the same Exchange and/or of any other Exchange/s and shall include:
i. An individual member of the Exchange being a member of one Exchange,
is also a member of another Exchange, or
ii. An individual, being a member of one Exchange is also a designated
director/nominee of a company/ body corporate, which is a member of
another Exchange, or
iii. An individual, who is a designated director/nominee of a company/body
corporate in which there are at least two designated directors/nominees and
one of the designated directors/nominees is a member individually of
another Exchange, or
iv. An individual, being a member of one commodity/stock Exchange or an
individual, who is a designated director/nominee of a company/body
corporate, which is a member of one Exchange, is a designated partner in
any partnership firm of another Exchange.
z. ‘Non-member Client or Registered Non-member’ means a client or non-
member client who is registered with the Exchange from time to time under
the Bye-Laws.
aa. Notice Board refers to the Board displayed at the registered office of the
Exchange and also the Bulletin Board, Market News and Information corner
displayed on the trading system of the Exchange or the News and circulars,
notifications, etc. downloaded / broadcast at the trading system of the
members.

ab. ‘Person’ includes an individual, partnership firm, body corporate,

corporation, joint Hindu family, a co-operative society, association of
persons, bank, financial institution, public sector organisation, statutory
corporation, a government department or non-government entity or such
other person as the oard may decide from time to time.
ac. 'Place of Business' means an office where a member is conducting a bona
fide business for dealing in commodities and the address of which is
officially intimated to the Exchange.
ad. ‘Recognised Exchange’ means an Exchange, which is for the time being
recognised by the Central Govern ment and/or FMC under the provisions of
the FC(R) Act, 1952.
ae. ‘Register of Members of the Exchange’ means the register containing the
names and other details of the Members of the Exchange registered with the
Exchange under various categories. af.‘Regulations’ or ‘The Regulations’
means the Regulations of the Exchange for the time being in force and
include Business Rules, code of conduct, circulars, notices and such other
Regulations prescribed by the Board of Directors or relevant authority from
time to time for the operations of the Exchange and these shall be subject
to the provisions of the Forward Contracts (Regulation) Act, 1952.
ag. ‘Relevant Authority’ means the Board or Managing Director or such
authority as may be specified by the Board from time to time as relevant for
a specified purpose.
ah. ‘Remisier’ means a person, who is engaged by a member of the
Exchange primarily to solicit business for the member for trading on the
Exchange.
ai. ‘Rules’ refer to the Rules relating in general to the constitution and
management of an Exchange and include, its memorandum and articles of

association. These Rules shall be subject to the provisions of the FC(R) Act,
1952 and Rules thereunder. aj. ‘Securities’ include:
. Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities or instruments of a like nature in or of any
incorporated company or other body corporate or otherwise, including
futures, options and other derivatives contracts permitted under Law;
ii. Government securities;
iii Such other instruments as may be declared by the Central Government to
be securities;
iv Rights or interest in securities, derivatives, futures and options and other
contracts of such nature; and
v Any other instruments that may be incorporated under the definition of
securities in the Securities Contracts (Regulation) Act, 1956 or FC(R) A,
1952.
ak. ‘Sub-broker’ means any person not being a member of the Exchange,
who acts on behalf of a broker as an agent or otherwise for assisting the
clients in buying, selling or dealing in contracts through such broker.
al. ‘Trading system’ means the automated trading system (ATS) of the
Exchange or any other system provided by the Exchange, which makes
available to the members of the Exchange, by whatever method, quotations
in Commodities or any other instruments and disseminates information
regarding trades effected, volumes, etc. and such other notifications as may
be placed thereon by the Exchange.

MANAGEMENT OF THE EXCHANGE
The Board may appoint various Committee(s)/panel, from time to time, for
managing the affairs of the Exchange, which will include the following,
provided that the Board will have the right to appoint other Committee(s) in
addition to the Committees specified below:
Membership Committee, Trading Committees, Clearing House Committee,
Arbitration Panel, Vigilance Committee and Other Committees
a. The Board may every year after every Annual General Meeting constitute
Membership Committee, Trading Committee, Clearing House Committee,
Arbitration Panel, Vigilance Committee and Other Committees/Panels/
Advisory Boards, as it may desire. Constitution, purpose and powers of the
Committees/panels shall be decided by the Board from time to time. The
members of the Committee will treat all information pertaining to their area
of responsibility in complete secrecy.
b. A member of any Committee who is on the Committee by virtue of being
a Member of the Exchange or of the Clearing House shall vacate such office
forthwith if he ceases to be a Member of the Exchange and/or member of
Clearing House, as the case may be; or upon suspension, expulsion or
declaration as defaulter by the Exchange. Provided that the Board will have
the power to terminate the services of a Committee member at any point of
time, if it so desire.
c. The Committees, panels and Advisory Boards shall consist of such
number of members as the Board may determine from time to time.
d. The Board may induct Exchange Members and commodity experts on the
Committees, panels and Advisory Boards, in such numbers as may be
decided by the Board from time to time.

e. All members of the Committee, Panels and Advisory Boards shall hold
office from the date of their respective appointments till the first meeting of
the Board held after the next Annual General Meeting. Provided that, if new
members of the Committees are not appointed at the said meeting of the
Board, the existing members shall continue until the successors are validly
appointed by the Board.
f. The Committees shall have such responsibilities and powers as may be
delegated to it by the Board from time to time which may, inter alia, include
the responsibilities and powers to be discharged in accordance with the
provisions of the Bye-Laws and Rules.
FUNCTIONS OF THE MEMBERSHIP COMMITTEE
Major Functions of Membership Committee shall be to recommend

admission of new Members of the Exchange as per the Rules and Bye-Laws
of the Exchange. The Committee shall also have the power to recommend to
the Board for refusing membership to an applicant, if it is satisfied that in the
interest of the Exchange it is expedient to do so. In case of rejection, it shall
record its recommendation in writing. The Committee will select the
members based on the terms and conditions of membership as may be
specified by the Board for different classes of members from time to time.

FUNCTIONS OF THE TRADING COMMITTEE
The Trading Committee’s functions include:

a. Review and recommend Rules for automated trading for proper
functioning of the trading system and for the selection of, and trading in,
approved commodities;
b. The specification of price limits for each contract month within which any
futures contracts in any commodity shall be transacted in the Exchange, the
suspension of trading in one or more contracts when pre-set price limits are
breached, and the conditions for the relaxation or tightening of price limits
along with the new limits when necessary;
c. The specification of position limits for each contract month within which a
futures contract shall be transacted and held by members of the Exchange
and clients, the conditions for the relaxation or tightening of position limits
along with the new limits when necessary, and the conditions under which
exemptions or 7 Rules concessions may be granted to members of the
Exchange uniformly or selectively;
d. Review and recommend risk management systems to ensure that trading
takes place in a fair and safe manner;
e. Recommend Business Rules for clearing and settlement;
f. Approval of the basis for computation of the settlement price for each
clearing day and special settlement rates for settlement of disputes or on
days when there is no trading; and
g. Dealing with emergencies and special situations.
The Board may accept the recommendation made by the Trading Committee
if such recommendations are within the jurisdiction of the Trading
Committee and in accordance with the Bye-Laws, Rules and Regulations.

FUNCTIONS OF THE TRADING COMMITTEE
The Trading Committee’s functions include:

a. Review and recommend Rules for automated trading for proper
functioning of the trading system and for the selection of, and trading in,
approved commodities;
b. The specification of price limits for each contract month within which any
futures contracts in any commodity shall be transacted in the Exchange, the
suspension of trading in one or more contracts when pre-set price limits are
breached, and the conditions for the relaxation or tightening of price limits
along with the new limits when necessary;
c. The specification of position limits for each contract month within which a
futures contract shall be transacted and held by members of the Exchange
and clients, the conditions for the relaxation or tightening of position limits
along with the new limits when necessary, and the conditions under which
exemptions or 7 Rules concessions may be granted to members of the
Exchange uniformly or selectively;
d. Review and recommend risk management systems to ensure that trading
takes place in a fair and safe manner;
e. Recommend Business Rules for clearing and settlement;
f. Approval of the basis for computation of the settlement price for each
clearing day and special settlement rates for settlement of disputes or on
days when there is no trading; and
g. Dealing with emergencies and special situations.
The Board may accept the recommendation made by the Trading Committee
if such recommendations are within the jurisdiction of the Trading
Committee and in accordance with the Bye-Laws, Rules and Regulations.

Overview of National Commodity & Derivatives Exchange

Limited (NCDEX)
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 (formerly the Credit Rating Information Services of
India Limited), Indian Farmers Fertiliser Cooperative Limited
(IFFCO) and Canara Bank by subscribing to the equity shares have joined
the initial promoters as shareholders of the Exchange. NCDEX is the only
commodity exchange in the country promoted by national level institutions.
This unique parentage enables it to offer a bouquet of benefits, which are
currently in short supply in the commodity markets. 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.
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.

NCDEX is a nation-level, technology driven de-mutualized 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 Market Commission in respect of futures

trading in commodities. Besides, NCDEX is subjected to various laws of the
land like the Companies Act, Stamp Act, Contracts Act, Forward
Commission (Regulation) Act and various other legislations, which impinge
on its working.
NCDEX is located in Mumbai and offers facilities to its members in more

than 550 centres throughout India. The reach will gradually be expanded to
more centres.
Products in NCDEX
Agro Products
Cashew, Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta,
Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Groundnut (in
shell), Groundnut Expeller Oil, Guar gum, Guar Seeds, Gur, Indian
Parboiled Rice, Indian Raw Rice, Indian 28 mm Cotton, Indian 31 mm
Cotton, Jeera, Jute sacking bags, Lemon Tur, Maharashtra Lal Tur, Masoor

Grain Bold, Medium Staple Cotton, Mentha Oil, Mulberry Green Cocoons,
Mulberry Raw Silk, Rapeseed - Mustard Seed, Pepper, Raw Jute, Rapeseed
Mustard Seed Oilcake, RBD Palmolein, Refined Soy Oil, Rubber, Sesame
Seeds, Soy Bean, Sugar, Turmeric, Urad (Black Matpe), V-797 Kapas,
Wheat, Yellow Peas, Yellow Red Maize, Yellow Soybean Meal
Base Metals
Electrolytic Copper Cathode
Precious Metals
Gold 1 Kg, Sona (1 Kg gold), Silver 30 Kg, Chandi (30 Kg silver)
Energy Products
Brent Crude Oil, Furnace Oil
Ferrous Metals
Mild Steel Ingots, Sponge Iron

ORGANIZATION STRUCTURE OF NCDEX
RULES OF NCDEX
1. "Board" means Board of Directors of National Commodity &

Derivatives Exchange Limited.
2. "Bye Laws" means the Bye Laws of the National Commodity &
Derivatives Exchange Limited for the time being in force.
3. "NCDEX" or "Exchange" means National Commodity & Derivatives

Exchange Limited.

4. "Clearing Bank(s)" means such bank(s) as NCDEX may appoint to act

as funds settling agency, for the collection of margin money for all
deals cleared through exchange and any other funds movement
between clearing members and the Clearing House and between
clearing members as may be directed by the Clearing House from time
to time.
5. "Clearing Member" means a member of the Clearing House of the
Exchange engaged in providing Clearing facilities and

includes Professional Clearing Member and all categories of clearing
members as may be admitted as such by the Clearing House. The
Trading Member while performing function of clearing and settling
trades shall mean Clearing Member even if referred to as Trading
Member.
6. "Clearing House" means a division of the Exchange or any agency
identified by the relevant authority or any independent entity such as

Clearing Corporation set up and empowered suitably to act as a
facilitator for processing of deliveries and payments between clearing
members /trading members and participants for trades effected by
them on the Exchange.
7. "Commodities" shall have the meaning assigned to "goods" in the

Forward Contracts (Regulation) Act, 1952.
8. "Trading Member" means a broker and the member of the NCDEX

who has been granted membership by the NCDEX with the Bye Laws
and Rules of NCDEX but does not denote the shareholder of the
Exchange.

9. "Regulations", unless the context indicates otherwise, includes

business rules, code of conduct and such other regulations prescribed
by the Relevant Authority from time to time for the operations of the
Exchange and these shall be subject to the provisions of the Forward
Contracts (Regulation) Act, 1952, Rules framed thereunder, the
directives of Forward Market Commission or any other similar
regulatory authority and such other directives and provisions as may
be specified from time to time by the Relevant Authority.
10."Relevant Authority" means the Board or such other authority as

specified by the Board from time to time as relevant authority for a
specified purpose.
11.Settlement Fund means a fund established and maintained in

accordance with the relevant provisions of the Bye Laws.
BOARD OF NCDEX
1. The Board may organise, maintain, control, manage, regulate and

facilitate the operations of the Exchange and of commodities
transactions by trading members / clearing members, subject to the
provisions of the Forward Contracts (Regulation) Act, 1952, and
Rules thereunder, and any directives issued thereunder as may be
prescribed from time to time.
2. Directors of the National Commodity & Derivatives Exchange

Limited shall be appointed in accordance with the provisions of the

Articles of Association of the Company as amended from time to

time. The Central Government may nominate one person as its
representatives for appointment as Director and not more than three
persons representing interests not directly represented through
membership of the Exchange, for appointment as Directors in
accordance with Section 6 (2) (b) of Forward Contracts (Regulation)
Act, 1952. Any such appointment of Directors shall be considered as
one being made under the provisions of these rules.
3. All appointments to the Board of Directors shall be in accordance with

the procedure prescribed for appointment of Directors under The
Companies Act, 1956 and by the Exchange.
4. The Board is empowered to make Bye Laws, Rules and regulations
from time to time, for all or any matters relating to the conduct of
business of the Exchange, the business and transactions of trading
members / clearing members between trading members / clearing
members inter-se as well as the business and transactions between
trading members / clearing members and persons who are not trading
members / clearing members, and to control, define and regulate all
such transactions and dealings and to do such acts and things which
are necessary for the purposes of the Exchange.
5. Without prejudice to the generality of the foregoing, the Board is
empowered to make Regulations, subject to the provisions of the

Forward Contracts (Regulation) Act, 1952 and Rules thereunder, for
all or any of the following matters:

a) Norms, procedures, terms and conditions for admission to

membership of the Exchange;
b) Conduct of business of the Exchange;
c) Conduct of trading members / clearing members with regard to the

business of the Exchange;
d) Prescription from time to time, and administration of penalties,

fines and other consequences, including suspension/expulsion of
Trading / Clearing Members from the Exchange for violation of any
requirements of the Rules, Bye Laws and Regulations and the codes of
conduct;
e) Manner of operations and interfacing with clearing bank(s) and

other clearing and settlement agencies;
f) Prescription, from time to time, of capital adequacy and other norms

which shall be required to be maintained by different categories of
Trading / Clearing Members;
g) Maintenance of records and books of accounts by Trading /

Clearing Members as may be specified from time to time;
h) Investigation of the financial condition, business conduct and

dealings of the Trading / Clearing Members;
i) Disciplinary action/procedures against any Trading / Clearing

Member;

j) Declaration of any trading member / clearing member as a defaulter

or suspension or resignation or exclusion from trading membership /
clearing membership and consequences thereof and Readmission;
k) Conditions, levy for admission or subscription for admission or

continuance of trading membership / clearing membership;
l) Charges payable by trading members / clearing members for

business transacted through the Exchange, as may be laid down from
time to time;
m) Investigation of the financial condition, business conduct and

dealings of the trading members / clearing members;
n) Appointment and dissolution of Committee or Committees for any

purpose of the Exchange;
o) Such other matters in relation to the Exchange as may be specified

under the provisions of the Articles of Association, Bye Laws or these
Rules or as may be necessary or expedient for the organisation,
maintenance, control, management, regulation and facilitation of the
operation of the Exchange.
6. The Board is empowered to delegate, from time to time, to the

Executive Committee(s) or to the Managing Director or to any person
or committee of persons which may be referred to as Relevant
Authority, such of the powers vested in it and upon such terms as it
may think fit, to manage all or any of the affairs of the Exchange and

from time to time, to revoke, withdraw, alter or vary all or any of such
powers.
7. The Board may, from time to time, constitute one or more committees
comprising of members of the Board or such others as the Board may
in its discretion deem fit or necessary and delegate to such committees
such powers as the Board may deem fit and the Board may from time
to time revoke such delegation. The Committees constituted by the
Board may inter alia include:
a) Admissions Committee for admission of trading members / clearing

members;
b) Infrastructure Committee to recommend appropriate infrastructure

and implement the same;
c) Systems Committee to recommend setting up of systems for

carrying on the functioning of the Exchange and to implement and
monitor the same;
d) Any other matter which the Board may think fit.
8. The Board shall have the authority to issue directives from time to
time to the Executive Committee or any other Committees or any
other person or persons to whom any powers have been delegated by
the Board. Such directives issued in exercise of this power, which may
be of policy nature or may include directives to dispose off a
particular matter or issue, shall be binding on the concerned
Committee(s) or person(s).

9. Subject to the approval of Forward Markets Commission under the

provisions of the Forward Contracts (Regulation) Act, 1952 and Rules
thereunder, the Board is empowered to vary, amend, repeal or add to
Bye Laws, Rules and Regulations framed by it.
10.The Members of the Board and of such committees as may be

identified by the Board shall adhere to the Code of Conduct as may be
prescribed by the Board from time to time.
11. Notwithstanding anything contained in the Rules, Bye Laws,
Regulation or any circular, in the event of any conflict or ambiguity

on any matter, the decision of Board shall supersede and the Board
shall have final say on all matters including but not limited to the
matters concerning functioning, regulation, business, membership, and
day to day management of Exchange. Board may delegate and instruct
any authority or committee to exercise such powers and functions as it
may deem fit irrespective of such powers and functions being vested
in any other authority or committee or subcommittee under Rules, Bye
Laws, Regulations or any directions and any such delegation of power
and functions by the Board shall supersede in the event of any conflict
or ambiguity.
CONSTITUTION
1. One or more Executive Committee(s) may be appointed by the Board

for the purposes mentioned in 4.2 here below. . The Executive

Committee may also be referred to as Governing Body for the

functions delegated to it by the Board.
2. Executive Committee(s) appointed by the Board may, interalia,

include:
a) Managing Director of the NCDEX,
b) Not more than one person nominated by the Central Government as

its representative;
c) Not more than three persons representing interests not directly

represented through membership of the Exchange;
d) Such number of persons and such other persons as may be decided

by the Board from time to time;
3. The maximum strength of any Executive Committee shall be decided

by the Board or any other authority or committee to whom the Board
delegates this authority from time to time.
4. The person nominated under clauses b), c) and d) above shall hold
office for a period of one year or for a period as mentioned by the
authority nominating him, whichever is lesser.
POWERS OF EXECUTIVE COMMITTEE
1. The Board may delegate from time to time to the Executive

Committee such of the powers vested in it and upon such terms as it
may think fit, from time to time, to revoke, withdraw, alter or vary all
or any of such powers.

2. The Executive Committee shall have such responsibilities and powers

as may be delegated to it by the Board from time to time which may
include the following responsibilities and powers to be discharged in
accordance with the provisions of the Bye Laws and Rules:
a) Approving commodities/goods for admission to the relevant

Official List which can be traded in spot and derivative segment of the
Exchange;
b) Devise policies for development of market for commodities and

derivatives and recommend to the Board for implementation.
c) Any other matter delegated by the Board.
3. The Board or Executive Committee may from time to time constitute
such sub-committees and sub delegate any or all its functions to such
Sub Committees. The constitution, quorum and responsibilities of
such sub committees will be determined by Board/Executive
Committee.
4. The Executive Committee may delegate from time to time and

authorize the Managing Director to carry out any of its functions, as it
may deem appropriate.
5. The Executive Committee(s)/Sub committee (s) shall be bound and
obliged to carry out and implement any directives issued by the Board
from time to time and shall be bound to comply with all conditions of
delegation and limitations on the powers of the Executive
Committee(s) as may be prescribed.

FILLING UP OF VACANCIES
1. Any vacancy caused by resignation, withdrawal of nomination, death

or otherwise of a particular category of nominated person on the
Executive committee shall be filled in by Board by nominating
another person.
VACATION OF OFFICE OF MEMBERS OF THE BOARD/

EXECUTIVE COMMITTEE
1. The office of any member of the Board or Executive Committee

including that of the public representatives, trading members and other
nominees on the Executive Committee shall ipso facto be vacated if:
a) He is adjudicated as insolvent;
b) He applied to be adjudicated insolvent;
c) He is convicted by any Court in India of any offence and sentenced

in respect thereof to imprisonment for not less than 30 days;
d) He absents himself from three consecutive meetings of the

Executive Committee or for a continuous period of three months
whichever is longer without obtaining leave of absence from the
Committee meeting;
e) In the case of a trading member / clearing member, if he ceases to

be a trading member of the Exchange / member of the clearing house
of the Exchange, or if he, by notice in writing addressed to the Board

or Executive Committee as the case may be, resigns his office or if he

is suspended or expelled or if his membership is terminated;
2. Provided however that if at any time the Board is satisfied that

circumstances exist which render it necessary in public interest to do
so, the Board may revoke the nomination of any such person.
ELIGIBILITY OF TRADING MEMBER / CLEARING MEMBER TO

BECOME EXECUTIVE COMMITTEE MEMBER
1. No trading member/clearing member shall be eligible to be nominated

as a member of an Executive Committee:
a) Unless he satisfies the requirement, if any, prescribed in that behalf

by the Rules framed under the Forward Contracts (Regulation) Act,
1952 and the rules thereunder;
b) Unless he is a trading member / clearing member of Exchange for

such period as may be decided by the Board from time to time;
c) If he is a partner with a trading member who is already a member of

that Executive Committee;
d) If he has at any time been declared as defaulter or failed to meet his

liabilities in ordinary course or compounded with his creditors;
e) If his certificate of registration as a broker has been cancelled by

the competent authority or he has been expelled by the Exchange;

f) If his certificate of registration as a broker or his trading rights have

been suspended by the Relevant Authority or the Exchange as the case
may be or his membership rights have been suspended by the
Exchange on account of any disciplinary action taken against him
under the Rules, Regulations or Bye laws of the Exchange and two
years have not elapsed from the date of expiry of such suspension of
certificate of registration, trading rights or membership rights;
2. A trading member nominated for two consecutive years as a member

on an Executive Committee shall not be eligible to be nominated to
the Executive Committee unless a period of two years has elapsed
since his last nomination.
OFFICE BEARERS OF EXECUTIVE COMMITTEE
1. The Executive Committee shall from time to time have the following
office-bearers namely, the Chairman and Vice Chairman.
2. The Managing Director of the Exchange shall be the Chairman of

Executive Committee(s).
3. The Executive Committee members shall elect one among themselves
as the Vice Chairman.
4. The Vice Chairman so elected shall hold office for a period of one
year and shall be eligible for re-election.
5. In the event of any casual vacancy arising in the office of the Vice-
Chairman due to death, resignation or any other cause, the Executive
Committee shall nominate a successor from among the members of
the Executive Committee.

6. The persons nominated/elected as above in any casual vacancy shall

hold office for the same period for which the office-bearer in whose
place he was appointed would have held office if it had not been
vacated as aforesaid.
MEETINGS OF THE EXECUTIVE COMMITTEE
1. The Executive Committee may meet at such times and at such

periodicity as may be required due to business exigency and may
adjourn and otherwise regulate its meetings and proceedings as it
thinks fit.
2. The quorum for a meeting of the Executive Committee, shall be one-
third of the total strength of the Executive Committee, any fraction

being rounded off as one, or five members whichever is lower;
provided that where at any time the number of interested members
exceeds two-thirds of the total strength, then the number of remaining
members, i.e., the number of members present and not interested shall
be the quorum for the meeting.
3. The Chairman of the Executive Committee may at any time convene a
meeting of the Executive Committee.
4. Questions arising at any meeting of the Executive Committee shall be
decided by a majority of the votes cast excepting in cases where a
larger majority is required by any provision of the Rules, Bye Laws
and Regulations of the Exchange. In the case of equality of votes on
matters, which can be decided by a majority of votes, the Chairman
presiding over the meeting shall have a second or casting vote.

5. At all meetings of the Executive Committee the Chairman shall

ordinarily preside and in his absence the Vice-Chairman shall preside.
If the Vice-Chairman also were not present at the meeting, the
members of the Executive Committee present shall choose one from
among themselves to be Chairman of such meeting.
6. Subject to the conditions stated elsewhere every member of the
Executive Committee shall have only one vote whether on a show of
hands or on a poll except that in the case of a poll resulting in equal
votes, the Chairman who presides over the meeting shall have a
casting vote.
7. No vote by proxy shall be allowed either on a show of hands or on a
poll in respect of any matter.
8. No member, who has been suspended, expelled or declared defaulter
shall be entitled to be present at a meeting or to take part in any
proceedings or to vote thereat.
CHAIRMAN AND VICE CHAIRMAN
1. The Chairman may assume and exercise all such powers and perform
all such duties as may be delegated to him by the Executive
Committee from time to time as provided in the Rules, Bye Laws and
Regulations of the Exchange.
2. The Chairman, shall be entitled to exercise any or all of the powers

exercisable by the Executive Committee whenever he be of the
opinion that immediate action is necessary, subject to such action
being placed before by the Executive Committee within twenty-four
hours.

3. A meeting of the Executive Committee for the time being, at which a
quorum is present shall be competent to exercise all or any of the

authorities, powers and discretion for the time being vested in or
exercisable by the Executive Committee generally.

4.1 CALCULATIONS
MCX DEC 2006
Commodity Contract/Expiry
Date Open (Rs) High (Rs) Low (Rs) Close (Rs)
Symbol Month
05-12-
GOLD 05DEC2006 9297.00 9346.00 9202.00 9356.00
2006
04-12-
GOLD 05DEC2006 9300.00 9313.00 9240.00 9265.00
2006
02-12-
GOLD 05DEC2006 9301.00 9320.00 9284.00 9309.00
2006
01-12-
GOLD 05DEC2006 9250.00 9323.00 9240.00 9290.00
2006
30-11-
GOLD 05DEC2006 9214.00 9277.00 9191.00 9269.00
2006
29-11-
GOLD 05DEC2006 9240.00 9252.00 9184.00 9206.00
2006
28-11-
GOLD 05DEC2006 9247.00 9259.00 9164.00 9217.00
2006
27-11-
GOLD 05DEC2006 9263.00 9280.00 9221.00 9247.00
2006
25-11-
GOLD 05DEC2006 9224.00 9260.00 9220.00 9256.00
2006
24-11-
GOLD 05DEC2006 9144.00 9233.00 9144.00 9222.00
2006
23-11-
GOLD 05DEC2006 9129.00 9149.00 9129.00 9142.00
2006
22-11-
GOLD 05DEC2006 9115.00 9184.00 9113.00 9127.00
2006
21-11-
GOLD 05DEC2006 9095.00 9148.00 9093.00 9126.00
2006

20-11-
GOLD 05DEC2006 9095.00 9139.00 9071.00 9086.00
2006
18-11-
GOLD 05DEC2006 9081.00 9088.00 9077.00 9085.00
2006
17-11-
GOLD 05DEC2006 9101.00 9109.00 9009.00 9085.00
2006
16-11-
GOLD 05DEC2006 9160.00 9178.00 9105.00 9116.00
2006
15-11-
GOLD 05DEC2006 9153.00 9172.00 9080.00 9165.00
2006
14-11-
GOLD 05DEC2006 9146.00 9197.00 9098.00 9140.00
2006
13-11-
GOLD 05DEC2006 9169.00 9207.00 9095.00 9137.00
2006
11-11-
GOLD 05DEC2006 9150.00 9152.00 9142.00 9147.00
2006
10-11-
GOLD 05DEC2006 9148.00 9242.00 9118.00 9142.00
2006
09-11-
GOLD 05DEC2006 9026.00 9175.00 8983.00 9162.00
2006
08-11-
GOLD 05DEC2006 9142.00 9143.00 9027.00 9041.00
2006
07-11-
GOLD 05DEC2006 9144.00 9171.00 9115.00 9136.00
2006
06-11-
GOLD 05DEC2006 9170.00 9179.00 9101.00 9148.00
2006
04-11-
GOLD 05DEC2006 9158.00 9188.00 9149.00 9162.00
2006
03-11-
GOLD 05DEC2006 9108.00 9173.00 9033.00 9163.00
2006
02-11-
GOLD 05DEC2006 8980.00 9129.00 8980.00 9116.00
2006
01-11-
GOLD 05DEC2006 8904.00 8999.00 8904.00 8969.00
2006
31-10-2006 GOLD 05DEC2006 8920.00 8924.00 8827.00 8894.00

30-10-2006 GOLD 05DEC2006 8890.00 8965.00 8881.00 8927.00

28-10-2006 GOLD 05DEC2006 8875.00 8890.00 8875.00 8881.00

27-10-2006 GOLD 05DEC2006 8847.00 8899.00 8811.00 8868.00
26-10-2006 GOLD 05DEC2006 8791.00 8896.00 8791.00 8867.00
25-10-2006 GOLD 05DEC2006 8732.00 8820.00 8675.00 8782.00
24-10-2006 GOLD 05DEC2006 8691.00 8756.00 8596.00 8740.00
23-10-2006 GOLD 05DEC2006 8865.00 8865.00 8688.00 8696.00
21-10-2006 GOLD 05DEC2006 8850.00 8867.00 8840.00 8856.00
20-10-2006 GOLD 05DEC2006 8938.00 8958.00 8841.00 8856.00
19-10-2006 GOLD 05DEC2006 8823.00 8938.00 8773.00 8917.00
18-10-2006 GOLD 05DEC2006 8840.00 8895.00 8815.00 8825.00
17-10-2006 GOLD 05DEC2006 8960.00 8980.00 8796.00 8838.00
16-10-2006 GOLD 05DEC2006 8892.00 8957.00 8876.00 8951.00
14-10-2006 GOLD 05DEC2006 8869.00 8910.00 8866.00 8902.00
13-10-2006 GOLD 05DEC2006 8740.00 8868.00 8721.00 8860.00

12-10-2006 GOLD 05DEC2006 8705.00 8755.00 8664.00 8732.00
11-10-2006 GOLD 05DEC2006 8716.00 8777.00 8672.00 8701.00
10-10-2006 GOLD 05DEC2006 8819.00 8833.00 8677.00 8718.00
09-10-2006 GOLD 05DEC2006 8750.00 8853.00 8726.00 8806.00
07-10-2006 GOLD 05DEC2006 8739.00 8748.00 8725.00 8733.00
06-10-2006 GOLD 05DEC2006 8715.00 8748.00 8582.00 8731.00
05-10-2006 GOLD 05DEC2006 8697.00 8778.00 8631.00 8733.00
04-10-2006 GOLD 05DEC2006 8825.00 8888.00 8601.00 8659.00
03-10-2006 GOLD 05DEC2006 9149.00 9149.00 8830.00 8845.00
30-09-2006 GOLD 05DEC2006 9160.00 9174.00 9135.00 9144.00
29-09-2006 GOLD 05DEC2006 9233.00 9233.00 9117.00 9166.00
28-09-2006 GOLD 05DEC2006 9179.00 9269.00 9179.00 9250.00
27-09-2006 GOLD 05DEC2006 9090.00 9169.00 9068.00 9159.00
26-09-2006 GOLD 05DEC2006 9090.00 9106.00 9015.00 9071.00
07-09-2006 GOLD 05DEC2006 9667.00 9782.00 9515.00 9558.00

06-09-2006 GOLD 05DEC2006 9844.00 9854.00 9755.00 9765.00

05-09-2006 GOLD 05DEC2006 9716.00 9845.00 9687.00 9827.00
04-09-2006 GOLD 05DEC2006 9705.00 9720.00 9670.00 9695.00
02-09-2006 GOLD 05DEC2006 9692.00 9700.00 9685.00 9696.00
01-09-2006 GOLD 05DEC2006 9735.00 9735.00 9630.00 9688.00
31-08-2006 GOLD 05DEC2006 9640.00 9710.00 9620.00 9692.00
30-08-2006 GOLD 05DEC2006 9570.00 9644.00 9547.00 9587.00
29-08-2006 GOLD 05DEC2006 9599.00 9605.00 9469.00 9531.00
28-08-2006 GOLD 05DEC2006 9679.00 9690.00 9542.00 9570.00
26-08-2006 GOLD 05DEC2006 9682.00 9695.00 9682.00 9694.00
NCDEX DEC 2006
Date Prev Close Price Open Price High Price Low Price Close Price
21-NOV-2006 9238.00 9174.00 9190.00 9156.00 9178.00

22-NOV-2006 9178.00 9174.00 9225.00 9170.00 9181.00
23-NOV-2006 9181.00 9182.00 9194.00 9180.00 9186.00
24-NOV-2006 9186.00 9200.00 9263.00 9200.00 9238.00
25-NOV-2006 9238.00 9259.00 9287.00 9251.00 9282.00
27-NOV-2006 9282.00 9291.00 9320.00 9270.00 9298.00
28-NOV-2006 9298.00 9299.00 9303.00 9231.00 9276.00
29-NOV-2006 9276.00 9280.00 9305.00 9257.00 9275.00
30-NOV-2006 9275.00 9289.00 9339.00 9266.00 9338.00
01-DEC-2006 9338.00 9337.00 9370.00 9311.00 9340.00
02-DEC-2006 9340.00 9340.00 9366.00 9340.00 9356.00
04-DEC-2006 9356.00 9350.00 9365.00 9312.00 9350.00
05-DEC-2006 9350.00 9325.00 9369.00 9290.00 9322.00
06-DEC-2006 9322.00 9287.00 9297.00 9210.00 9224.00
07-DEC-2006 9224.00 9201.00 9205.00 9100.00 9145.00
08-DEC-2006 9145.00 9175.00 9234.00 9120.00 9128.00
09-DEC-2006 9128.00 9111.00 9121.00 9104.00 9114.00

11-DEC-2006 9114.00 9115.00 9149.00 9092.00 9114.00

12-DEC-2006 9114.00 9131.00 9158.00 9129.00 9145.00
13-DEC-2006 9145.00 9145.00 9154.00 9090.00 9122.00
14-DEC-2006 9122.00 9123.00 9135.00 9100.00 9120.00
15-DEC-2006 9120.00 9105.00 9120.00 8880.00 8969.00
16-DEC-2006 8969.00 8888.00 8944.00 8700.00 8854.00
18-DEC-2006 8854.00 8925.00 8979.00 8806.00 8942.00
19-DEC-2006 8942.00 8916.00 9020.00 8650.00 8951.00
20-DEC-2006 8951.00 8996.00 9045.00 8996.00 9040.00
21-DEC-2006 9346.00 9202.00 9356.00 9265.00

22-DEC-2006 9313.00 9240.00 9265.00 9309.00
23-DEC-2006 9320.00 9284.00 9309.00 9290.00
26-DEC-2006 9323.00 9240.00 9290.00 9269.00
27-DEC-2006 9277.00 9191.00 9269.00 9206.00
28-DEC-2006 9252.00 9184.00 9206.00 9217.00
29-DEC-2006 9259.00 9164.00 9217.00 9247.00
30-DEC-2006 9280.00 9221.00 9247.00 9256.00
01-JAN-2007 9260.00 9220.00 9256.00 9222.00
02-JAN-2007 9233.00 9144.00 9222.00 9142.00
08-JAN-2007 9149.00 9129.00 9142.00 9127.00
03-JAN-2007 9184.00 9113.00 9127.00 9126.00
04-JAN-2007 9148.00 9093.00 9126.00 9086.00
05-JAN-2007 9139.00 9071.00 9086.00 9085.00
06-JAN-2007 9088.00 9077.00 9085.00 9085.00
09-JAN-2007 9082.00 8962.00 9068.00

10-JAN-2007 9095.00 9065.00 9092.00
11-JAN-2007 9103.00 8998.00 9068.00
12-JAN-2007 8991.00 8880.00 8974.00
13-JAN-2007 9030.00 8863.00 8957.00

15-JAN-2007 9079.00 8914.00 8924.00

16-JAN-2007 9095.00 8958.00 9083.00
17-JAN-2007 8993.00 8962.00 8990.00
18-JAN-2007 8997.00 8851.00 9951.00
19-JAN-2007 9214.00 8971.00 9998.00
20-JAN-2007 9193.00 8987.00 9129.00
22-JAN-2007 9269.00 9108.00 9127.00
23-JAN-2007 9405.00 9050.00 9158.00
24-JAN-2007 9540.00 9455.00 9481.00
25-JAN-2007 9564.00 9404.00 9461.00
27-JAN-2007 8924.00 8827.00 8894.00

29-JAN-2007 8965.00 8881.00 8927.00
30-JAN-2007 8890.00 8875.00 8881.00
31-JAN-2007 8899.00 8811.00 8868.00
01-FEB-2007 9996.00 9791.00 9967.00
02-FEB-2007 9920.00 9675.00 9792.00
03-FEB-2007 9756.00 9596.00 9740.00
05-FEB-2007 9965.00 9699.00 9696.00
06-FEB-2007 9967.00 9940.00 9956.00
07-FEB-2007 9959.00 9941.00 9956.00
08-FEB-2007 9939.00 9773.00 9917.00
09-FEB-2007 9995.00 9915.00 9925.00
10-FEB-2007 9990.00 9796.00 9939.00
12-FEB-2007 9957.00 9976.00 9951.00
13-FEB-2007 9910.00 9966.00 9902.00
CALCULATION OF NET SPREAD FOR DEC 2006
Close Net
Close (Rs) Price Difference Spread Spread

9356 9178 178 178 166.91613

9265 9181 84 84 72.96904
9309 9186 123 123 111.93962
9290 9238 52 52 40.9201
9269 9282 -13 13 1.906541
9206 9298 -92 92 80.934884
9217 9276 -59 59 47.941363
9247 9275 -28 28 16.923928
9256 9338 -82 82 70.881034
9222 9340 -118 118 106.90028
9142 9356 -214 214 202.93884
9127 9350 -223 223 211.95142
9126 9322 -196 196 184.96868
9086 9224 -138 138 127.05103
9085 9145 -60 60 49.09864
9085 9128 -43 43 32.108755
9116 9114 2 2 -8.901546
9165 9114 51 51 40.069005
9140 9145 -5 5 -5.934415
9137 9122 15 15 4.081073
9147 9120 27 27 16.076253
9142 8969 173 173 162.1691
9162 8854 308 308 297.22551
9041 8942 99 99 88.245869
9136 8951 185 185 174.18342
9148 9040 108 108 97.123252
9162 9265 -103 103 91.980963
9163 9309 -146 146 134.95418
9116 9290 -174 174 162.99373
8969 9269 -300 300 289.09458
8894 9206 -312 312 301.17714
8927 9217 -290 290 279.15076
8881 9247 -366 366 355.16055
8868 9256 -388 388 377.16301
8867 9222 -355 355 344.18384
8782 9142 -360 360 349.28253

8740 9127 -387 387 376.3167

8696 9126 -430 430 419.34373
8856 9086 -230 230 219.27137
8856 9085 -229 229 218.27197
8917 9085 -168 168 157.23531
8825 9068 -243 243 232.30072
8838 9092 -254 254 243.27862
8951 9068 -117 117 106.22499
8902 8974 -72 72 61.310368
8860 8957 -97 97 86.345725
8732 8924 -192 192 181.44229
8701 9083 -382 382 371.36631
8718 8990 -272 272 261.41143
8806 8951 -145 145 134.38175
8733 8998 -265 265 254.39766
8731 9129 -398 398 387.32091
8733 9127 -394 394 383.3209
8659 9158 -499 499 488.34693
8845 9481 -636 636 625.04296
9144 9461 -317 317 305.87516
9166 8894 272 272 261.1993
9250 8927 323 323 312.12919
9159 8881 278 278 267.21125
9071 8868 203 203 192.27187
9558 9967 -409 409 397.32528
9765 9792 -27 27 15.304995
9827 9740 87 87 75.298673
9695 9696 -1 1 -10.59582
9696 9956 -260 260 248.24888
9688 9956 -268 268 256.25369
9692 9917 -225 225 213.27449
9587 9925 -338 338 326.33284
9531 9939 -408 408 396.35816
9570 9951 -381 381 369.32759
9694 9902 -208 208 196.28222

Net Spread For Dec 2006
700
600
500
Amount(Rs)
400
300 Net Spread
200
100
0
-100 1 7 13 19 25 31 37 43 49 55 61 67
The average spread for this contract is Rs 209.6479 whereas the average net
spread is Rs 198.65997. From the graph given above we can see that the
nature of spread between the two exchanges has been volatile in nature. But
there has been a great number of opportunities for arbitrage in this contract.
MCX FEB 2007
Symbol Month
05-02-
GOLD 05FEB2007 9320.00 9350.00 9201.00 9291.00
2007
03-02-
GOLD 05FEB2007 9221.00 9237.00 9220.00 9234.00
2007

02-02-
GOLD 05FEB2007 9323.00 9347.00 9171.00 9189.00
2007
01-02-
GOLD 05FEB2007 9251.00 9350.00 9236.00 9329.00
2007
31-01-
GOLD 05FEB2007 9204.00 9279.00 9165.00 9242.00
2007
30-01-
GOLD 05FEB2007 9180.00 9215.00 9156.00 9195.00
2007
29-01-
GOLD 05FEB2007 9255.00 9265.00 9165.00 9207.00
2007
27-01-
GOLD 05FEB2007 9245.00 9252.00 9232.00 9249.00
2007
25-01-
GOLD 05FEB2007 9250.00 9316.00 9231.00 9266.00
2007
24-01-
GOLD 05FEB2007 9224.00 9249.00 9161.00 9241.00
2007
23-01-
GOLD 05FEB2007 9115.00 9242.00 9108.00 9223.00
2007
22-01-
GOLD 05FEB2007 9135.00 9179.00 9092.00 9117.00
2007
20-01-
GOLD 05FEB2007 9139.00 9144.00 9126.00 9129.00
2007
19-01-
GOLD 05FEB2007 9044.00 9145.00 9032.00 9136.00
2007
18-01-
GOLD 05FEB2007 9106.00 9162.00 9027.00 9056.00
2007
17-01-
GOLD 05FEB2007 9007.00 9126.00 8939.00 9107.00
2007
16-01- GOLD 05FEB2007 9037.00 9068.00 8988.00 9023.00

2007
15-01-
GOLD 05FEB2007 9075.00 9075.00 9043.00 9057.00
2007
13-01-
GOLD 05FEB2007 9070.00 9097.00 9070.00 9085.00
2007
12-01-
GOLD 05FEB2007 8880.00 9088.00 8865.00 9068.00
2007
11-01-
GOLD 05FEB2007 8871.00 8933.00 8843.00 8882.00
2007
10-01-
GOLD 05FEB2007 8906.00 8906.00 8815.00 8888.00
2007
09-01-
GOLD 05FEB2007 8862.00 8935.00 8808.00 8909.00
2007
08-01-
GOLD 05FEB2007 8885.00 8885.00 8798.00 8841.00
2007
06-01-
GOLD 05FEB2007 8833.00 8870.00 8831.00 8864.00
2007
05-01-
GOLD 05FEB2007 9070.00 9078.00 8775.00 8816.00
2007
04-01-
GOLD 05FEB2007 9146.00 9147.00 9066.00 9090.00
2007
03-01-
GOLD 05FEB2007 9281.00 9326.00 9080.00 9135.00
2007
02-01-
GOLD 05FEB2007 9274.00 9295.00 9250.00 9288.00
2007
01-01-
GOLD 05FEB2007 9251.00 9269.00 9250.00 9265.00
2007
30-12-
GOLD 05FEB2007 9243.00 9269.00 9243.00 9265.00
2006
29-12- GOLD 05FEB2007 9219.00 9242.00 9204.00 9234.00

2006
28-12-
GOLD 05FEB2007 9159.00 9227.00 9147.00 9217.00
2006
27-12-
GOLD 05FEB2007 9142.00 9179.00 9133.00 9159.00
2006
26-12-
GOLD 05FEB2007 9145.00 9196.00 9129.00 9143.00
2006
23-12-
GOLD 05FEB2007 9268.00 9268.00 9100.00 9123.00
2006
22-12-
GOLD 05FEB2007 9077.00 9106.00 9067.00 9093.00
2006
21-12-
GOLD 05FEB2007 9128.00 9136.00 9072.00 9078.00
2006
20-12-
GOLD 05FEB2007 9148.00 9170.00 9107.00 9123.00
2006
19-12-
GOLD 05FEB2007 9075.00 9147.00 9053.00 9134.00
2006
18-12-
GOLD 05FEB2007 9092.00 9108.00 9022.00 9049.00
2006
16-12-
GOLD 05FEB2007 9081.00 9095.00 9063.00 9077.00
2006
15-12-
GOLD 05FEB2007 9225.00 9249.00 9070.00 9108.00
2006
14-12-
GOLD 05FEB2007 9252.00 9259.00 9215.00 9227.00
2006
13-12-
GOLD 05FEB2007 9264.00 9279.00 9201.00 9255.00
2006
12/12/2006 GOLD 5-Feb-07 9277 9285 9238 9254
11/12/2006 GOLD 5-Feb-07 9240 9280 9212 9267

9/12/2006 GOLD 5-Feb-07 9232 9238 9224 9231
8/12/2006 GOLD 5-Feb-07 9280 9367 9232 9247
7/12/2006 GOLD 5-Feb-07 9315 9315 9212 9269
6/12/2006 GOLD 5-Feb-07 9420 9420 9318 9335
5/12/2006 GOLD 5-Feb-07 9468 9498 9391 9431
4/12/2006 GOLD 5-Feb-07 9485 9493 9418 9469
2/12/2006 GOLD 5-Feb-07 9471 9489 9470 9483
1/12/2006 GOLD 5-Feb-07 9464 9519 9451 9478
30-11-2006 GOLD 5-Feb-07 9379 9490 9367 9479
29-11-2006 GOLD 5-Feb-07 9385 9417 9347 9369
28-11-2006 GOLD 5-Feb-07 9396 9413 9321 9376
27-11-2006 GOLD 5-Feb-07 9409 9436 9372 9402
25-11-2006 GOLD 5-Feb-07 9340 9395 9340 9391
24-11-
GOLD 05FEB2007 9290.00 9369.00 9290.00 9355.00
2006
23-11-
GOLD 05FEB2007 9279.00 9290.00 9275.00 9288.00
2006
22-11-
GOLD 05FEB2007 9265.00 9334.00 9260.00 9273.00
2006
21-11-
GOLD 05FEB2007 9254.00 9288.00 9237.00 9274.00
2006

20-11-
GOLD 05FEB2007 9249.00 9286.00 9225.00 9238.00
2006
18-11-
GOLD 05FEB2007 9225.00 9231.00 9220.00 9228.00
2006
17-11-
GOLD 05FEB2007 9225.00 9243.00 9153.00 9225.00
2006
16-11-
GOLD 05FEB2007 9303.00 9319.00 9251.00 9262.00
2006
15-11-
GOLD 05FEB2007 9292.00 9318.00 9237.00 9309.00
2006
14-11-
GOLD 05FEB2007 9297.00 9343.00 9250.00 9292.00
2006
13-11-
GOLD 05FEB2007 9313.00 9375.00 9255.00 9293.00
2006
11-11-
GOLD 05FEB2007 9279.00 9294.00 9279.00 9291.00
2006
10-11-
GOLD 05FEB2007 9282.00 9360.00 9265.00 9284.00
2006
09-11-
GOLD 05FEB2007 9164.00 9309.00 9128.00 9297.00
2006
08-11-
GOLD 05FEB2007 9280.00 9280.00 9175.00 9185.00
2006
07-11-
GOLD 05FEB2007 9252.00 9312.00 9225.00 9280.00
2006
06-11-
GOLD 05FEB2007 9316.00 9327.00 9247.00 9286.00
2006

NCDEX FEB 2007
Date Prev Close Price Open Price High Price Low Price Close Price
21-NOV-2006 9238.00 9300.00 9380.00 9300.00 9375.00
22-NOV-2006 9357.00 9422.00 9422.00 9310.00 9398.00
23-NOV-2006 9367.00 9377.00 9377.00 9377.00 9377.00
24-NOV-2006 9377.00 9388.00 9430.00 9376.00 9430.00
25-NOV-2006 9406.00 9432.00 9475.00 9430.00 9475.00
27-NOV-2006 9443.00 9490.00 9495.00 9416.00 9470.00
28-NOV-2006 9466.00 9470.00 9479.00 9410.00 9422.00
29-NOV-2006 9448.00 9424.00 9497.00 9421.00 9448.00
30-NOV-2006 9448.00 9460.00 9530.00 9460.00 9530.00
01-DEC-2006 9486.00 9510.00 9560.00 9503.00 9529.00
02-DEC-2006 9529.00 9525.00 9525.00 9525.00 9525.00
04-DEC-2006 9525.00 9525.00 9558.00 9520.00 9520.00
05-DEC-2006 9532.00 9540.00 9540.00 9451.00 9499.00
06-DEC-2006 9499.00 9450.00 9465.00 9400.00 9438.00
07-DEC-2006 9438.00 9400.00 9400.00 9310.00 9356.00
08-DEC-2006 9356.00 9380.00 9400.00 9330.00 9370.00
09-DEC-2006 9370.00 9321.00 9338.00 9301.00 9335.00
11-DEC-2006 9315.00 9315.00 9348.00 9290.00 9348.00
12-DEC-2006 9314.00 9340.00 9359.00 9321.00 9321.00
13-DEC-2006 9333.00 9321.00 9341.00 9292.00 9319.00
14-DEC-2006 9319.00 9311.00 9326.00 9293.00 9326.00
15-DEC-2006 9309.00 9282.00 9330.00 9165.00 9209.00
16-DEC-2006 9209.00 9150.00 9160.00 9145.00 9152.00
18-DEC-2006 9152.00 9262.00 9262.00 9102.00 9155.00
19-DEC-2006 9155.00 9148.00 9200.00 9130.00 9156.00
20-DEC-2006 9156.00 9215.00 9225.00 9180.00 9212.00

21-DEC-2006 9212.00 9200.00 9209.00 9150.00 9182.00

22-DEC-2006 9182.00 9141.00 9160.00 9140.00 9154.00
23-DEC-2006 9154.00 9165.00 9178.00 9165.00 9175.00
26-DEC-2006 9174.00 9202.00 9274.00 9192.00 9228.00
27-DEC-2006 9228.00 9205.00 9225.00 9201.00 9213.00
28-DEC-2006 9213.00 9217.00 9265.00 9207.00 9237.00
29-DEC-2006 9237.00 9253.00 9275.00 9253.00 9267.00
30-DEC-2006 9267.00 9280.00 9400.00 9280.00 9329.00
01-JAN-2007 9329.00 9326.00 9332.00 9315.00 9315.00
02-JAN-2007 9325.00 9320.00 9337.00 9302.00 9319.00
03-JAN-2007 9319.00 9320.00 9352.00 9151.00 9270.00
04-JAN-2007 9270.00 9249.00 9249.00 9140.00 9168.00
05-JAN-2007 9168.00 9135.00 9135.00 8810.00 8993.00
06-JAN-2007 8993.00 8920.00 9039.00 8910.00 8943.00
08-JAN-2007 8943.00 8935.00 8950.00 8875.00 8922.00
09-JAN-2007 8922.00 8940.00 8990.00 8891.00 8972.00
10-JAN-2007 8972.00 8961.00 8964.00 8892.00 8930.00
11-JAN-2007 8930.00 8920.00 8985.00 8912.00 8952.00
12-JAN-2007 8952.00 8918.00 9135.00 8918.00 9115.00
13-JAN-2007 9115.00 9138.00 9149.00 9121.00 9135.00
15-JAN-2007 9135.00 9041.00 9130.00 9041.00 9112.00
16-JAN-2007 9112.00 9102.00 9126.00 9057.00 9092.00
17-JAN-2007 9092.00 9080.00 9168.00 9002.00 9157.00
18-JAN-2007 9157.00 9158.00 9200.00 9080.00 9108.00
19-JAN-2007 9108.00 9114.00 9188.00 9089.00 9177.00

20-JAN-2007 9177.00 9176.00 9180.00 9168.00 9173.00
22-JAN-2007 9173.00 9176.00 9209.00 9145.00 9162.00
23-JAN-2007 9162.00 9155.00 9258.00 9155.00 9253.00
24-JAN-2007 9253.00 9260.00 9280.00 9210.00 9275.00
25-JAN-2007 9275.00 9282.00 9339.00 9255.00 9287.00
27-JAN-2007 9287.00 9340.00 9340.00 9275.00 9286.00
29-JAN-2007 9286.00 9300.00 9309.00 9209.00 9255.00
30-JAN-2007 9255.00 9223.00 9250.00 9200.00 9242.00
31-JAN-2007 9242.00 9240.00 9323.00 9202.00 9291.00
01-FEB-2007 9291.00 9295.00 9369.00 9276.00 9334.00
02-FEB-2007 9334.00 9312.00 9360.00 9192.00 9224.00
03-FEB-2007 9224.00 9250.00 9252.00 9235.00 9249.00
05-FEB-2007 9249.00 9268.00 9280.00 9215.00 9243.00
06-FEB-2007 9243.00 9259.00 9335.00 9245.00 9296.00
07-FEB-2007 9296.00 9330.00 9331.00 9270.00 9287.00

08-FEB-2007 9287.00 9291.00 9350.00 9230.00 9342.00
09-FEB-2007 9342.00 9351.00 9435.00 9325.00 9433.00
10-FEB-2007 9433.00 9428.00 9433.00 9422.00 9428.00
12-FEB-2007 9428.00 9420.00 9430.00 9353.00 9402.00
13-FEB-2007 9402.00 9350.00 9470.00 9350.00 9404.00
14-FEB-2007 9404.00 9440.00 9494.00 9401.00 9454.00
15-FEB-2007 9454.00 9475.00 9501.00 9445.00 9473.00
16-FEB-2007 9473.00 9475.00 9492.00 9421.00 9466.00
17-FEB-2007 9466.00 9475.00 9497.00 9461.00 9477.00
19-FEB-2007 9477.00 9495.00 9600.00 9471.00 9523.00
20-FEB-2007 9523.00 9599.00 9711.00 9459.00 9550.00

Calculation of NET Spread FEB 2007
Close (Rs) Close Price Difference Spread Net Spread
9107 9370 -263 263 251.95154
9023 9335 -312 312 301.02285
9057 9348 -291 291 279.99468
9085 9321 -236 236 224.99392
9068 9319 -251 251 240.00533
8882 9326 -444 444 433.11295
8888 9209 -321 321 310.17896
8909 9152 -243 243 232.20025
8841 9155 -314 314 303.23933
8864 9156 -292 292 281.22492
8816 9212 -396 396 385.22044
9090 9182 -92 92 81.07362
9135 9154 -19 19 8.063235
9288 9175 113 113 101.95879
9265 9228 37 37 25.941075
9265 9213 52 52 40.95
9234 9237 -3 3 -8.045649
9217 9267 -50 50 38.946718

9159 9329 -170 170 158.94469
9143 9315 -172 172 160.96263
9123 9319 -196 196 184.97227
9093 9270 -177 177 166.01946
9078 9168 -90 90 79.089162
9123 8993 130 130 119.16624
9134 8943 191 191 180.18938
9049 8922 127 127 116.25296
9077 8972 105 105 94.206383
9108 8930 178 178 167.21274
9227 8952 275 275 264.12813
9255 9115 140 140 129.01432
9254 9135 119 119 108.00302
9267 9112 155 155 144.00889
9231 9092 139 139 128.04243
9247 9157 90 90 78.994138
9269 9108 161 161 150.01007
9335 9177 158 158 146.92935
9431 9173 258 258 246.87403
9469 9162 307 307 295.85774
9483 9253 230 230 218.79518
9478 9275 203 203 191.7851
9479 9287 192 192 180.77736
9369 9286 83 83 71.844061
9376 9255 121 121 109.8583
9402 9242 160 160 148.85041

9391 9291 100 100 88.827864
9355 9334 21 21 9.823915
9288 9224 64 64 52.929632
9273 9249 24 24 12.923772
9274 9243 31 31 19.926741
9238 9296 -58 58 46.916842
9228 9287 -59 59 47.928207
9225 9342 -117 117 105.89729
9262 9433 -171 171 159.8209
9309 9428 -119 119 107.79563
9292 9402 -110 110 98.821318
9293 9404 -111 111 99.819527
9291 9454 -163 163 151.79098
9284 9473 -189 189 177.78388
9297 9466 -169 169 157.78023
9185 9477 -292 292 280.841
9280 9523 -243 243 231.75654
9286 9550 -264 264 252.73686

Net Spread For Feb 2007
500
450
400
350
Amount (Rs)
300
250
Net Spread
200
150
100
50
0
-50 1 6 11 16 21 26 31 36 41 46 51 56 61
spread is Rs 156.07972. From the graph given above we can see that the
nature of spread between the two exchanges has been positive leaving One
or two moments. The spread has been highly beneficial for the traders as
there has been an ample opportunity for arbitrage. Moreover the graph is
moving towards the north showing that there are more opportunities for
arbitrage.

MCX APRIL2007
Symbol Month
24-01-
GOLD 05APR2007 9396.00 9414.00 9320.00 9405.00
2007
23-01-
GOLD 05APR2007 9275.00 9398.00 9273.00 9383.00
2007
22-01-
GOLD 05APR2007 9299.00 9337.00 9257.00 9276.00
2007
20-01-
GOLD 05APR2007 9298.00 9298.00 9284.00 9288.00
2007
19-01-
GOLD 05APR2007 9210.00 9303.00 9195.00 9294.00
2007
18-01-
GOLD 05APR2007 9267.00 9320.00 9186.00 9211.00
2007
17-01-
GOLD 05APR2007 9167.00 9287.00 9111.00 9269.00
2007
16-01-
GOLD 05APR2007 9200.00 9229.00 9150.00 9184.00
2007
15-01-
GOLD 05APR2007 9216.00 9238.00 9209.00 9216.00
2007
13-01-
GOLD 05APR2007 9240.00 9259.00 9236.00 9248.00
2007
12-01-
GOLD 05APR2007 9046.00 9244.00 9035.00 9226.00
2007
11-01-
GOLD 05APR2007 9034.00 9100.00 9010.00 9047.00
2007
10-01-
GOLD 05APR2007 9071.00 9075.00 8995.00 9051.00
2007
09-01-
GOLD 05APR2007 9045.00 9119.00 8985.00 9088.00
2007
08-01-
GOLD 05APR2007 9048.00 9050.00 8980.00 9015.00
2007
06-01-
GOLD 05APR2007 9015.00 9049.00 9006.00 9042.00
2007
05-01- GOLD 05APR2007 9245.00 9245.00 8974.00 8996.00

2007
04-01-
GOLD 05APR2007 9298.00 9311.00 9233.00 9252.00
2007
03-01-
GOLD 05APR2007 9444.00 9490.00 9250.00 9300.00
2007
02-01-
GOLD 05APR2007 9435.00 9465.00 9417.00 9460.00
2007
01-01-
GOLD 05APR2007 9405.00 9443.00 9405.00 9436.00
2007
30-12-
GOLD 05APR2007 9399.00 9435.00 9399.00 9430.00
2006
29-12-
GOLD 05APR2007 9375.00 9403.00 9374.00 9398.00
2006
28-12-
GOLD 05APR2007 9321.00 9394.00 9310.00 9384.00
2006
27-12-
GOLD 05APR2007 9299.00 9335.00 9292.00 9323.00
2006
26-12-
GOLD 05APR2007 9309.00 9352.00 9292.00 9305.00
2006
23-12-
GOLD 05APR2007 9260.00 9351.00 9260.00 9285.00
2006
22-12-
GOLD 05APR2007 9229.00 9264.00 9227.00 9249.00
2006
21-12-
GOLD 05APR2007 9318.00 9318.00 9230.00 9236.00
2006
20-12-
GOLD 05APR2007 9314.00 9322.00 9265.00 9278.00
2006
19-12-
GOLD 05APR2007 9156.00 9296.00 9156.00 9289.00
2006
18-12-
GOLD 05APR2007 9291.00 9295.00 9182.00 9205.00
2006
16-12-
GOLD 05APR2007 9239.00 9239.00 9221.00 9234.00
2006
15-12-
GOLD 05APR2007 9377.00 9400.00 9229.00 9272.00
2006
14-12-
GOLD 05APR2007 9402.00 9414.00 9370.00 9382.00
2006

13-12-
GOLD 05APR2007 9428.00 9430.00 9361.00 9411.00
2006
12-12-
GOLD 05APR2007 9424.00 9442.00 9396.00 9410.00
2006
11-12-
GOLD 05APR2007 9395.00 9431.00 9366.00 9423.00
2006
09-12-
GOLD 05APR2007 9389.00 9400.00 9386.00 9392.00
2006
08-12-
GOLD 05APR2007 9458.00 9521.00 9400.00 9405.00
2006
07-12-
GOLD 05APR2007 9471.00 9471.00 9371.00 9425.00
2006
06-12-
GOLD 05APR2007 9435.00 9545.00 9435.00 9485.00
2006
05-12-
GOLD 05APR2007 9600.00 9647.00 9550.00 9582.00
2006
04-12-
GOLD 05APR2007 9634.00 9636.00 9568.00 9617.00
2006
02-12-
GOLD 05APR2007 9625.00 9631.00 9623.00 9627.00
2006
01-12-
GOLD 05APR2007 9610.00 9660.00 9593.00 9617.00
2006
30-11-
GOLD 05APR2007 9523.00 9625.00 9515.00 9611.00
2006
29-11-
GOLD 05APR2007 9526.00 9559.00 9498.00 9520.00
2006
28-11-
GOLD 05APR2007 9534.00 9555.00 9475.00 9515.00
2006
27-11-
GOLD 05APR2007 9550.00 9574.00 9516.00 9534.00
2006
25-11-
GOLD 05APR2007 9494.00 9538.00 9494.00 9525.00
2006
24-11-
GOLD 05APR2007 9459.00 9517.00 9459.00 9496.00
2006
23-11-
GOLD 05APR2007 9425.00 9430.00 9411.00 9425.00
2006
22-11-
GOLD 05APR2007 9442.00 9456.00 9411.00 9425.00
2006

21-11-
GOLD 05APR2007 9408.00 9442.00 9396.00 9422.00
2006
20-11-
GOLD 05APR2007 9377.00 9428.00 9377.00 9415.00
2006
18-11-
GOLD 05APR2007 9375.00 9380.00 9361.00 9373.00
2006
17-11-
GOLD 05APR2007 9301.00 9428.00 9301.00 9364.00
2006
16-11-
GOLD 05APR2007 9430.00 9483.00 9430.00 9468.00
2006
15-11-
GOLD 05APR2007 9440.00 9465.00 9401.00 9436.00
2006
14-11-
GOLD 05APR2007 9440.00 9488.00 9410.00 9439.00
2006
13-11-
GOLD 05APR2007 9485.00 9495.00 9414.00 9443.00
2006
11-11-
GOLD 05APR2007 9445.00 9449.00 9443.00 9445.00
2006
10-11-
GOLD 05APR2007 9426.00 9500.00 9411.00 9431.00
2006
09-11-
GOLD 05APR2007 9320.00 9440.00 9280.00 9422.00
2006
NCDEX April 2007
Date Open Price High Price Low Price Close Price

10-JAN-2007 9289.00 9289.00 9052.00 9052.00
11-JAN-2007 9299.00 9299.00 9299.00 9299.00
12-JAN-2007 9199.00 9300.00 9198.00 9300.00
13-JAN-2007 9300.00 9300.00 9300.00 9300.00
15-JAN-2007 9235.00 9395.00 9235.00 9255.00
16-JAN-2007 9390.00 9390.00 9225.00 9296.00
17-JAN-2007 9280.00 9360.00 9212.00 9296.00
18-JAN-2007 9360.00 9360.00 9290.00 9290.00
19-JAN-2007 9280.00 9300.00 9272.00 9300.00

20-JAN-2007 9385.00 9385.00 9385.00 9385.00

22-JAN-2007 9370.00 9394.00 9315.00 9351.00
23-JAN-2007 9398.00 9398.00 9398.00 9398.00
24-JAN-2007 9400.00 9444.00 9285.00 9416.00
25-JAN-2007 9460.00 9519.00 9430.00 9498.00
27-JAN-2007 9450.00 9450.00 9450.00 9450.00
29-JAN-2007 9472.00 9490.00 9400.00 9465.00
30-JAN-2007 9388.00 9444.00 9388.00 9444.00
31-JAN-2007 9444.00 9515.00 9392.00 9461.00
01-FEB-2007 9500.00 9555.00 9480.00 9518.00
02-FEB-2007 9543.00 9543.00 9420.00 9471.00
03-FEB-2007 9430.00 9439.00 9430.00 9439.00
05-FEB-2007 9420.00 9434.00 9420.00 9434.00
06-FEB-2007 9434.00 9499.00 9434.00 9499.00
07-FEB-2007 9480.00 9490.00 9450.00 9450.00
08-FEB-2007 9460.00 9520.00 9410.00 9474.00
09-FEB-2007 9600.00 9600.00 9485.00 9562.00
10-FEB-2007 9586.00 9639.00 9586.00 9619.00
12-FEB-2007 9590.00 9590.00 9540.00 9567.00
13-FEB-2007 9599.00 9630.00 9576.00 9596.00
14-FEB-2007 9590.00 9660.00 9590.00 9633.00
15-FEB-2007 9611.00 9669.00 9572.00 9625.00
16-FEB-2007 9620.00 9630.00 9600.00 9630.00
17-FEB-2007 9640.00 9643.00 9640.00 9643.00
19-FEB-2007 9670.00 9677.00 9655.00 9668.00
20-FEB-2007 9673.00 9673.00 9510.00 9593.00
21-FEB-2007 9549.00 9770.00 9520.00 9599.00
22-FEB-2007 9715.00 9795.00 9715.00 9748.00
23-FEB-2007 9758.00 9860.00 9731.00 9796.00
24-FEB-2007 9820.00 9850.00 9820.00 9842.00
26-FEB-2007 9870.00 9889.00 9790.00 9868.00
27-FEB-2007 9890.00 9890.00 9750.00 9815.00

28-FEB-2007 9840.00 9840.00 9617.00 9709.00

01-MAR-2007 9650.00 9752.00 9610.00 9625.00
02-MAR-2007 9625.00 9625.00 9343.00 9361.00
03-MAR-2007 9450.00 9450.00 9350.00 9383.00
05-MAR-2007 9335.00 9395.00 9270.00 9323.00
06-MAR-2007 9400.00 9437.00 9369.00 9406.00
07-MAR-2007 9405.00 9475.00 9400.00 9430.00
08-MAR-2007 9481.00 9537.00 9477.00 9503.00
09-MAR-2007 9481.00 9521.00 9457.00 9490.00
10-MAR-2007 9450.00 9460.00 9442.00 9453.00
12-MAR-2007 9462.00 9481.00 9400.00 9446.00
13-MAR-2007 9464.00 9464.00 9385.00 9402.00
14-MAR-2007 9380.00 9380.00 9290.00 9333.00
15-MAR-2007 9361.00 9431.00 9352.00 9392.00
16-MAR-2007 9390.00 9470.00 9380.00 9436.00
17-MAR-2007 9459.00 9459.00 9440.00 9449.00
19-MAR-2007 9451.00 9478.00 9443.00 9462.00
20-MAR-2007 9460.00 9481.00 9430.00 9461.00
21-MAR-2007 9472.00 9482.00 9441.00 9463.00
22-MAR-2007 9471.00 9530.00 9471.00 9503.00
23-MAR-2007 9498.00 9500.00 9405.00 9410.00
24-MAR-2007 9420.00 9423.00 9401.00 9406.00
26-MAR-2007 9410.00 9450.00 9395.00 9413.00
27-MAR-2007 9430.00 9440.00 9401.00 9416.00
Calculation of Net Spread April 2007
Close
Close (Rs) Price Difference Spread Net Spread
9405 9052 353 353 341.961655

9383 9299 84 84 72.827912
9276 9300 -24 24 12.891624
9288 9300 -12 12 0.884412
9294 9255 39 39 27.907581
9211 9296 -85 85 73.933069
9269 9296 -27 27 15.898211
9184 9290 -106 106 94.952866
9216 9300 -84 84 72.927684
9248 9385 -137 137 125.857877
9226 9351 -125 125 113.891329
9047 9398 -351 351 339.970943
9051 9416 -365 365 353.957829
9088 9498 -410 410 398.886802
9015 9450 -435 435 423.959235
9042 9465 -423 423 411.934083
8996 9444 -448 448 436.974224
9252 9461 -209 209 197.810253
9300 9518 -218 218 206.74749
9460 9471 -11 11 -0.320705
9436 9439 -3 3 -8.287241

9430 9434 -4 4 -7.28066
9398 9499 -101 101 89.699897
9384 9450 -66 66 54.737466
9323 9474 -151 151 139.759847
9305 9562 -257 257 245.718305
9285 9619 -334 334 322.69641
9249 9567 -318 318 306.748986
9236 9596 -360 360 348.739544
9278 9633 -355 355 343.692287
9289 9625 -336 336 324.690436
9205 9630 -425 425 413.737945
9234 9643 -409 409 397.712781
9272 9668 -396 396 384.675068
9382 9593 -211 211 199.653583
9411 9599 -188 188 176.632584
9410 9748 -338 338 326.54453
9423 9796 -373 373 361.508157
9392 9842 -450 450 438.499418
9405 9868 -463 463 451.476135
9425 9815 -390 390 378.49565

9485 9709 -224 224 212.52266
9582 9625 -43 43 31.514343
9617 9361 256 256 244.650388
9627 9383 244 244 232.631288
9617 9323 294 294 282.672998
9611 9406 205 205 193.627219
9520 9430 90 90 78.66763
9515 9503 12 12 0.6272
9534 9490 44 44 32.623516
9525 9453 72 72 60.65094
9496 9446 50 50 38.672534
9425 9402 23 23 11.741385
9425 9333 92 92 80.78244
9422 9392 30 30 18.749138
9415 9436 -21 21 9.727165
9373 9449 -76 76 64.744672
9364 9462 -98 98 86.742346
9468 9461 7 7 -4.319563
9436 9463 -27 27 15.698479
9439 9503 -64 64 52.672876

9443 9410 33 33 21.725807
9445 9406 39 39 27.726985
9431 9413 18 18 6.731234
9422 9416 6 6 -5.265142
Spread For April 2007
500
400
300
Amount(Rs)
200 Series1
100
0
1 6 11 16 21 26 31 36 41 46 51 56 61
-100
spread is Rs 172.4619083. From the graph given above we can see that
though initially there were opportunities for arbitrage but in the end the
spread was very low and arbitrage was not possible to a great extent.

4.2 ANALYSIS AND CONCLUSION
The period under consideration for my study was in total of 3 Contracts. The
contracts were -----
Expiring on December 2006
Expiring on February 2007
Expiring on April 2007
CONTRACT AVG.SPREAD AVG.NET SPREAD

DEC 2006 209.6479 198.65997
FEB 2007 167.1129 156.07972
APR 2007 183.7321 172.4619083
AVERAGE 186.831 175.7339
Having a look at the table we see that the Avg net spread for the 3
contracts is coming out to be Rs 175.7339.This amount is for a unit as per
the assumptions of the study. Even if we take a single lot of standard five
hundred units we see that the avg amount of net benefit for the 3 contracts
taken together comes out to be Rs 87866.95.

A V G .N E T S P R E A D
250
200
150
Avg. Net Spread
A V G .N E T S P R E A D
100
50
0
D e c -J a n - F e b -M a r- A p r-
06 07 07 07 07
C o n tr a c t M o n th
The above chart clearly shows that the AVERAGE NET

SPREAD has been positive and so there has been clearly an
arbitrage opportunity available during the period. During the
contract of December 2006 it has been the highest, followed by
April 2007 and February 2007.

4.3 FINDINGS AND SUGESSTIONS
FINDINGS
After having studied the gold prices in MCX and NCDEX, I have found out
that there are substantial price differences of gold in the closing prices of
both the exchanges. These differences give birth to the availability of
arbitrage opportunities. But though sometimes the spread is positive but after
the transaction cost it becomes negative. So the cost of transaction is also to
be considered.
But arbitrage is a risky business and one should be aware of the trend in the
market. Moreover an investor should remain invested for the whole duration
of the contract. Otherwise he may not be able to reap the benefits of
arbitrage or he might even face heavy losses. The prices keep on fluctuating
every second as they are governed by demand and supply economics and are
extremely hard to determine before hand.
So if the investor even if by chance invest the other way round will suffer
losses which may be disastrous. This ever changing nature of prices makes it
really difficult to deploy the arbitraging process.

SUGESSTIONS
I would like to give the following suggestions to the investors who are
interested in engaging themselves in the arbitraging process---
1) Go for arbitraging only if you have the required knowledge of the market.
2) Remain invested for the whole duration of the contract only then you can
reap the benefits of arbitraging.
3) In the short run if you sell and buy then you might end up in losses
because price moments are very volatile in the short run. Only in the long
run you can have benefits.
4) Sometimes the spread might seem positive and alluring, but when we take
transaction cost into account it may end up in negative net spread. Like we
can see in the calculation of net spread of April 2007.
5) Go for arbitraging only if you are a heavy investor in the market. Small
investors are not benefited by arbitraging because it requires heavy
investment in heavy lots and also for a long period of time.

6) Last but not the least I would suggest that unless and until you have
patience and tolerance do not go for arbitraging
References
1. DeLong, J. B., Shleifer, A., Summers, L. H. &Waldmann, R. J. (1990), ‘Noise
trader risk in financial markets’, Journal of Political Economy 98(4)
2. Dybvig, P. H. & Ross, S. A. (1992), Arbitrage, in ‘The new Palgrave Dictionary

of Money and Finance’, Macmillon, London
3. Fama, E. (1965), ‘The behaviour of stock market prices’, Journal of Business 38
4. Froot, K. A. & Dabora, E. (1995), How are stock prices affected by the location of
trade? Technical report, NYSE Conference on Internationalisation of Stock
Markets
5. Kato, K., Linn, S. & Schallheim, J. (1991), ‘Are there arbitrage opportunities in
the market for american depository receipts?’ Journal of International Financial
Markets
6. Merton, R. C. (1987), ‘A simple model of capital market equilibrium with

incomplete information’, Journal of Finance (42)
7. Pagano, M. & Roell, A. (1993), Shifting gears: An economic evaluation of the

reform of the paris bourse, in ‘Financial Market Liberalization and the Role of
Banks’.

8. Ross, S. (2001), Arbitrage and finance, in ‘The Princeton Lectures in Finance’,

Princeton University Press.
9. Sharpe, W. & Alexander, G. (1990), Investments, fourth edn, Prentice-Hall.
10. Shleifer, A. & Summers, L. (1990), ‘The noise trader approach to finance’,
Journal of Economic Perspectives (4)
11. Shleifer, A. & Vishny, R. (1997), ‘The limits of arbitrage’, Journal of Finance
12. Billingsley, R. S. and Chance, D. M. (1988), "The pricing and performance of

stock index futures spreads," Journal of Futures Markets, 8(3)
13. Board, J. and Sutcliffe, C. M. S. (1996), "The Dual listing of stock index futures:
arbitrage, spread arbitrage, and currency risk," Journal of Futures Markets,16(1)
14. Booth, G. G., Brockman, P., and Tse, Y. (1998), "The relationship between US
and Canadian wheat futures," Applied Financial Economics, 8(1)
15. Brenner, M., Subrahmanyam, M. G., and Uno, J. (1989), "Stock index futures
arbitrage in the Japanese Markets," Japan and the World Economy, 1(3)
16. Butterworth, D. and Holmes, P. (1999), Inter-market spread trading: evidence

from UK index futures markets. Working Papers Series in Economics & Finance
9906. University of Durham
17. D'amato, M. and Pistoresi, B. (2001), "Interest rate spreads between Italy and
Germany: 1995-1997," Applied Financial Economics, 11(6)
18. Evans, J. L. and Archer, S. H. (1968), "Diversification and the reduction of

dispersion: an empirical analysis," Journal of Finance, 23(5)

19. Girma, P. B. and Paulson, A. S. (1999), "Risk arbitrage opportunities in petroleum

futures spreads," Journal of Futures Markets, 19(8)
20. Shleifer, A. and Vishny, R. W. (1997), "The limits of arbitrage," Journal of

Finance, 52(1)
21. Simon, D. P. (1999), "The soybean crush spread: empirical evidence and trading
strategies," Journal of Futures Markets, 19(3)
22. Wahab, M., Cohn, R., and Lashgari, M. (1994), "The gold-silver spread:
integration
23. cointegration, predictability, and ex-ante arbitrage," Journal of Futures Markets,
14(6)

Bibliography
Book
 COMMODITY FUTURES AND OPTIONS, MR. GEORGE KLEINMAN.

 HULL, JOHN C. 1993. OPTIONS, FUTURES AND OTHER DERIVATIVE
SECURITIES, 2ND EDITION. PRENTICE-HALL. ENGLEWOOD CLIFFS,
NEW JERSEY.
 KOLB, ROBERT, 1994. FUTURES, OPTIONS, AND SWAPS. KOLB
PUBLISHING COMPANY. FLORIDA.
 SHARPE, W. & ALEXANDER, G. (1990), INVESTMENTS, FOURTH EDN,
PRENTICE-HALL.
 HERBST, A. F. (1992), ANALYZING AND FORECASTING FUTURES
PRICES: A GUIDE FOR HEDGERS, SPECULATORS, AND TRADERS. NEW
YORK: JOHN WILEY & SONS, INC.
Websites
 www.mcxindia.com
 www.ncdex.com
 www.nseindia.com


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VEDANT UPADHYAYA 4105214214 1

1.1 ABOUT THE PROJECT

In this project I have studied about the possible opportunities of arbitrage

There exist price differences between the same commodity in two

Analysis of Arbitrage opportunities in Gold ee

1.2 WHY COMMODITY GOLD WAS CHOSEN

Gold is the indicator of an economy. A country’s economy is rated by the

Moreover gold is considered as the best hedge against inflation. In an

The prices of gold depend on a large number of factors and hence it is an

Analysis of Arbitrage opportunities in Gold ee

1.3 COMPANY PROFILE

Jaypee Commodities PVT LTD.

It is our commitment to partner with each of our clients, offer

Analysis of Arbitrage opportunities in Gold ee

Unlike a huge conglomerate where a client is only a number at

At Jaypee , teams of skilled financial professionals constantly

Analysis of Arbitrage opportunities in Gold ee

Markets are Always Right! And we respect that…

Analysis of Arbitrage opportunities in Gold ee

We believe in keeping our clients satisfied all the time. We are

We offer two types of Broking/Dealing Services: -

The Jaypee Advantage

Analysis of Arbitrage opportunities in Gold ee

Every Tick Counts !

platform systems and online account view.

We can assist Traders, Institutions and Individual Clients to trade

A basket of financial instruments to choose from!

Equities, Options, Commodities, Futures, Metals & Energy etc.

Analysis of Arbitrage opportunities in Gold ee

2.1 INTRODUCTION TO COMMODITY MARKET

Over the modern age of investing, commodity trading has emerged as an

Analysis of Arbitrage opportunities in Gold ee

Analysis of Arbitrage opportunities in Gold ee

Analysis of Arbitrage opportunities in Gold ee

financial assets. Commodities, therefore, tend to react to changing economic

Analysis of Arbitrage opportunities in Gold ee

shifting of risk to someone willing to accept it is called hedging.

Analysis of Arbitrage opportunities in Gold ee

1. Experience- Always make sure that your commodity broker has

Analysis of Arbitrage opportunities in Gold ee

There are several types of services and accounts to choose from:

Full service account. A full service account is where a professional

Analysis of Arbitrage opportunities in Gold ee

Discount online account. This account is for commodity investors who do

Commodities are traded constantly on commodity exchanges around the

Analysis of Arbitrage opportunities in Gold ee

Analysis of Arbitrage opportunities in Gold ee

Capturing the full benefits of commodity exposure has been a challenge in

Analysis of Arbitrage opportunities in Gold ee

Commodities markets have gained wide popularity among investors because

Also it is not false in case of Indian financial market. Commodity trading

Analysis of Arbitrage opportunities in Gold ee

In this project report I mainly concentrated towards the Arbitragers. Initially

2.2 INTRODUCTION TO DERIVATIVE MARKET

Analysis of Arbitrage opportunities in Gold ee

In the Indian context of the Securities Contracts (Regulation) Act, 1956

Analysis of Arbitrage opportunities in Gold ee

1. A security derived from a debt instrument, share, loan whether

2. A contract which derives its value from the prices, or index of

Types Derivatives Market

Derivative markets can broadly be classified as commodity derivative

Analysis of Arbitrage opportunities in Gold ee

Financial derivatives markets trade contracts that have a financial asset or