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CHAPTER - I

INTRODUCTION

INTRODUCTION
Commodity market is an important constituent of the financial
markets of any country. It is the market where a wide range of products, viz.,
precious metals, base metals, crude oil, energy and soft commodities like palm oil,
coffee etc. are traded. It is important to develop a vibrant, active and liquid
commodity market. This would help investors hedge their commodity risk, take
speculative positions in commodities and exploit arbitrage opportunities in the
market.
Derivatives as a tool for managing risk first originated in the commodities
markets. They were then found useful as a hedging tool in financial markets as well.
In India, trading in commodityfutures has been in existence from the nineteenth
century with organised trading in cottonthrough the establishment of Cotton Trade
Association in 1875. Over a period of time, othercommodities were permitted to be
traded in futures exchanges. Regulatory constraints in1960s resulted in virtual
dismantling of the commodity futures market. It is only in the lastdecade that
commodity futures exchanges have been actively encouraged however, the markets
have not grown to significant levels.
A commodity derivatives market (or exchange) is, in simple terms, nothing
more or less than a publicmarketplace where commodities are contracted for
purchase or sale at an agreed price for delivery at aspecified date. These purchases
and sales, which must be made through a broker who is a member of an organized
exchange, are made under the terms and conditions of a standardized futures
contract.Commodity prices do vibrate more rapidly and provide profitable
opportunities,

accordinglyrecessions,

depressions

and

booms

offer

many

opportunities to scoop up profits. Exchange Traded Derivatives can be broadly


classified into Futures and Options.

Indian markets have recently thrown open a new avenue for retail investors and
traders to participate commodity derivatives. For those who want to diversify their
portfolios beyond shares, commodities bonds and real estate are the best options.
The retail investors could have done very little to actually invest in
commodities such as gold and silver or oilseeds in the futures market. This was nearly
impossible in commodities except for gold and silver as there was practically no retail
avenue for pumping in commodities.
However, with the setting up of three multi-commodity exchanges in the country,
retail investors can now trade in commodity futures without having physical stocks!
Commodities actually offer immense potential to become a separate asset class for
market survey investors, arbitrageurs and speculators. Retail investors, who claim to
understand the equity markets, may find commodities an unfathomable market. But
commodities are easy to understand as far as fundamentals of demand and supply are
concerned. Retail investors should understand the risks and advantages of trading in
commodities futures before taking a leap.

Historically, pricing in commodities

futures has been less volatile compared with equity and bonds, thus providing an
efficient portfolio diversification option.
Currently, the various commodities across the country clock an annual turnover
of Rs.1,40,000crore ( Rs.1,400 billion). With the introduction of futures trading, the
sizes of the commodities market grow many folds here on.
Like any other market, the one for commodity futures plays a valuable role in
information pooling and risk sharing. The market mediates between buyers and
sellers of commodities, and facilitates decisions related to storage and consumption
of commodities. In the process, they make the underlying market more liquid.

NEED OF THE STUDY


Achieving hedging efficiency is the main reason to opt for futures
contracts. For instance, in February, 2007, India had to pay $ 52 per barrel more for
importing oil than what they had to pay a week ago. The utility of a futures contract
for hedging or risk management purpose parallel or near-parallel relationship
between the spot and futures prices over time. In other words, the efficiency of a
futures contract for hedging essentially envisages that the prices in the physical and
futures markets move in close union not only in the same direction, but also by
almost the same magnitude, so that losses in one market are offset by gains in the
other.
Theoretically ( and ideally), in a perfectly competitive market with surplus
supplies and abundant stocks round the year, the futures price will exceed the spot
price by the cost of storage till the maturity of the futures contract. But such storage
cost declines as the contract approaches maturity, thereby reducing the premium or
contango commanded by the futures contract over the spot delivery over its life and
eventually becomes zero during the delivery month when the spot and futures prices
virtually converge. The efficiency of a futures contract for hedging depends on the
prevalence of such an ideal price relationship between the spot and futures markets.

OBJECTIVES
To study commodity derivatives and their significance in Indian financial markets.
To understand the futures trading in Gold and Silver.
To study the price volatility of Gold & Silver in the spot and future markets.
To ascertain the basis / pay offs of Gold and Silver futures.
SCOPE OF THE STUDY
The study mainly focuses on Indian commodity market, its history and
latest development in the Indian commodity market.
The scope of the study limited to Indian commodity market. The study
vastly covered the accepts of commodity market, clearing house and settlement
mechanisms in Indian commodity market.
A study also keeps a birds-eye view on global commodity market and its
development. The study of conducted for a period of 45 days

METHODOLOGY OF THE STUDY


The data used in the project is secondary in nature & collected from
various websites, news paper and from the commodities head (Asst manager) of the
organization.
Data Collection:
The data of the Gold & Silver has been collected from the news paper& internet.
Analysis:
The analysis consists of the tabulation of the data assessing the profitability positions
of the Commodity futures, representing the data making the interpretation using data.

LIMITATIONS OF THE STUDY


The following are the limitation of this study
The study is conducted in short period, due to which the study may not be detailed
all aspect.
The study is limited only to the commodities of NCDEX.
The study is limited to Indian commodity markets.
The study is not based on the international perspective of derivatives markets
which

exists

in

NMCE, CME and CBOT etc.


The payoffs are estimated with respect to only Gold and Silver for a limited
period.

CHAPTER-II
REVIEW OF LITERATURE

Karvy Consultants Limited was established in 1982 at Hydrabad. It was established by


a group of Hydrabad-based practicing Chartered Accountants.
At initial stage it was very small in size. It was started with a capital of Rs. 1,50,000.
In starting it was only offering auditing and taxation services. Later, it acts into the
Registrar and Share transfer activities and subsequently into financial services and other
services like Financial Product Distribution, Investment Advisory Services, Demat
Services, Corporate Finance, Insurance etc.
All along, Karvys strong work ethics and professional background
leveraged with Information Technology enabled it to deliver quality to the individual. A
decade of commitment, professional integrity and vision helped Karvy achieving a
leadership position in its field when it handled largest number of corporate and retail that
proved to be a sound business synergy.
Today, Karvy has access to millions of Indian shareholders, besides
companies, banks, financial institutions and regulatory agencies. Over the past one and
half decades, Karvy has evolved as a veritable link between industry, finance and people.
In January 1998, Karvy became first Depository Participant in Andhra
Pradesh. An ISO 9002 Company, Karvys commitment to quality and retail reach has
made it an Integrated Financial Services Company.

Today, company has 230 branch offices in 164 cities all over the India. The
company adds 5 new offices every month to the companys ever growing national
network in every nook and corner of the country. The company service over 16 million
individual investors, 180 corporate and handle corporate disbursements that exceed
Rs.2500 Crores.

WHERE KARVY STAND IN THE MARKET?


KARVY is a legendary name in financial services, Karvys credit is defined
by its mission to succeed, passion for professionalism, excellent work ethics and
customer centric values.
Today KARVY is well known as a premier financial services enterprise,
offering a broad spectrum of customized services to its clients, both corporate and retail.
Services that KARVY constantly upgrade and improve are because of companys skill in
leveraging technology. Being one of the most techno-savvy organizations around helps
company to deliver even more cost effective financial solutions in the shortest possible
time.
What bears ample testimony to Karvys success is the faith reposed in
company by valued investors and customers, all across the country. Indeed, with Karvys
wide network touching every corner of the country, even the most remote investor can
easily access Karvys services and benefit from companys expert advice.
KARVY GROUP
Karvy Consultants Limited
Karvy Securities Limited
Karvy Investor Services Limited
Karvy Stock broking Limited
Karvy Computer Shares Pvt. Ltd.

Board of Directors Karvy Consultants Limited


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Parthasarathy C
Yugandhar M
Ramakrishna M S
Prasad V Potluri
Robert Gibson
Sanjay Kumar Dhir
R Shyamsunder
[Table1: BODs of Karvy Consultants Limited]
Karvy Investor Services Limited
Parthasarathy C
Yugandhar M
Ramakrishna M S
[Table2: BODs of Karvy Investor Services Limited]
Karvy Securities Limited
Parthasarathy C
Yugandhar M
Ramakrishna M S
Ajay Kumar K
William Samuel
Nicholas Tully
[Table3: BODs of Karvy Securities Limited]
Karvy Stock Broking Limited
Parthasarathy C
Yugandhar M
Ramakrishna M S
Ajay Kumar K
Kutumba Rao V
10

William Samuel
Nicholas Tully
[Table4: BODs of Karvy Stock Broking Limited]
Mission Statement of Karvy
An organization exists to accomplish something or achieve something. The
mission statement indicates what an organization wants to achieve. The mission
statement may be changed periodically to take advantage of new opportunities or
respond to new market conditions.
Karvys mission statement is To Bring Industry, Finance and People
together.
Karvy is work as intermediary between industry and people. Karvy work as
investment advisor and helps people to invest their money same way Karvy helps
industry in achieving finance from people by issuing shares, debentures, bonds, mutual
funds, fixed deposits etc.
Companys mission statement is clear and thoughtful which guide
geographically dispersed employees to work independently yet collectively towards
achieving the organizations goals.

Vision of Karvy
Companys vision is crystal clear and mind frame very directed. To be
pioneering financial services company. And continue to grow at a healthy pace,
year after year, decade after decade. Companys foray into IT-enabled services and
internet business has provided an opportunity to explore new frontiers and business
solutions. To build a corporate that sets benchmarks for others to follow.
Behind the Picture: What Customers matter for KARVY?
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The underlying picture forming answer for above question is given below.

[Fig.1 Competitive Advantage of Karvy]


Every year with this picture keeping in mind Karvy accelerate with Recovery, Revival
and Reappearance.
Karvy has started 2004 on a strong note with the realization to signal some of the
challenges it faced previous year. In a competitive market and a branded business, Karvy
need to carefully manage itself to avoid down trading or brand shifts by consumers.
For Karvy, Jamnagar branch 2003 was truly exhilarating because of:
Successful implementation of a carefully crafted strategy.
Excellence in execution.
Immense learning enabling to set up a launch pad for revitalizing
itself.
Some competitive advantages are long lasting. These are intangible, difficult to replicate
and thus more sustainable. Karvy has focused on some of these to gain competitive
advantages. There are:
Winning culture and a desire to excel in everything Karvy do.
Strong meaningful relationships with Customers along with Strategic Partners in
which Karvy operate and above all, its own staff.
Karvy value and carefully nurture relationships with customers. Karvy truly
believe that more than technological prowess and business process innovations, it is the
focus on relationships which has been the corner stone of satisfying and successful
presence in India over many years.
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This has been possible with deep insight of consumer behavior as well as
market demand drivers, understanding of the arena where to operate and quality
execution all thanks to a greater team that makes this happen.
Karvys customers consider themselves part of Karvy family and share their
experiences and dreams with other customers and thus Karvy becomes successful not
only in relating customers but also gains new customers from satisfied prevailing
customers.
Karvy want to create a strong emotional bond with new customers promoted by
prevailing customers.
Karvy Values:
Integrity
Responsibility
Reliability
Unity
Understanding
Excellence
Confidentiality

Karvy has adequate internal control systems and procedures


commensurate with the size nature of its business. These system and procedures provide
reasonable assurance of maintenance of proper accounting records, reliability of
financial information, protection of resources and safeguarding of assets against
unauthorized use
KARVY SERVICES AN OVERVIEW
1.

Stock broking

2.

Demat services
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3.

Investment product distribution

4.

Investment advisory services

5.

Corporate finance & Merchant banking

6.

Insurance

7.

Mutual fund services

8.

IT enabled services

9.

Registrars & Transfer agents

10.

Loans

1.

Stock Broking:

KARVY is working as Capital Market Intermediaries. Stockbrokers are regulated by


SEBI [Stock-brokers and Sub-brokers] Regulations, 1992. The stockbroker is a member
of the stock exchange. Stockbrokers are the intermediaries who are allowed to trade in
securities on the exchange of which they are members. They buy and sell on their own
behalf as well as on behalf of their clients.
Stockbrokers expand their business by engaging sub-broker. Sub-brokers mean any
person not being a member of a stock exchange who acts on behalf of a stock broker as
an agent or otherwise for assisting the investors in buying, selling or dealing in securities
through such stock-brokers.

2. Demat Services:
Karvy is a depository participant with the National Securities Depository Limited
(NSDL) for trading and settlement of dematerialized shares.
Depository Participants (DPs) are described as an agent of the depository. They are
intermediaries between the depository and the investors. The relationship between the
DPs and the depository is governed by an agreement made between the two under
Depositories Act.
A DP can offer depository-related services only after obtaining a certificate of
registration from SEBI.
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Since Karvy is also in the broking business, investors who use Karvys depository
services get a dual benefit. They can use Karvys brokerage services to execute
transactions and Karvys depository services to settle them.
3. Investment Products Distribution:
Company is also concern with the distribution of investment products like
(a).

Fixed Deposit

(b).

Bonds

(a). Fixed Deposit:


KARVY is dealer of 34 fixed deposits of various types which includes fixed deposits of
Public Sector, Non Banking Finance Companies, Housing Finance Companies and
Manufacturing CompaniCompany is dealer of following Fixed Deposits
PUBLIC SECTOR
Sl. No.

Company Name

HUDCO

Sardar Sarovar Narmada Nigam Ltd.

Tamilnadu Power Finance Corporation Ltd.

NTPC

NON BANKING FINANCE COMPANIES


Sl. No.

Company Name

Ashok Leyland Finance Ltd.

Bajaj Auto Finance Ltd.

Birla Home Finance Ltd.

Cholamandalam Investment & Finance Co. Ltd.

Escorts Finance Ltd.

First Leasing Company of India Ltd.

IDBI Suvidha

Nicco Uco Alliance Credit Ltd.

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[Table6: FD of Non Banking Finance Companies with which Karvy deals]


HOUSING FINANCE COMPANIES
Sl. No.

Company Name

Can Fin Homes Ltd.

Dewan Housing Finance Corporation Ltd.

Gruh Finance Ltd.

HDFC Ltd.

PNB Housing Finance Ltd.

Sundaram Home Finance Ltd.

[Table7: FD of Housing Finance Companies with which Karvy deals]

MANUFACTURING COMPANIES
Sl. No.

Company Name

A P Paper Mills Ltd.

Amtek India Ltd.

Atul Ltd.

Ballarpur Industries Ltd.

Chambal Fertilizers & Chemicals Ltd.

Escort Ltd.

Greaves Ltd.

Gujarat Alkalies & Chemicals Ltd.

Indian Express

10

Ind-Swift Ltd.

11

JK Industries Ltd.

12

Jindal Steel & Power Ltd.

13

Sound Craft Industries Ltd.


16

14

Supreme Industries Ltd.

15

Zuari Industries Ltd.

[Table8: FD of Manufacturing Companies with which Karvy deals]


(b). Bonds:
Karvy is dealer of following bonds
RBI Saving Bonds
NHB
REC

(c). IPO:
Company is also provides services related to Initial Public Offer of company. Company
provides stationary at the time of IPO as well as provides information to investors
regarding IPO and solves their queries.

4.

Investment Advisory Services:

This division provides portfolio management services to high net-worth individuals and
corporate. The expertise of Karvy in research and stock broking gives it the right
perspective to provide investment advisory services. Company provides advisory
services to its clients.
Financial goal of each individual investor varies according to his dream, ambition and
family size and future financial planning for the children & old age pension for self and
wife so does the pathway to achieve it. Karvy apply the principles of Financial Planning
as both science & art, it understands the time horizon, risk bearing capacity and
investment goals of investors keeping in mind their psyche and financial needs. Based
upon this Karvy helps individual investors to plan their entire life up to retirement,
Taxes, Insurance needs and other important personal financial goals. It designs portfolio
for investor to invest their saving in various financial products like shares, bonds,
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debentures, mutual funds, fixed deposits, insurance etc., Company design portfolio by
considering following factors
5.

Corporate finance & Merchant banking:

Corporate finance is the financial activity of corporation. It deals with the firm's
operations with regard to investing and financing. It concerned with how firms raise
capital and the consequences of alternative methods of raising capital. Firms capital can
be raised by raising loans, issuing shares, and acquiring or merging with other businesses
by public or private companies
Karvy enjoys SEBI category (I) authorization for Merchant Banking.
Karvy offers the full spectrum of Merchant Banking Services, beginning from
identifying the best time for an issue to final stage of marketing it, to harvest
unparalleled success.
6.

Insurance:

Karvy is also dealer of many private life insurance companies. At Jamnagar branch,
company is associated with dealing of following companies.
7.

Mutual Fund Services:

Since its inception in 1982, Karvy has demonstrated a dedication coupled with
dynamism that has inspired trust from various segments corporate, government bodies
and individuals. Karvy has since been performing a pivotal role as the intermediary the
interface between these players.
With Mutual Funds emerging as a distinct asset class, Karvy has made a strategic choice
to leverage the power of latest technology to provide a cutting edge to its services.
Karvy, today, service nearly 80% of the asset management companies (AMCs) across an
extensive network of service centers with assets under service in excess of Rs.10,000
crores.
Karvy's ability to mass customize and offer a diverse range of products for a
diverse range of customers has helped mutual fund companies to uniquely position

18

themselves in the market place. Going forward, Karvy shall strive to create new products
and services, which would address the needs of the end customer.
List of Mutual Fund Clients of KARVY:

1
Alliance Mutual Fund
2
Birla Mutual Fund
3
Bank of Baroda Mutual Fund
4
Can Bank Mutual Fund
5
Chola Mutual Fund
6
Deutsche Mutual Fund
7
DSP Merrill Lynch Mutual Fund
8
Franklin Templeton Investments
9
GIC Mutual Fund
10
HDFC Mutual Fund
11
HSBC Mutual Fund
12
IL & FS Mutual Fund
13
JM Mutual Fund
14
Kotak Mutual Fund
15
LIC Mutual Fund
16
Punjab National Bank Mutual Fund
17
Prudential ICICI Mutual Fund
18
Principal Mutual Fund
19
Reliance Mutual Fund
20
State Bank of India Mutual Fund
21
Standard Chartered Mutual Fund
22
Sundaram Mutual Fund
23
SUN F&C Mutual Fund
24
Tata Mutual Fund
8. Income Tax enabled services:
Karvy has been started this service since March, 2004. Karvy is work as TIN
Facilitation Centre it provides following IT enabled services.
a. Distribution of PAN Card.
b. Distribution of TAN Card.
c. Services related to e-TDS.

19

Karvy work as an intermediary between NSDL and IT payers. Karvy provides various
form for different IT enabled services and guide people to fill that forms. It also solves
queries of the tax payers. It also distributes PAN and TAN card to the tax payers.

TIN Overview
National Securities Depository Ltd. (NSDL) has established a nationwide Tax
Information Network (TIN) on behalf of the Income Tax Department (ITD). This is
designed to make the tax administration more effective, furnishing of returns convenient,
reduce compliance cost and bring greater transparency.
While NSDL will be the primary agency responsible for the design, implementation and
maintenance of TIN as per the requirements of ITD, other agencies will also play key
roles in the TIN system.
Karvy has established infrastructure required to provide IT enabled services so, Karvy
provides TIN facilitation centers all over India on behalf of NSDL. Besides Karvy
following companies can also work as intermediary between NSDL and customer
9.

Registrars & Transfer agents:

In 1985, Karvy entered the Registrar and Share Transfer Business to create a market
niche in the competitive field of financial services. In 1994-95, it reached a
milestone when it processed 104 Public Issues constituting 46 per cent market share.
Now in its second decade of existence, Karvy is the leader in the industry: In an opinion
poll conducted by an independent market research agency - MARG, Karvy has been
rated as Indias Most Admired Registrar on various parameters: Overall Excellence.
Handling of Volumes
Timely Dispatch
Quality Management and Technological Up gradation.
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A SEBI Category 1 Registrar, So far, Karvy has handled over 675 ISSUES as Registrars
to public issues processed over 52 million applications and is servicing over 16 million
investors from various locations spread over 205 clients.
10. Loan:
Karvy has recently started this service at selected branches of metro cities. This service
has not been started in Saurashtra-Kucch region. Karvy provides loans for following.
Vehicle Loan
Home Loan
Personal Loan
MARKETING STRATEGY OF KARVY SILVER
Market Positioning
Market positioning statements of Karvy are At Karvy we give you single window
service and We also ensure your comfort.So, Karvy focus on the consumers who
prefer almost all investment activities at same place by providing number of various
financial services. At Karvy a person can purchase or sell shares, debentures etc. and
at the same place also demat it. Karvy also provides other investment option to the
same person at same place like Mutual Fund, Insurance, Fixed Deposit, and Bonds
etc. and help the person in designing his portfolio. By this way Karvy provides
comfort to its customers.
Karvy is also positioned according to Ries and Trout. Karvy is promoted as a no. 1
investment product distributor and R & T agent of India.

21

Target Market:
Karvy uses demographic segmentation strategy and segment people based on their
occupation. Karvy uses selective specialization strategy for market targeting. Target
person for the Karvy Stock Broking and Karvy Investment Service are persons who can
work as sub-broker for the companies. Companies focus on Advisors of Insurance and
post office, Tax consultants and CAs for making sub-broker.

Marketing channel System:


Karvy uses one level marketing channel for investment product distribution. Sub-brokers
work as intermediary between consumer and company. Company has both forward and
backward flow of activity through channel. Company distributes stationery, brokerage,
and information forward to its sub-broker. The sub-brokers send filled forms, queries,
amount of investment etc. back to the company.
PROJECT Channel Members:
Karvy provides PROJECT to the sub-brokers because they will be viewed as
the company by the investors. The executives of Karvy explain various new schemes of
investment to the sub-brokers with its objective, risk factors and expected return.
Company also periodically arrange seminar to guide sub-brokers.
Advertising and Promotion:
The objective of advertising of Karvy is to create awareness about services of
Karvy among investors and sub-brokers and increase sub-brokers of Karvy.
Company doesnt give advertisement in media like TV, Newspapers, and Magazines etc.
Karvys advertisement is made indirectly by the companies associate with it. Karvy is R
& T agent of around 700 companies. They publish name, address and logo of Karvy on
their annual report.
Karvy also publish its weekly Stock Market Newsletter Karvy Bazaar Baatein and
monthly magazine The Finapolis to guide investors and sub-brokers about market.
22

HR POLICY OF KARVY
Karvys HR Department is located at Hyderabad.
Recruitment and Selection Policy:
The upper level members like zonal managers, regional managers, branch managers and
senior executives are recruited by publishing recruitment advertisement in leading
national level newspaper. The qualified applicant are then called for interview and
selected.
The regional manager has authority to select lower level employee like peon, marketing
executives, accountant etc. by approval of zonal manager.
PROJECT and Development:
Continuous PROJECT and upgrading technical, behavioral and managerial skills is a
way of life in Karvy. Karvy encourages employees to hone their skills regularly to
enable them to face the challenges of the changing requirements of customers that fit
market up and down.
PROJECT needs analysis is done on a regular basis and systematic methodologies are
ensured that skills and capabilities of all employees are constantly upgraded to enable
them to perform in the challenging work environment.
New employee has given PROJECT under experienced employee. The new employee
work under experience employee and observe his all activities. When company employs
new technology or there is any change in the working of company the PROJECT
program is arranged.
Employee Motivation:
Karvys employees are highly empowered. They dont have to report any person of the
same branch but they report upper level branch. E.e. Marketing executive of Jamnagar
branch directly reports Senior Marketing executive of Baroda zonal office.
If particular branch earn certain profit then Karvy gives them special incentives. E.g. last
year Karvy had arranged two days tour of Div for their employees of Rajkot, Jamnagar,
23

Junagadh and Bhavnagar branch which was totally free of cost. This also helps in
maintaining co-operation between employees.
Quality Policy Of Karvy:
To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by
combining its human and technological resources, to provide superior quality financial
services. In the process, Karvy will strive to exceed Customers expectations.
Quality Objectives of Karvy
Build in-house processes that will ensure transparent and harmonious
relationships with its clients and investors to provide high quality of services.
Establish a partner relationship with its investor service agents and
vendors that will help in keeping up its commitments to the customers.
Provide high quality of work life for all its employees and equip them
with adequate knowledge & skills so as to respond to customer's needs.
Continue to uphold the values of honesty & integrity and strive to
establish unparalleled standards in business ethics.
Use state-of-the art information technology in developing new and
innovative financial products and services to meet the changing needs of investors
and clients.
Strive to be a reliable source of value-added financial products and
services and constantly guide the individuals and institutions in making
a judicious choice of same.
Strive to keep all stake-holders (shareholders, clients, investors,
employees, suppliers and regulatory authorities) proud and satisfied.
Achievements of Karvy:
Largest mobilizer of funds as per PRIME DATABASE
First ISO - 9002 Certified Registrar in India
A Category- I Merchant banker
A Category- I Registrar to Public Issues
24

Ranked as "The Most Admired Registrar by MARG


Handled the largest- ever Public Issue - IDBI
Strategic tie-up with Jardine Fleming India Securities Ltd
Handled over 500 Public issues as Registrars
Handling the Reliance Account which accounts for nearly 10 million account
holders
First Depository Participant from Andhra Pradesh
SWOT ANALYSIS OF KARVY
Strengths:
Employees are highly empowered.
Strong Communication Network.
Good co-operation between employees.
Number 1 Registrar and Transfer agent in India.
Number 1 dealer of Investment Products in India.

Weaknesses:
High Employee Turnover.

Opportunity:
Growth rate of mutual fund industry is 40 to 50% during last year
and it expected that this rate will be maintained in future also.
Marketing at rural and semi-urban areas.
Threats:
Increasing number of local players.
Past image of Mutual Fund.

25

CHAPTER-III
INDUSTRY PROFILE

26

Ever since the drawn of civilization, commodity trading has


become an integral part of mankind. The first and foremost reason is that commodity
represents the fundamental elements of lifestyle of human beings. In the early days,
people used to exchange goods for goods, which was called as Barter System. With the
advancement of civilization, trading system has gone through various changes and has
now entered into an era of Future trading besides existence physical trading across the
world. The history of Commodity Future trading can be traced back to 1688 with the
introduction of Future trading in rice in Japan. This was followed by an increased
participation in commodity derivatives, especially in Futures, in the industrialized
countries like America and Britain. All the countries opened the avenue for introduction
of Future trading in commodities in 19 th century. Major commodity Future trading
platforms opened in the world are Chicago Board of Trade (NYBOT) and New York
Mercantile Exchange (NYMEX).
A Commodity derivative is a contract which derives its value from an
underlying commodity. The main purpose of Future market is to provide a
mechanism for successfully managing the price risk associated with commodities.
Future markets provide a platform for buyers and sellers to trade in a huge number of
diverse commodities such as agricultural products, metals and energy. These markets
are not only meant for hedgers, speculators and arbitrages, but also for retail investors
who want to trade in booming commodity market.

INDIAN SCENARIO
The commodity derivatives markets in India are as old as those of the US. The
origin of commodity derivatives markets in India can be traced back to 1875, when
Bombay Cotton Trade Association Ltd., was set up to start trading in cotton Futures.
Subsequent to this, many other associations have started Future trading in
commodities at different places. For example, the Futures trading in oilseeds started
in 1900 at Bombay, raw jute and jute products in 1912 in Calcutta, wheat in Hapur in
1913, bullion in Bombay in 1920. However, in 1939, the Option trading in cotton was
27

banned by the government of Bombay to restrict the speculative activity in the cotton
market. in subsequent years, forward trading in various commodities like oilseeds,
food grains, vegetable oil, sugar cloth were also prohibited.
Indias commodity exchanges have come a long way since their opening up in
the early twenty first century. In India, three national level exchanges namely Multi
Commodity Exchange of India (MCEX), National Commodity and Derivatives
Exchange (NCDEX) and National Multi Commodity Exchanges are operating to
cater to the needs of Indian investors. Apart from these national level exchanges,
nearly 20 regional exchanges are in operation, to deal with specified commodities in
that region.
MEANING OF COMMODITY DERIVATIVE MARKET:
FCRA Forward Contracts (Regulation) Act, 1952 defines goods as every
kind of movable property other than actionable claims, money and securities.
Futures trading is organized in such goods or commodities as are permitted by the
Central Government. At present, all goods and products of agricultural (including
plantation), mineral and fossil origin are allowed for futures trading under the
auspices of the commodity exchanges recognized under the FCRA.
A commodity derivative is a contract which derives its value from an
underlying commodity. The main purpose of future market is to provide a mechanism
for successfully managing the price risks associated with commodities. Future market
provides a platform for buyer and seller to trade in a huge number of diverse
commodities such as agriculture products, metals and energy. These markets are not
only meant for hedgers, speculators and arbitrages, but also for retail investors who
want to trade in booming commodity market.

28

DIFFERENCE BETWEEN COMMODITY AND FINANCIAL


DERIVATIVES:
The basic concept of a derivative contract remains the same whether
the underlying happens to be a commodity or a financial asset. However there are
some features which are very peculiar to commodity derivative markets. In the case
of financial derivatives, most of these contracts are cash settled. Even in the case of
physical settlement, financial assets are not bulky and do not need special facility for
storage. Due to the bulky nature of the underlying assets, physical settlement in
commodity derivatives creates the need for warehousing. Similarly, the concept of
varying quality of asset does not really exist as far as financial underlings are
concerned. However in the case of commodities, the quality of the asset underlying a
contract can vary at times.
WHY ARE COMMODITY DERIVATIVES REQUIRED:
India is among the top-5 producers of most of the commodities, in addition to
being a major consumer of bullion and energy products. Agriculture contributes about
22% to the GDP of the Indian economy. It employees around 57% of the labor force
on a total of 163 million hectares of land. Agriculture sector is an important factor in
achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a
major center for trading of commodity derivatives.
It is unfortunate that the policies of FMC during the most of 1950s to 1980s
suppressed the very markets it was supposed to encourage and nurture to grow with
times. It was a mistake other emerging economies of the world would want to avoid.
However, it is not in India alone that derivatives were suspected of creating too much
speculation that would be to the detriment of the healthy growth of the markets and
the farmers. Such suspicions might normally arise due to a misunderstanding of the
characteristics and role of derivative product.

29

It is important to understand why commodity derivatives are required


and the role they can play in risk management. It is common knowledge that prices of
commodities, metals, shares and currencies fluctuate over time. The possibility of
adverse price changes in future creates risk for businesses. Derivatives are used to
reduce or eliminate price risk arising from unforeseen price changes. A derivative is a
financial contract whose price depends on, or is derived from, the price of another
asset.
SPREAD TRADE IN COMMODITIES:
In Future trading, a spread trade refers to the act of buying one commodity or
Futures contract and selling a related one, in an attempt to profit from the price
difference between the two. Basically, it is an act of entering long (buying) as well as
short (selling) position simultaneously in an attempt to make profit.
There can be three types of spread one can enter in Commodity Derivative Market.
1.

A spread can be established between different months of the

samecommodity

(called

an

inter

delivery spread).
2.

Between the same related commodities, usually for the same

month(inter commodity spread).


3.

Between the same or related commodities traded on two

differentexchanges

(inter

market

spread).
Spread trading can be done at the market price or at desired difference level
between the commodities. For example, Buy one contract of February of December
Gold and at the same time sell one contract of February Gold when the February
Gold contract is 100 points higher than the December contract.
In this case first and foremost thing that need to be observed is the liquidity
present in both the contracts. The benefits that can be arrived from entering in spread
trading is the lower margin requirement, because these strategies normally carry less
risk.

30

WHAT CAN COMMODITY MARKET OFFER?


If you are an investor, commodities futures represent a good form of investment
because of the following reasons..
High Leverage The margins in the commodity futures market are less than the
F&O section of the equity market.
Less Manipulations - Commodities markets, as they are governed by
international price movements are less prone to rigging or price manipulations.
Diversification The returns from commodities market are free from the direct
influence of the equity and debt market, which means that they are capable of being
used as effective hedging instruments providing better diversification. If you are an
importer or an exporter, commodities futures can help you in the following ways
Hedge against price fluctuations Wide fluctuations in the prices of import or
export products can directly affect your bottom-line as the price at which you
import/export is fixed before-hand. Commodity futures help you to procure or sell the
commodities at a price decided months before the actual transaction, thereby ironing
out any change in prices that happen subsequently.
If you are a producer of a commodity, futures can help you as follows:
Lock-in the price for your produce If you are a farmer, there is every chance
that the price of your produce may come down drastically at the time of harvest. By
taking positions in commodity futures you can effectively lock-in the price at which
you wish to sell your produce
Assured demand Any glut in the market can make you wait unendingly for a
buyer. Selling commodity futures contract can give you assured demand at the time
of harvest. If you are a large scale consumer of a product, here is how this market can
help you.

31

Control your cost If you are an industrialist, the raw material cost dictates the final
price of your output. Any sudden rise in the price of raw materials can compel you to
pass on the hike to your customers and make your products unattractive in the market.
By buying commodity futures, you can fix the price of your raw material.

INDIAN COMMODITY FUTURES MARKET:


India has a long history of commodity futures market, extending over
125 years. Still, such trading was interrupted suddenly since the mid seventies in the
fond hope of ushering in an elusive socialistic pattern of society. As the country
embarked on economic liberalization policies and signed the GATT agreement in the
early nineties, the government realized the need for futures trading to strengthen the
competitiveness of Indian agriculture and the commodity trade and industry. Futures
trading began to be permitted in several commodities, and the ushering in of the 21 st
century saw the emergence of new National Commodity Exchanges with countrywide
reach for trading in almost all primary commodities and their products.
There have been over 20 exchanges existing for commodities all over
the country. However these exchanges are commodity specific and have a strong
regional focus. The Government, in order to make the commodities market more
transparent and efficient, accorded approval for setting up of national level multi
commodity exchanges. Accordingly two widest exchanges are there which deal in a
wide variety of commodities and which allow nation-wide trading. They are:
1) National Commodity & Derivatives Exchange (NCDEX)
2) Multi Commodity Exchange of India (MCX)
3) National Multi Commodity Exchange (NMCX)

32

NATIONAL COMMODITY & DERIVATIVES EXCHANGE (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 Fertilizer Cooperative Limited (IFFCO),Canara Bank and Goldman Sachs
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.

33

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 worldclass 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.

MULTI COMMODITY EXCHANGE OF INDIA (MCX):


MCX is an independent and de-mutulised multi commodity exchange in India.
It was inaugurated on November 10, 2003 by Mr. MukeshAmbani, Chairman and
Managing Director, Reliance Industries Ltd.; and has permanent recognition from the
Government of India for facilitating online trading, clearing and settlement
operations for commodities futures market across the country. Today, MCX features
amongst the world's top three bullion exchanges and top four energy exchanges.
MCX offers a wide spectrum of opportunities to a large cross section of
participants including producers/ processors, traders, corporate, regional trading
centre, importers, exporters, co-operatives and industry associations amongst others.
Headquartered in the financial capital of India, Mumbai, MCX is led by an expert
management team with deep domain knowledge of the commodities futures market.
Presently, the average daily turnover of MCX is around USD1.55 bn (Rs.7,000 crore
34

- April 2006), with a record peak turnover of USD3.98 bn (Rs.17,987 crore) on April
20, 2006. In the first calendar quarter of 2006, MCX holds more than 55% market
share of the total trading volume of all the domestic commodity exchanges. The
exchange has also affected large deliveries in domestic commodities, signifying the
efficiency of price discovery.
Being

nation-wide

commodity

exchange

having

state-of-the-art

infrastructure, offering multiple commodities for trading with wide reach and
penetration, MCX is well placed to tap the vast potential poised by the commodities
market.

NATIONAL MULTI COMMODITY EXCHANGE OF INDIA (NMCE)


National Multi-Commodity Exchange of India Ltd has been promoted by
commodity-relevant public institutions, viz., Central Warehousing Corporation
(CWC), National Agricultural Cooperative Marketing Federation of India (NAFED),
Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural
Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM),
and Neptune Overseas Limited (NOL).
While various integral aspects of commodity economy, viz., warehousing,
cooperatives, private and public sector marketing of agricultural commodities,
research and training were adequately addressed in structuring the Exchange, finance
was still a vital missing link. Punjab National Bank (PNB) took equity of the
Exchange to establish that linkage.
Today, NMCE is the only Exchange in India to have such investment and
technical support from the commodity relevant institutions. These institutions are
represented on the Board of Directors of the Exchange and also on various committees
set up by the Exchange to ensure good corporate governance. Some of them have also
lent their personnel to provide technical support to the Exchange management.

35

NMCE is unique in many other respects. It is a zero-debt company; following


widely accepted prudent accounting and auditing practices. It has robust delivery
mechanism making it the most suitable for the participants in the physical commodity
markets. The exchange does not compromise on its delivery provisions to attract
speculative volume. Public interest rather than commercial interest guide the
functioning of the Exchange. It has also established fair and transparent rule-based
procedures and demonstrated total commitment towards eliminating any conflicts of
interest. It is the only Commodity Exchange in the world to have received ISO
9001:2000 certification from British Standard Institutions (BSI).
Vision
National Multi-Commodity Exchange of India Limited is committed to provide world
class services of on-line screen based Futures Trading of permitted commodities and
efficient Clearing and guaranteed settlement, while complying with Statutory /
Regulatory requirements. We shall strive to ensure continual improvement of
customer services and remain quality leader amongst all commodity exchanges.
Mission

Improving efficiency of marketing through on-line trading in Dematerialization

form.

Minimization of settlement risks.

improving efficiency of operations by providing best infrastructure and latest

technology.

Rationalizing the transaction fees to optimum level.

Implementing best quality standards of warehousing, grading and testing in tune

with trade practices.

Improving facilities for structured finance.

improving quality of services rendered by suppliers.

Promoting awareness about on-line features trading services of NMCE across the

length and breadth of the country.

36

STATUTORY
FUTURES:

FRAMEWORK

FOR

REGULATING

COMMODITY

Commodity futures contracts and the commodity exchanges


organizing trading in such contracts are regulated by the Government of India under
the Forward Contracts (Regulation) Act, 1952 (FCRA), and the Rules framed there
under. The nodal agency for such regulation is the ForwardMarkets Commission
(FMC), situated at Mumbai, which functions under the aegis of the Ministry of
Consumer Affairs, Food & Public Distribution of the Central Government.
FORWARD MARKETS COMMISSION (FMC):
Forward Markets Commission (FMC) headquartered at Mumbai is a
regulatory authority, which is overseen by the Ministry of Consumer Affairs and
Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the
Forward Contracts (Regulation) Act, 1952.

"The Act Provides that the Commission shall consist of not less
than two but not exceeding four members appointed by the Central Government out
of them being nominated by the Central Government to be the Chairman thereof.
Currently Commission comprises three members among whom Dr. Kewal Ram, IES,
is acting as Chairman and Smt. Padma Swaminathan, CSS and Dr. (Smt.) Jayashree
Gupta, CSS, are the Members of the Commission."

The functions of the Forward Markets Commission are as follows:


37

To advise the Central Government in respect of the recognition or the withdrawal


of recognition from any association or in respect of any other matter arising out of the
administration of the Forward Contracts (Regulation) Act 1952.
To keep forward markets under observation and to take such action in relation to
them, as it may consider necessary, in exercise of the powers assigned to it by or
under the Act.
To collect and whenever the Commission thinks it necessary, to publish
information regarding the trading conditions in respect of goods to which any of the
provisions of the act is made applicable, including information regarding supply,
demand and prices, and to submit to the Central Government, periodical reports on
the working of forward markets relating to such
goods;
To make recommendations generally with a view to improving the organization
and working of forward markets
To undertake the inspection of the accounts and other documents of any
recognized association or registered association or any member of such association
whenever it considerers it necessary.
COMMODITIES SELECTED IN PHASE I
Bullion
Gold
Silver
AFGRI commodities

Soya bean

Soya oil

Rapeseed/Mustard

Seed Rapeseed/

Mustard Seed Oil

Crude Palm oil

RBD Palmolein
38

0 COMMODITIES INTRODUCED IN PHASE II

Rubber

Jute

Pepper

Chana (Gram)

Guar

Wheat

COMMODITY FUTURE DERIVATIVES


All the commodities are not suitable for futures trading & for being
suitable for futures trading the market for commodity should be competitive, i.e.,
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. There should be fluctuations in
price. The commodity should have long shelf life and be capable of standardization
and gradation.
A commodity futures contract is essentially a financial instrument.
Following the absence of futures trading in commodities for nearly four decades, the
new generation of commodity producers, processors, market functionaries, financial
organizations, broking agencies and investors at large are, unfortunately, unaware at
present of the economic utility, the operational techniques and the financial
advantages of such trading. Commodity future market involves particularly different
types of forward contracts.

39

Forward contracts
FCRA defines forward contract as "a contract for the delivery of goods and
which not a ready delivery contract is".
All contracts in commodities providing for delivery of goods and/or payment
of price after 11 days from the date of the contract are "forward" contracts. Forward
contracts are of three types
1) Specific Delivery & Ready Delivery Contracts
2) Futures Contracts
3) Option Contracts
Specific Delivery/Ready Delivery contracts:
Specific delivery contracts provide for the actual delivery of specific quantities
and types of goods during a specified future period, and in which the names of both
the buyer and the seller are mentioned.
Under the Act, a ready delivery contract is one, which provides for the delivery
of goods and the payment of price therefore, either immediately or within such period
not exceeding 11 days after the date of the contract, subject to such conditions as may
be prescribed by the Central Government. Already delivery contract is required by
law to be fulfilled by giving and taking the physical delivery of goods. In market
parlance, the ready delivery contracts are commonly known as "spot" or "cash"
contracts.
Futures Contract:
A commodity futures contract is essentially a financial instrument. Following
the absence of futures trading in commodities for nearly four decades, the new
generation of commodity producers, processors, market functionaries, financial
organizations, broking agencies and investors at large are, unfortunately, unaware at
present of the economic utility, the operational techniques and the financial
advantages of such trading.
40

A futures contract is a legally binding agreement between two parties to buy or


sell in the future, on a designated exchange, a specific quantity of a commodity at a
specific price. The buyer and seller of a futures contract agree now on a price for a
product to be delivered, or paid, for at a set time in the future, known as the
"settlement date." Although actual delivery of the commodity can take place in
fulfillment of the contract, most futures contracts are actually closed out or "offset"
prior to delivery.
A commodity futures contract is a tradable standardized contract, the terms of
which are set in advance by the commodity exchange organizing trading in it.
The futures contract is for a specified variety of a commodity, known as
the "basis, though quite a few other similar varieties, both inferior and superior, are
allowed to be deliverable or tender-able for delivery against the specified futures
contrac
The parties to the contract are required to negotiate only the quantity to be
bought and sold, and the price. The Exchange prescribes everything else. Because of
the standardized nature of the futures contract, it can be traded with ease at a
moments notice.
Option Contract:
An option on a commodity futures contract is a legally binding agreement
between two parties that gives the buyer, who pays a market determined price known
as a "premium," the right (but not the obligation), within a specific time period, to
exercise his option. Exercise of the option will result in the person being deemed to
have entered into a futures contract at a specified price known as the "strike price." In
some cases, an option may confer the right to buy or sell the underlying asset directly,
and these options are known as options on the physical asset.
speculators use these futures contracts to benefit from changes in
hardly interested in either taking or receiving deliveries of goods.

41

Therefore,
prices and are

COMMODITY FUTURES TRADING CYCLE:


NCDEX trades commodity futures contracts having one-month, two-month and
three-month expiry cycles. All contracts expire on the 20 th of the expiry month. Thus
a January expiration contract would expire on the 20 th of January and a February
expiry contract would cease trading on the 20th February. If the 20th of the expiry
month is a trading holiday, the contracts shall expire on the previous trading day.
New contracts will be introduced on the trading day following the expiry of the near
month contract.
Procedure for Individual investor to start trading in Commodity Futures
Market can be as follows:
Selection of Broker:
A trustworthy, reliable, efficient, effective & innovative broker, having
membership to any of the Exchange like MCX / NCDEX etc. would be in Investors
interest. Broker should be such that recognizes investors needs & aspirations & work
as a dedicated team to deliver highly effective & customized solutions to investors
risk management needs.
Information about Self:
After selecting a broker, investor will be asked to provide information that is
personal & financial. A member client agreement should be signed between the
broker & investor. Investor should give photographs, bank details & should possess
normal DMAT Account or broker opens that account for him/her. If trading is
intended with delivery of commodities then Commodity DMAT Account is been
opened.

42

Depositing the Margin:


In order to trade futures contracts, investor has to deposit margins in cash with
broker. There are two types of margins, namely; initial margin & mark to market
margin.

i) Initial MarginInitial Margin is set by the exchanges on basis of volatility in the particular
commodity & is a percentage of the contract.
ii) Mark to market MarginAt the end of the day, the contract is marked to market; meaning traders
account is credited or debited based on the profit/ loss made during the session. On
this profit or loss there broker can charge margin that is nothing but mark to market
margin.

INTRADAY TRADING:
Then as per individual investors wish he can buy or sell commodities online.
Just he has to specify which commodity & what price is he going to buy or sell.
Electronic terminals are used for this trading at various broking offices that provides
the same information countrywide. This trading process is called as, Intraday
Trading.

Benefit of this online trading is that it provides a secure, transparent, fast and
user-friendly system. It leads to better price discovery of commodities like Bullion,
Metals and Agro products by bringing large number of Buyers and Sellers on a
common National and International platform.

43

CLEARING TRADES ON COMMODITY EXCHANGE


All trades on Commodity Exchange are supported by an initial
margin. At the End-of day Commodity Exchange does mark-to-market of all the open
positions. This activity results into final position of all members in respect to booked
losses or losses on open positions. Members make the shortfalls good by way of payins to Commodity Exchange by next day and the members in profit on such positions
are given the necessary credits. These payments are processed electronically through
a countrywide network of clearing banks.
SETTLEMENT OF THE CONTRACT AND DELIVERY
A contract has a life cycle of two months. At Commodity Exchange, 5 days before
the expiry of a contract, the contract enters into a tender period. At the start of the
tender period, both the parties must state their intentions to give or receive delivery,
based on which the parties are supposed to act or bear the penal charges for any
failure in doing so. Those who do not express their intention to give or receive
delivery at the beginning of tender period are required to square-up their open
positions before the expiry of the contract. In case they do not their positions are
closed out at 'due date rate'. The links to the physical market through the delivery
process ensures maintenance of uniformity between spot and futures prices.

LIMITATIONS OF COMMODITY FUTURE MARKET:


Commodity market is very difficult to predict. Commodity prices depend upon
region, monsoon, transportation cost, demand-supply theory, import/ export policies
& Global market trends. So commodity market experience volatility that cannot be
predicted easily.

Without knowing the spot market for commodities it is very difficult to play with

Future market. In capital market it depends upon Companies performance, decisions,


44

long run plans, mergers, etc. there are definite regions to move up & down in the
market, but in the case of Commodity market there are so many regions for the
market movement, it is like a game of luck to the investor.
Customer has to deposit the margin amount that is based on volatility of
commodity plus brokerage that is deducted from total losses made. So if at all there is
a loss, the total loss amount will be very huge. In this aspect it is very risky market.
Commodity market not yet developed in India so it is less reliable.
Commodity market gives high return but with multiplier of high risk

PRICING COMMODITY FUTURES:


The process of arriving at a figure at which a person buys and another sells a
futures contract for a specific expiration date is called price discovery. In an active
futures market, the process of price discovery continues from the markets opening
until its close. The prices are freely and competitively derived. Future prices are
therefore considered to be superior to be administered prices or the prices that are
determined privately.

Further, the low transaction costs and frequent trading

encourages wide participation in futures markets lessening the opportunity for control
by a few buyers and sellers.

We try to understand the pricing of commodity futures contracts and look at


how the futures price is related to the spot price of the underlying asset. We study the
cost-of-carry model to understand the dynamics of pricing that constitute the
estimation of fair value of futures the cost of carry model.

45

THE COST OF CARRY MODEL:


Use arbitrage arguments to arrive at the fair value of futures. For
pricing purposes, we treat the forward and the futures market as one and the same. A
futures contract is nothing but a forward contract that is exchange traded and that is
settled at the end of each day. The buyer who needs an asset in the future has the
choice between buying the underlying asset today in the spot market and holding it,
or buying it in the forward market. If he buys it in the spot market today. In involves
opportunity costs. He incurs the cash outlay for buying the asset and he also incurs
costs for storing it if instead he buys the asset in the forward market, he does not
incur an initial outlay. However the costs of holding the asset are now incurred by
the seller of the forward contract who charges the buyer a price that is higher than the
price of the asset in the spot market.

THE FUTURES BASIS:


The cost-of-carry model explicitly defines the relationship between the futures
price and the related spot price. The difference between the spot price and the futures
price is called the basis. We see that as a futures contract nears expiration, the basis
reduces to zero. This means that there is a convergence of the futures price to the
price of the underlying asset. This happens because if the futures price is above the
spot price during the delivery period it gives rise to a clear arbitrage.
VARIATION OF BASIS OVER TIME
As the time to expiration of a contract reduces, the basis reduces. Towards the
close of trading on the day of settlement, the futures price and the spot price
converge. The closing price for the April gold futures contract is the closing value of
gold in the spot market on that day.

46

In case of such arbitrage the trader can short his futures contract, buy the asset
from the spot market and make the delivery. This will lead to a profit equal to the
difference between the futures price and spot price. As traders start exploiting this
arbitrage opportunity the demand for the contract will increase and futures prices will
fall leading to the convergence of the future price with the spot price. If the futures
price is below the spot price during the delivery period all parties interested in buying
the asset in the spot marked making a profit equal to the difference between the
future price and the spot price. As more traders take a long position the demand for
the particular asset would increase and the futures price would rise nullifying the
arbitrage opportunity.
PARTICIPANTS IN COMMODITY MARKET:
For a market to succeed/ it must have all three kinds of participants hedgers,
speculators and arbitragers. The confluence of these participants ensures liquidity and
efficient price discovery on the market. Commodity markets give opportunity for all
three kinds of participants.

Hedgers
Many participants in the commodity futures market are hedgers. They use the
futures market to reduce a particular risk that they face. This risk might relate to the
price of any commodity that the person deals in. The classic hedging example is that
of wheat farmer who wants to hedge the risk of fluctuations in the price of wheat
around the time that his crop is ready for harvesting. By selling his crop forward, he
obtains a hedge by locking in to a predetermined price. Hedging does not necessarily
improve the financial outcome; indeed, it could make the outcome worse. What it
does however is, that it makes the outcome more certain. Hedgers could be
government institutions, private corporations like financial institutions, trading
companies and even other participants in the value chain, for instance farmers,
extractors, ginners, processors etc., who are influenced by the commodity prices.
47

There are basically two kinds of hedges that can be taken. A


company that wants to sell an asset at a particular time in the future can hedge by
taking short futures position. This is called a short hedge. A short hedge is a hedge
that requires a short position in futures contracts. As we said, a short hedge is
appropriate when the hedger already owns the asset, or is likely to own the asset and
expects to sell it at some time in the future.
Similarly, a company that knows that it is due to buy an asset in the
future can hedge by taking long futures position. This is known as long hedge. A long
hedge is appropriate when a company knows it will have to purchase a certain asset
in the future and wants to lock in a price now.
Speculators
If hedgers are the people who wish to avoid price risk, speculators are those
who are willing to take such risk. These are the person who takes positions in the
market & assume risks to profit from price fluctuations in fact the speculators
consume market information make forecasts about the prices & put money in these
forecasts. An entity having an opinion on the price movements of a given commodity
can speculate using the commodity market.
While the basics of speculation apply to any market, speculating in commodities is
not as simple as speculating on stocks in the financial market.
it is easy to buy the shares and hold them for
whatever duration he wants to. However, commodities are bulky products and come
with all the costs and procedures of handling these products. The commodities
futures markets provide speculators with an easy mechanism to speculate on the price
of underlying commodities.
To trade commodity futures on the NCDEX, a customer
must open a futures trading account with a commodity derivatives broker. Buying
futures simply involves putting in the margin money. This enables futures traders to
take a position in the underlying commodity without having to actually hold that
commodity. With the purchase of futures contract on a commodity,
the holder essentially makes a legally binding promise or obligation to buy the
underlying security at some point in the future (the expiration date of the contract).

48

Arbitrage
A central idea in modern economics 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. The
buying cheap and selling expensive continues till prices in the two markets reach
equilibrium. Hence, arbitrage helps to equalise prices and restore market efficiency.
The cost-of-carry ensures that futures prices stay in tune with the spot
prices of the underlying assets. Whenever the futures price deviates substantially
from its fair value, arbitrage opportunities arise. To capture mispricing that result in
overpriced futures, the arbitrager must sell futures and buy spot, whereas to capture
mispricing that result in underpriced futures, the arbitrager must sell spot and buy
futures. In the case of investment commodities, mispricing would result in both,
buying the spot and holding it or selling the spot and investing the proceeds.
However, in the case of consumption assets which are held primarily for reasons of
usage, even if there exists a mispricing, a person who holds the underlying may not
want to sell it to profit from the arbitrage

REGULATORY FRAMEWORK FOR COMMODITY TRADING IN INDIA:


At present there are three tiers of regulations of forward/futures
trading

system

in

India,

namely,

government
49

of

India,

Forward

Markets

Commission(FMC) and commodity exchanges.

The need for regulation arises on

account of the fact that the benefits of futures markets accrue in competitive conditions.
Proper regulation is needed to create competitive conditions. In the absence of
regulation, unscrupulous participants could use these leveraged contracts for
manipulating prices.

This could have undesirable influence on the spot prices,

thereby affecting interests of society at large. Regulation is also needed to ensure that
the market has appropriate risk management system. In the absence of such a system,
a major default could create a chain reaction.
The resultant financial crisis in a futures market could create systematic risk.
Regulation is also needed to ensure fairness and transparency in trading, clearing,
settlement and management of the exchange so as to protect and promote the interest
of various stakeholders, particularly non-member users of the market.

RULES GOVERNING COMMODITY DERIVATIVES EXCHANGES:


The trading of commodity derivatives on the NCDEX is regulated by
Forward Markets Commission (FMC). Under the Forward Contracts (Regulation)
Act, 1952, forward trading in commodities notified under section 15 of the Act can be
conducted only on the exchanges, which are granted recognition by the central
government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food
and Public Distribution). All the exchanges, which deal with forward contracts, are
required to obtain certificate of registration from the FMC Besides, they are 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 their working.

Forward Markets Commission provides regulatory oversight in order


to ensure financial integrity (i.e. to prevent systematic risk of default by one major
operator or group of operators), market integrity (i.e. to ensure that futures prices are
truly aligned with the prospective demand and supply conditions) and to protect and
50

promote interest of customers/ nonmembers. It prescribes the following regulatory


measures:
1. Limit on net open position as on close of the trading houses. Sometimes limit is
also imposed on intra-day net open position. The limit is imposed operator-wise/ and
in some cases, also member wise.
2. Circuit filters or limit on price fluctuations to allow cooling of market in the
event of abrupt upswing or downswing in prices.
3. Special margin deposit to be collected on outstanding purchases or sales when
price moves up or down sharply above or below the previous day closing price. By
making further purchases/sales relatively costly, the price rise or fall is sobered down.
This measure is imposed only on the request of the exchange.
4. Circuit breakers or minimum/maximum prices. These are prescribed to prevent
futures prices from failing below as rising above not warranted by prospective supply
and demand factors. This measure is also imposed on the request of the exchange.
5. Skipping trading in certain derivatives of the contract closing the market for a
specified period and even closing out the contract. These extreme are taken only in
emergency situations.
Besides these regulatory measures, the F.C.R Act provides that a clients
position cannot be appropriated by the member of the exchange, except when a
written consent is taken within three days time. The FMC is persuading increasing
number of exchanges to switch over to electronic trading, clearing and settlement
which is more customer/friendly.

The FMC has also prescribed simultaneous

reporting system for the exchanges following open out cry system.

These steps facilitate audit trail and make it difficult for the members
to indulge in malpractice like trading ahead of clients, etc. The FMC has also
mandated all the exchanges following open outcry system to display at a prominent
place in exchange premises, the name, address, telephone number of the officer of the
commission who can be contacted for any grievance. The website of the commission
51

also has a provision for the customers to make complaint and send comments and
suggestions to the FMC. Officers of the FMC have been instructed to meet the
members and clients on a random basis, whenever they visit exchanges, to ascertain
the situation on the ground, instead of merely attending meetings of the board of
directors and holding discussions with the office bearers.
RULES GOVERNING INTERMEDIARIES:
In addition to the provisions of the Forward Contracts (Regulation)
Act 1952 and rules framed there under, exchanges are governed by its own rules and
bye laws(approved by the FMC). In this section we have brief look at the important
regulations that govern NCDEX. For the sake of convenience/these have been
divided into two main divisions pertaining to trading and clearing.
The NCDEX provides an automated trading facility in all the
commodities admitted for dealings on the spot market and derivative market.
Trading on the exchange is allowed only through approved workstation(s)
located at locations for the office(s) of a trading member as approved by the
exchange. If LAN or any other way to other workstations at any place connects an
approved workstation of a trading Member it shall require an approval of the
exchange.
Each trading member is required to have a unique identification number which is
provided by the exchange and which will be used to log on (sign on) to the trading
system. A trading member has a non-exclusive permission to use the trading system
as provided by the exchange in the ordinary course of business as trading member.
He does not have any title rights or interest whatsoever with respect to trading
system/its facilities/ software and the information provided by the trading system.
For the purpose of accessing the trading system/the member will
install and use equipment and software as specified by the exchange at his own cost.
The exchange has the right to inspect equipment and software used for the purposes
of accessing the trading system at any time. The cost of the equipment and software
supplied by the exchange/installation and maintenance of the equipment is borne by
52

the trading member and users Trading members are entitled to appoint, (subject to
such terms and conditions/as may be specified by the relevant authority) from time to
time Authorized persons and Approved users.
Trading members have to pass a petrifaction program/which has been
prescribed by the exchange. In case of trading members/other than individuals or
sole proprietorships/suchcertification program has to be passed by at least one of
theirdirectors/employees/partners/members of governing body.
Each trading member is permitted to appoint a certain number of
approved users as notified from time to time by the exchange. The appointment of
approved users is subject to the terms and conditions prescribed by the exchange.
Each approved user is given a unique identification number through which he will
have access to the trading system.An approved user can access the trading system
through a password and can change the password from time to time.
The trading member or its approved users are required to maintain
complete secrecy of its password. Any trade or transaction done by use of password
of any approved user of the trading member, will be binding on such trading member.
Approved user shall be required to change his password at the end of the password
expiry period.
TRADE OPERATIONS:
Trading members have to ensure that appropriate confirmed order
instructions are obtained from the constituents before placement of an order on the
system. They have to keep relevant records or documents concerning the order and
trading system order number and copies of the order confirmation slip/modification
slip must be made available to the constituents.
The trading member has to disclose to the exchange at the time of order entry
whether the order is on his own account or on behalf of constituents and also specify
orders for buy or sell as open or close orders. Trading members are solely responsible
for the accuracy of details of orders entered into the trading system including orders
entered on behalf of their constituents.
53

Traders generated on the system are

irrevocable and blocked in 1. The exchange specifies from time to time the market
types and the manner if any, in which trade cancellation can be effected.
Where a trade cancellation is permitted and trading member wishes to cancel a
trade, it can be done only with the approval of the exchange.
TRADING DAYS:
The exchange operates on all days except Saturday and Sunday and on
holidays that it declares from time to time. Other than the regular trading hours,
trading members are provided a facility to place orders offline i.e. outside trading
hours. These are stored by the system but get traded only once the market opens for
trading on the following working day.
The types of order books, trade books, price limits, matching rules and
other parameters pertaining to each or all of these sessions is specified by the exchange
to the members via its circulars or notices issued from time to time. Members can place
orders on the trading system during these sessions, within the regulations prescribed by
the exchange as per these bye laws, rules and regulations, from time to time.
TRADING HOURS AND TRADING CYCLE:
The exchange announces the normal trading hours/open period in advance
from time to time. In case necessary, the exchange can extend or reduce the trading
hours by notifying the members.

Trading cycle for each commodity/derivative

contract has a standard period, during which it will be available for trading.
CONTRACT EXPIRATION:
Derivatives contracts expire on a pre-determined date and time up to which the
contract is available for trading. This is notified by the exchange in advance. The
contract expiration period will not exceed twelve months or as the exchange may
specify from time to time.

TRADING PARAMETERS:
The exchange from time to time specifies various trading parameters
relating to the trading system. Every trading member is required to specify the buy or
54

sell orders as either an open order or a close order for derivatives contracts. The
exchange also prescribes different order books that shall be maintained on the trading
system and also specifies various conditions on the order that will make it eligible to
place it in those books.
The exchange specifies the minimum disclosed quantity for orders that will be
allowed for each commodity/derivatives contract. It also prescribed the number of
days after which Good Till Cancelled orders will be cancelled by the system. It
specifies parameters like lot size in which orders can be placed, price steps in which
shall be entered on the trading system, position limits in respect of each commodity
etc.
FAILURE OF TRADING MEMBER TERMINAL:
In the event of failure of trading members workstation and/ or the loss of
access to the trading system, the exchange can at its discretion undertake to carry out
on behalf of the trading member the necessary functions which the trading member is
eligible for. Only requests made in writing in a clear and precise manner by the
trading member would be considered. The trading member is accountable for the
functions executed by the exchange on its behalf and has to indemnity the exchange
against any losses or costs incurred by the exchange.
MARGIN REQUIREMENTS
Subject to the provisions as contained in the exchange bye-laws and such other
regulations as may be in force, every clearing member/in respect of the trades in
which he is party to, has to deposit a margin with exchange authorities.

The exchange levies initial margin on derivatives contracts using the concept
of Value at Risk (VaR) or any other concept as the exchange may decide from time to
time. The margin is charged so as to cover one-day loss that can be countered on the
position on 99% of the days. Additional margins may be levied for deliverable

55

positions, on the basis of VaR from the expiry of the contract till the actual settlement
date plus a mark-up for default.
The margin has to be deposited with the exchange within the time notified by
the exchange. The exchange also prescribes categories of securities that would be
eligible for a margin deposit, as well as the method of valuation and amount of
securities that would be required to be deposited against the margin amount.
The procedure for refund/adjustment of margins is also specified by the
exchange from time to time. The exchange can impose upon any particular trading
member or category of trading member any special or other margin requirement. On
failure to deposit margin/s as required under this clause, the exchange/clearing house
can withdraw the trading facility of the trading member. After the pay-out, the
clearing house releases all margins.
UNFAIR TRADE PRACTICES:
No trading member should buy, sell, deal in derivatives contracts in a
fraudulent manner, or indulge in any unfair trade practices including market
manipulation. This includes the following; fi Effect, take part either directly or
indirectly in transactions, which are likely to have effect of artificially, raising or
depressing the prices of spot/derivatives contracts.
Indulge in any act, which is calculated to create a false or misleading appearance
of trading, resulting in reflection of prices, which are not genuine.

Buy, sell commodities/contract on his own behalf or on behalf of a person


associated with him pending the execution of the order of his constituent or of his
company or director for the same contract.
Delay the transfer of commodities in the name of the transferee. Indulge in
falsification of his books, accounts and records for the purpose of market
manipulation.
56

When acting as an agent, execute a transaction with a constituent at a price other


than the price at which it was executed on the exchange.
Either take opposite position to an order of a constituent or execute opposite
orders which he is holding in respect of two constituents except in the manner laid
down by the exchange.
LAST DAY OF TRADING:
Last trading day for a derivative contract in any commodity is the
date as specified in the respective commodity contract. If the last trading day as
specified in the respective commodity contract is a holiday, the last trading day is
taken to be the previous working day of exchange. On the expiry date of contracts,
the trading members/ clearing members have to give delivery information as
prescribed by the exchange from time to time. If a trading member/clearing member
fails to submit such information during the trading hours on the expiry date for the
contract/the deals have to be settled as per the settlement calendar applicable for such
deals, in cash-together with penalty as stipulated by the exchange deals entered into
through the exchange. The clearing member cannot operate the clearing account for
any other purpose.

RULES GOVERNING INVESTOR GRIEVANCES, ARBITRATION:


In matters where the exchange is a party to the dispute, the civil courts at Mumbai
have exclusive jurisdiction and in all other matters, proper courts within the area
covered under the respective regional arbitration center have jurisdiction in respect of
the arbitration proceedings falling/conducted in that regional arbitration center.
For the Purpose of clarity, we define the following:

57

Arbitrator means a sole arbitrator or a panel of arbitrators.


Applicant means the person who makes the application for initiating arbitrate
proceedings.
Respondent means the person against whom the applicant lodges an arbitration
application, whether or not there is a claim against such person.

If the value of claim, difference or dispute is more than Rs.25 Lakh on the date of
application/then such claim, difference or dispute are to be referred to a panel of three
arbitrators. If the value of the claim, difference or dispute is up to Rs.25 Lakh, then
they are to be referred to a sole arbitrator. Where any claim, difference or dispute
arises between agent of the member and client of the agent of the member, in such
claim, difference or dispute, the member, to whom such agent of the member is
affiliated, is impeded as a party.

In case the warehouse refuses or fails to

communicate to the constituent the transfer of commodities, the date of dispute is


deemed to have arisen on.
1. The date of receipt of communication of warehouse refusing to transfer the
commodities in favor of the constituent.
2. The date of expiry of 5 days from the date of lodgment of dematerialized request
by the constituent for transfer with the seller, whichever is later.
3.
PROCEDURE FOR ARBITRATION:
The application has to submit to the exchange application for arbitration in the
specified form (Form No.1/1A) along with the following enclosures.
1. The statement of case(containing all the relevant facts about the dispute and relief
sought).
2. The statement of account`ts
3. Copies of members constituent agreement
4. Copies of the relevant contract notes, invoice and delivery challan.
58

TYPES OF COMMODITY FUTURE CONTRACTS:

AGRICULTURAL COMMODITIES
Commodities such as corn, soya beans, sugar, cotton, coffee, seeds, etc., which
indeed form a part of daily consumption, are traded on the futures exchange. Though
all of them form a part of agricultural commodities, they are further segregated into
grains, soft commodities and meat futures.
Red beans, corn, wheat, soya beans and soya bean meal, etc. form a part of
grains, whereas commodities like cocoa, coffee, dried cocoon, cotton yarn and raw
sugar, etc. form a part of soft commodities. Animal products like live hogs, live
cattle, pork bellies, eggs and poultry products form a part of meat futures.

METALLURGICAL COMMODITIES
The metallurgical category includes genuine metals and petro products. The metals
are further grouped into precious and industrial metals. In general, the precious
metals are in relative short supply and they retain their value irrespective of the
conditions of the economy.

ENERGY COMMODITES
Petroleum products consist of heating oil, crude oil, gasoline and propane. They are
traded on futures market and are referred to as Energy Futures.
New York Mercantile Exchange (NYMEX) is the worlds leading energy futures
exchange.
GOLD COMMODITY FUTURE MARKET:
Introduction

59

Gold is a unique asset based on few basic characteristics. First, it is primarily a


monetary asset, and partly a commodity. As much as two thirds of golds total
accumulated holdings relate to store of value considerations. Holdings in this
category include the central bank reserves, private investments, and high-cartage
jewelry bought primarily in developing countries as a vehicle for savings. Thus, gold
is primarily a monetary asset. Less than one third of golds total accumulated
holdings can be considered a commodity, the jewelry bought in Western markets for
adornment, and gold used in industry.
The distinction between gold and commodities is important. Gold has
maintained its value in after-inflation terms over the long run, while commodities
have declined.Some analysts like to think of gold as a currency without a country.
It is an internationally recognized asset that is not dependent upon any governments
promise to pay. This is an important feature when comparing gold to conventional
diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk.
Gold in Indian Scenario:
Gold is valued in India as a savings and investment vehicle and is the second
preferred investment behind bank deposits. India is the worlds largest consumer of
gold in jewelry 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%.

Golds circulates within the system and roughly 30% of gold jewelry
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 jewelry 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
60

and bar demand dropped to 67 tons. Indian jewelry 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. The
Indian brides 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).

India 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 worlds largest consumer of gold to jewellery as investment.
In July 1997 the RBI authorized the commercial banks to import gold for sale or
loan to jewelers 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 jewelry off take is sensitive to price increase and even more so to volatility..

Major gold production countries:


South Africa, United States, Australia, China, Canada, Russia, Indonesia, Peru,
Uzbekistan, Papua New Guinea, China, Brazil, Chile, Philippines, Mali, Mexico,
Argentina, Zimbabwe& Colombia.

61

What makes Gold Special?


Timeless and Very Timely Investment: For thousands of years, gold has been
prized for its rarity, its beauty, and above all, for its unique characteristics as a store
of value. Nations may rise and fall, currencies come and go, but gold endures. In
todays uncertain climate, many investors turn to gold because it is an important and
secure asset that can be tapped at any time, under virtually any circumstances. But
there is another side to gold that is equally important, and that is its day-to-day
performance as a stabilizing influence for investment portfolios. These advantages
are currently attracting considerable attention from financial professionals and
sophisticated investors worldwide.
Gold is an effective diversifier: Diversification helps protect your portfolio against
fluctuations in the value of any one-asset class. Gold is an ideal diversifier, because
the economic forces that determine the price of gold are different from, and in many
cases opposed to, the forces that influence most financial assets.
Gold is the ideal gift: In many cultures, gold serves as a family treasure or a wealth
transfer vehicle that is passed on from generation to generation. Gold bullion coins
make excellent gifts for birthdays, graduations, weddings, holidays and other
occasions. They are appreciated as much for their intrinsic value as for their mystical
appeal and beauty. And because gold is available in a wide range of sizes and
denominations, you dont need to be wealthy to give the gift of gold.
Gold is highly liquid: Gold can be readily bought or sold 24 hours a day, in large
denominations and at narrow spreads. This cannot be said of most other investments,
including stocks of the worlds largest corporations. Gold is also more liquid than
many alternative assets such as venture capital, real estate, and timberland. Gold
proved to be the most effective means of raising cash during the 1987 stock market
crash, and again during the 1997/98 Asian debt crisis. So holding a portion of your
portfolio in gold can be invaluable in moments when cash is essential, whether for
margin calls or other needs.
62

Gold responds when you need it most: Recent independent studies have revealed
that traditional diversifiers often fall during times of market stress or instability. On
these occasions, most asset classes (including traditional diversifiers such as bonds
and alternative assets) all move together in the same direction. There is no
cushioning effect of a diversified portfolio leaving investors disappointed.
However, a small allocation of gold has been proven to significantly improve the
consistency of portfolio performance, during both stable and unstable financial
periods. Greater consistency of performance leads to a desirable outcome an
investor whose expectations are met.
What makes Gold different from other commodities?
The flow demand of commodities is driven primarily by exogenous variables
that are subject to the business cycle, such as GDP or absorption. Consequently, one
would expect that a sudden unanticipated increase in the demand for a given
commodity that is not met by an immediate increase in supply should, all else being
equal, drive the price of the commodity upwards. However, it is our contention that,
in the case of gold, buffer stocks can be supplied with perfect elasticity. If this
argument holds true, no such upward price pressure will be observed in the gold
market in the presence of a positive demand shock.

The existence of a sophisticated liquid market in gold has, over the


past 15 years, provided a mechanism for gold held by central banks and other major
institutions to come back to the market. Although the demand for gold as an
industrial input or as a final product (jewellry) differs across regions, it is argued that
the core driver of the real price of gold is stock equilibrium rather than flow
equilibrium. This is not to say that exogenous shifts in flow demand will have no
influence at all on the price of gold, but rather that the large supply of inventory is
likely to dampen any resultant spikes in price. The extent of this to dampening effect

63

depends on the gestation lag within which liquid inventories can be converted in
industrial inputs. In the gold industry such time lags are typically very short.
Gold has three crucial attributes that, combined, set it apart from other
commodities: firstly, assayed gold is homogeneous; secondly, gold is indestructible
and fungible; and thirdly, the inventory of aboveground stocks is astronomically large
relative to changes in flow demand. One consequence of these attributes is a dramatic
reduction in gestation lags, given low search costs and the well-developed leasing
market. One would expect that the time required convert bullion into producer
inventory is short, relative to other commodities which may be less liquid and less
homogenous than gold and may require longer time scales to extract and be
converted into usable producer inventory, making them more vulnerable to cyclical
price volatility. Of course, because of the variability of demand, the price
responsiveness of each commodity will depend in part on precautionary inventory
holding.

64

CHAPTER-IV
DATA ANALYSIS AND INTERPRETATION

65

Fig 3.1

Fig 3.2

FACTORS INFLUENCING GOLD PRICE


Rising Demand

Rise in Investor demand.


Robust Jewelry intake.
Geo-political concerns.
US dollar movement against other currencies.
Indian rupee movement against the US dollar.
Central Banks diversifying into bullion.
66

Fall in Supply
Central Bank Sales Slowing and Massive De-Hedging
Gold Mine Production
Fig 3.3

GOLD SPOT PRICES: 2008 2010

67

Fig 3.4
CONTRACT SPECIFICATIONS:
Name of
Commodity

Gold

Ticker symbol

Gold

Trading System

NCDEX Trading System

Basis
Unit of trading
Delivery unit
Quotation/base
value
Tick size
Quality
Specification
Quantity variation

Ex - Ahmedabad inclusive of Custom Duty,


exclusive of local sales tax/VAT, and any other
charges and levies
1 Kg
1 kg
None
Re. 1
Not more than 999.9 fineness bearing a serial
number and identifying stamp of a refiner
approved by the Exchange. List of approved
refiners is available at:
www.ncdex.com\downloads\refiners_gold.pdf
None

SILVER COMMODITY FUTURE MARKETS:


Introductions
68

In a number of ways, the outlook for the silver market is even brighter than
that of gold. One reason for the cheery presage stems from the use of the white metal
as a raw material during the greatest build-out of infrastructure in the history of the
planet.
Another factor springs from the retail end of the chain of production. Along
with the bloom of the emerging regions, a horde of consumers is piling into the
global marketplace for the first time. With bulging wallets, the newcomers by the
billions demand their share of upscale products ranging from fancy goblets to
mobile phones that contain the white metal.
It goes without saying that the market for silver will not vault skyward in a
single straight line. Rather, the upward trek will be erratic and confounding. In
sketching out the likely path of the market, the savvy investor has to keep track of the
secular trends as well as the cyclic patterns in the forum.

History
Silver is one of the oldest found metals on earth and it had been used in
jewelry and utensils since 4th millennium B.C. Old books indicate that at that time it
was extracted from lead.
First attempt to mine silver is said to be have been made around 3000 BC in
the areas of Anatolia. A process, cupellation was found out in order to extract silver
from silver ores around 2500BC. This led to the discovery of more silver mines
around the world.
It was used as currency in many civilizations. Silver coin as a currency was
first introduced in the eastern Mediterranean in 550 B.C. It started gaining popularity
as a medium of exchange since then. The discovery of the American countries
marked an important twist in the history of silver as the major silver mines in
Mexico, Peru and Bolivia were found.

69

There have been important technological improvements till now, which have
resulted in the increased production of silver and have made it an unmatchable
commodity.
Silver that is found with some percentage of other elements in it is called
impure silver. That is why it is graded upon its fineness. According to the Indian
standards, silver is graded into six categories
Grade
Finenes
s

9999

9995

999

970

925

916

999.9

999.5

999

970

925

916

Over view
Silver is produced throughout the world but an interesting fact remains that the
primary source of silver is not the silver mines but the other sources of silver. Silver
mines produce a small amount of silver that is 25% of the worlds total production
and the rest of it is derived as a by-product from gold mines (15%), copper mines
(24%), lead and zinc mines (34%) and other sources. The total production of silver in
the world figures to be around 615 million ounces and Mexico is the leading silver
producing country. The total demand of silver in the world amounts to be around 29
thousand tons. About 95% of this demand is contributed largely by three industrial
sectors namely photography, jewelry and silverware sectors. The idea of silver as a
holding asset and as a source of coinage is losing popularity to the idea of silver as an
industrial commodity.

The demand of silver in 2002 from these sectors was: Photography sector 342 million ounces
Jewelry sector 205 million ounces
Silverware sector 259 million ounces
The countries that are the major consumers of silver are: 70

United States, Canada,Mexico, United Kingdom, France, Germany, Italy, Japan,

India

Silver as an investment
Silver, like other precious metals, may be used as an investment. For more than
four thousand years, silver has been regarded as a form of money and store of value.
However, since the end of the silver standard, silver has lost its role as legal tender in
the United States.
Silver is a metal that is associated with metals like gold, lead, zinc and copper,
though its unusual properties makes it very different from them.
It is used in making various kinds of jewelry, as it is considered as a precious
metal second to gold but its contribution in the various industrial sectors as a raw
material makes it unmatchable. No other metal can replace silver as it has an endless
number of uses.
The colored shiny element that is highly ductile and malleable and is used in
making jewelry, coins and tableware. It is also used in chemical experiments as it
provides a high electrical and thermal conductivity. It is found in the metallic state
and also in a large amount of minerals mainly in argentite. That is why it is called
argentums in Latin.

Silver standard
The silver standard is a monetary system in which the standard
economicunit of account is a fixed weight of silver. The silver specie standard was
widespread fom the fall of the Byzantine Empire until the nineteenth century.
Following the discovery in the sixteenth century of large deposits of silver at the
Cerro Rico in Potosi, Bolivia, an international silver specie standard came into
existence in conjunction with the Spanishpieces of eight. These silver dollar coins
played the role of an international trading currency for nearly four hundred years. In
71

1704, following Queen Anne's proclamation, the British West Indies became one of
the first regions to adopt a gold standard in conjunction with the Spanish gold
doubloon coin. In 1717, the master of the Royal Mint, Sir Isaac Newton, introduced a
new mint ratio as between silver and gold, and this had the effect of putting Britain
'de facto' unto a gold standard. Following the Napoleonic wars, the United Kingdom
introduced the gold sovereign coin and formally adopted a gold standard in 1821. At
the same time, revolutions in Latin America interrupted the supply of silver dollars
(pieces of eight) that were being produced at the mints in Potosi, Mexico, and Lima.
The British gold standard initially extended to some of the British colonies, notably
the Australasian colonies and the Southern African colonies, but it did not extend to
the North American colonies, to British India, or to South-East Asia. Canada adopted
a gold standard in 1853 as did Newfoundland in 1865. In 1873, Germany changed
over to the gold standard in conjunction with the new gold mark coin. The United
States changed over to gold 'de facto' in the same year, and over the next 35 years, all
other nations changed to gold, leaving only China and the British colony of Hong
Kong on the silver standard. The silver standard finally came to an end when it was
abandoned by China and Hong Kong in 1935.

Characteristics
Silver is a very ductile and malleable (slightly harder than gold) monovalent
coinage metal with a brilliant white metallic luster that can take a high degree of
polish.
It has the highest electrical conductivity of all metals, even higher than copper, but
its greater cost and tendency to tarnish have prevented it from being widely used in
place of copper for electrical purposes.
Despite this, 13,540 tons were used in the electromagnets used for enriching
uranium during World War II (mainly because of the wartime shortage of copper).
Another notable exception is in high-end audio cables.
Silver also has the lowest contact resistance of any metal.
Silver is stable in pure air and water.
Silver producing countries
72

Mexico (99 million ounces)


Peru (98.4 million ounces)
Australia (71.9 million ounces)
China (63.8 million ounces)
Poland (43.8 million ounces)
Chile (42.8 million ounces)
Canada (40.6 million ounces)
United States (40.2 million ounces)
Russia (37.9 million ounces)
Kazakhstan (20.6 million ounces)
Bolivia (13.1 million ounces)
Sweden (9.4 million ounces)
Indonesia (8.6 million ounces)
Morocco (6.3 million ounces)
Argentina (5 million ounces)
Turkey (3.7 million ounces)
South Africa (3.2 million ounces)
Iran (2.6 million ounces)
Japan (2.4 million ounces)
India (2.1 million ounces)
The above-mentioned figures are the silver production figures of the
countries in 2004. Clearly, Mexico leads the list of silver producing countries. It
contributes to about 15% of the worlds total production. As already mentioned, only
25% of the worlds total production (i.e. 615 million ounces) comes from the primary
silver mines and the rest from other sources like refining of other metals and also from
scrap recycling.

73

World silver survey done in 1998 depicts that around 152.2 million ounces of
silver was separated from the waste for recycling purposes.
Indian silver market
However, this import level fell sharply as a result of the decline in demand due to
rise in silver prices and inconsistent monsoon on which the income of the rural sector
depends. But, even this sharp decline could not affect Indias reputation of being one
of the largest consumer countries of silver in the world. India stands third after
United States and Japan among the leading consumers of silver in the world. The
countries from which India imports silver and maintain the flow of silver in the
market are:

China
United Kingdom
European Union
Australia
Dubai

Major trading canters of silver

London
Zurich
New York (COMEX)
Chicago (CBOT)
Hong Kong
Tokyo Commodity Exchange (TOCOM)

74

Fig 3.6

Fig 3.7

NCDEX SILVER FUTURES CONTRACT SPECIFICATIONS

Name of Commodity

Silver

Ticker symbol

SILVER

Trading System

NCDEX Trading System

Basis

Ex - Ahmedabad inclusive of Custom Duty,


exclusive of local sales tax/VAT, and any other
charges and levies

Unit of trading

30 Kg

Delivery unit

30 kg

Quotation/base value

Rs per Kg of Silver with 999 fineness

Tick size

Re. 1

75

Quality Specification

Not less than 999 fineness bearing a serial number


and identifying stamp of a refiner approved by the
Exchange. List of approved refiners is available at:
www.ncdex.com\downloads\refiners_silver.pdf

Quantity variation

+/- 10 per cent at bar level.

Fig 3.8
BASIC PAYOFFS
A payoff is likely profit/loss that would accrue to a market participant with
change in the price of the underlying asset; this is generally depicted in the form of
payoff diagrams which show the prices of the underlying asset on the X-axis and the
profit/losses on the Y-axis. The Asset could be a commodity like gold or silver, or it
could be a financial asset like a stock or an index.

76

77

The trader in the long position is said to buy a contract. In case of


long position trader earns the profit when there is an increase in the future prices
more than the delivery price resulting in the increasing payoffs and incurs loss in the
situation of falling future price below the delivery price.

78

The short-side trader sells a contract. The trader in the short position earns profit
when the delivery price is more than the future price of the commodity on the expiry
date of the future contract and in contrary, he incurs the loss when the delivery price
is less than the future price of the commodity on the expiry date of the contract.

FUTURE AND SPOT PRICES OF GOLD COMMODITY FUTURE CONRACT


EXPIRING ON 3RD OCTOBER 2013

DATE

27Aug-13
28Aug-13
29Aug-13
30Aug-13
31Aug-13
2-Sep13
3-Sep13
4-Sep13
5-Sep13
6-Sep13
7-Sep13
9-Sep13
10-Sep-

PREV.
CLOSE
PRICE

OPEN
PRICE

HIGH
PRICE

LOW
PRICE

CLOSE
PRICE

TRADE
VALUE

31900 32311 32710 32280 33640 9

291.48 32700

-940

33640 34500 34501 34500 33678 6

207

34130

452

4.37

33678 33750 33750 33546 33636 2

67.3

33250

-386

-2.5

33636 33600 33600 32900 33010 3

99.5

32250

-760

-3.0

33010 32525 32525 32301 32980 0

32860

-120

1.89

32980 32600 32600 32570 33015 2

65.17

32000

33015 33890 33890 33890 34430 1

33.89

33290

34430 32700 32700 32700 32636 0

32750

114

-1.6

32636 32600 32600 32600 32210 1

32.6

31900

-310

-2.5

32210 32170 32170

31670 31860 7

222.68 31550

-310

-1.0

31860 31949 31949 31733 31860 0

31880

20

1.04

31860 31540 31540 31540 31521 0

31450

-71

-1.3

31521 31322 31322 31221 30780 2

62.54

30700

-80

-2.3

79

VOL.

SPOT
PRICES

PAY
OFF

% OF
CHA
IN
PRIC

OPEN
INT.

1015
1140

-2.6

4.03

13
11-Sep13
12-Sep13
13-Sep13
14-Sep13
16-Sep13
17-Sep13
18-Sep13
19-Sep13
20-Sep13
21-Sep13
23-Sep13
24-Sep13
25-Sep13
26-Sep13
27-Sep13
28-Sep13
30-Sep13
1-Oct13
3-Oct13

30780 30600 30600 30600 30698 2

61.2

30530

-168

-0.5

30698 31000 31000 31000 30086 1

31

30710

624

0.59

30086 29840 29840 29801 29546 3

89.48

29708

162

-3.2

29546 31279 31330 31218 30140 0

30241.5 101.5 1.79

30140 29412 29412

29412 29783 1

29.41

29600

-183

-2.1

29783 29946 29674

2876

29750 0

29978

228

1.27

29750 29345 30156

29256 30028 0

29594

-434

-1.2

30028 30760 30760

30740 30433 0

30225

-208

2.13

30433 29986 29990

29870 29910 0

30160

250

-0.2

29910 29985 29985

29985 29910 0

30975

1065

2.70

29910 30125 30045

29756 29852 0

29613.5

-4.3
238.5

29852 29953 29953

29953 29850 0

29693

-157

0.26

29850 29925 30051

29925 30220 2

59.98

30000

-220

1.03

30220 30091 30091

30091 29830 2

60.18

30090

260

0.30

29830 29970 29970

29970 30737 1

29.97

29878

-859

-0.7

30737 30756 30756

30501 30737 0

30970

233

3.65

30737 30865 30959

30853 30450 0

30200

-250

-2.4

30450 30231 30231

30231 29650 0

30000

350

-0.6

29650 29908 29908

29908 29650 0

29450

-200

-1.8

PROFIT/LOSS FROM THE CONTRACT

80

-4190

CALCULATION OF BASIS PAYOFF

In case of the above commodity future contract the contract period begins
from 27th August 2013 with the initial contract price of Rs.33,640/- and ends with the
actual market price of Rs. 29,450/- on 3rd October 2013. Therefore the payoff of the
contract will be beneficial to short position trader resulting in a loss to the buyer with
the amount of Rs. 4,190/- .

Following is the table showing calculation of Payoffs

27th August
2013 (Buying)

Buyer

Seller

33,640/-

33,640/-

29,450/-

29,450/-

3rd October
2013 (Closing
Period)
LOSS

4,190/-

PROFIT

81

4,190/-

LOSS FOR THE BUYER OF FUTURES = Rs. 4,190/GAIN FOR THE SELLER OF FUTURES = Rs. 4,190/-

FUTURE AND SPOT PRICES OF SILVER COMMODITY FUTURE


CONTRACT EXPIRING ON 4THMARCH 2013.
`DATE

1-Jan13
2-Jan13
3-Jan13
4-Jan13
5-Jan13
7-Jan13
8-Jan13
9-Jan13
10-Jan13
11-Jan13
12-Jan13
14-Jan13
15-Jan13
16-Jan13
17-Jan13
18-Jan13
19-Jan-

PREV
CLOSE
PRICE

OPEN
PRICE

HIGH
PRICE

LOW
PRICE

CLOSE
PRICE

OPEN
INT.

TRADE
VALUE

SPOT
PRICES

PAY
OFF

57794 57825 57825

57825

57965 0

480

57905

-60

57965 58559 59590

58559

58753 90

420

53.25

58365

-388

0.794

58753 57680 58972

57575

58570 0

420

58875

305

0.874

58570 57106 57650

56950

57580 90

450

51.51

56700

-880

3.694

57580 57295 57654

57256

57996 0

450

57520

-476

1.446

57996 58740 58570

57256

58025 0

450

58150

125

1.095

58025 58201 58440

57900

58469 390

480

227.08 58100

-369

0.086

58469 58320 58320

58320

58011 30

510

17.5

58295

284

0.336

58011 58201 58201

58201

58726 30

480

17.46

58075

-651

0.377

58726 57906 57906

57906

58202 0

480

58392.5 190.5

0.547

58202 58340 58340

58340

58173 0

480

57985

-188

0.698

58173 58401 58401

58401

58917 30

480

17.52

58850

-67

1.492

58917 58873 59101

58873

59473 120

480

70.82

59280

-193

0.731

59473 59650 59650

59650

59758 30

480

17.9

59200

-558

59758 59000 59000

59000

59531 30

480

17.7

59120

-411

59531 59383 59444

59383

59414 60

480

35.65

59148.5 -265.5 0.048

59414 59802 59802

59802

59346 0

480

59294

VOL.

82

-52

% of
Change

0.135
0.135
0.246

13
21-Jan13
22-Jan13
23Jan13
24-Jan13
25-Jan13
28-Jan13
29-Jan13
30-Jan13
31-Jan13
1-Feb13
2-Feb13
4-Feb13
5-Feb13
6-Feb13
7-Feb13
8-Feb13
9-Feb13
11-Feb13
12-Feb13
13-Feb13
14-Feb13
15-Feb13

59346 59536 59538

59536

59387 60

480

35.72

59387 59416 59664

59416

59600 210

480

125.07 59336

-264

59600 59722 59809

59679

59921 150

480

59921 59302 59302

59000

58950 240

480

58950 58694 58694

58694

58270 90

480

58270 58360 58360

58360

57755 30

480

57755 57822 57822

57822

57938 30

480

17.35

57500

-438

57938 58415 58415

58415

59135 0

480

57942.5

0.770
1192.5

59135 57600 57600

57506

57853 60

480

34.53

58600

747

1.135

57853 57800 57800

57800

58545 30

480

17.34

57704

-841

1.529

58545 58430 58430

58430

58410 0

480

57910

-500

0.357

58410 58583 58583

58583

58415 0

480

58016

-399

0.183

58415 57733 57733

57733

58379 0

480

58401.5 22.5

0.664

58379 58224 58224

58224

58360 30

480

17.47

58099

-261

0.518

58360 58285 58285

58285

58046 30

480

17.49

58419

373

0.551

58046 57812 58267

581897 58204 0

480

58115

-89

0.520

58204 58130 58157

57980

58255 0

480

58120

-135

0.009

58255 58390 57865

57567

57623 0

480

58070

447

57623 57650 57650

57650

57595 0

480

57157

-438

57595 57680 57680

57680

57430 0

480

57575

145

57430 57256 57300

57256

56744 60

510

34.37

57235.5 491.5

0.590

56744 56616 56616

56616

56135 30

510

16.98

57250

0.025

83

59406

19

0.189

0.118
89.61 59532.5 -388.5 0.331
142.04 59100
150
0.726
52.82 58200
-70
1.523
17.51 57500
-255
1.203

1115

0.000

0.086
1.572
0.731

16-Feb13
18-Feb13
19-Feb13
20-Feb13
21-Feb13
22-Feb13
23-Feb13
25-Feb13
26-Feb13
27-Feb13
28-Feb13
1-Mar13
2-Mar13
4-Mar13

1.485
0.532

56135 55970 55970

55970

56083 0

510

56400

317

56083 55920 56147

55920

56240 60

540

33.62

56100

-140

56240 56260 56260

55920

55191 90

510

50.53

56120

929

55191 55256 54671

53590

53733 0

510

54860

1127

53733 53500 54069

53500

54062 300

360

161.29 53492

-570

54062 54100 54100

54100

53350 60

300

32.46

54009

659

0.966

53350 53890 53875

53278

53726 0

300

54060

334

0.094

53726 53815 53990

53550

53967 0

300

54087.5 120.5

0.051

53967 53900 54300

53700

54519 150

180

80.79

53890

-629

0.365

54519 54200 54200

53991

53850 210

60

113.47 54050

200

0.297

53850 53780 53350

53195

53230 0

60

53230 53879 53178

52980

53650 0

60

53650 54789 54100

53789

53888 0

60

53888 53650 53700

53650

53700 60

60

32.21

PROFIT/LOSS FROM THE CONTRACT

84

2.245
2.494

0.403
52893.5 -756.5
1.743
52845
-1043
0.092
53832

602

53827

127
-4138

Fig 3.10

0.036

1.858

CALCULATION OF BASIS PAYOFF


In case of the above commodity future contract the contract period begins from 1st
January 2013 with the initial contract price of Rs.57,965/- and ends with the actual
market price of Rs. 53,827/- on

4th March 2013. Therefore the payoff of the

contract will be beneficial to short position trader resulting in a loss to the buyer with
the amount of Rs. 4,138/- .
Following is the table showing calculation of Payoffs

1st January
2013 (Buying)

Buyer

Seller

57,965/-

57,965/-

53,827/-

53,827/-

4th March 2013


(Closing
Period)
LOSS

4,138/-

PROFIT

LOSS FOR THE BUYER OF FUTURES = Rs. 4,138/GAIN FOR THE SELLER OF FUTURES = Rs. 4,138/-

85

4,138/-

GRAPH REPRESENTING GOLD FUTURE AND SPOT PRICES


Fig 3.11

GRAPH REPRESENTING SILVER FUTURE AND SPOT PRICES

Fig 3.12

86

INTERPRETATION

The graphs above represents the relationship between closing prices and spot

prices of
commodity future markets, where X-axis represent contract period and Y-axis
represents
prices.

The data belongs to the contract period of the commodity


Gold
Silver

: from 27th August 2013 to 3rd October 2013


: from 1stJanuary 2013 to 4th March 2013

Considering the above graphs we get to know that spot prices revolve around

future prices representing high positive correlation between spot prices and future
prices.

As we observe the future price and spot price trends of the commodity Gold,

there has been a overall decline in the price trends, where we observe a steep
decrease in the trend from the month of August to mid September and thereby
maintaining price stability with minute fluctuations.

As we observe the price trends of Silver commodity, there has been a overall

decline in the price trends, where we observe a increasing trend up to the end of the
January month and thereby continuing with the gradual decline till the maturity date.

The difference between future price and spot price of Gold is high when

compare to the
Silver future prices and spot prices.

GRAPH REPRESENTING % OF CHANGE IN PRICES OF GOLD:

87

GRAPH REPRESENTING % OF CHANGE IN PRICES OF SILVER:

INTERPRETATION
88

The graphs above represents the price volatility of commodities Gold and

Silver, where X-axis represent contract period and Y-axis represents percentage
change in prices.

The data belongs to the contract period of the commodity

Gold : from 27th August 2013 to 3rd October 2013


Silver : from 1stJanuary 2013 to 4th March 2013

From the above graph we observe a high fluctuating percentage change in gold

prices resulting in more volatile market for gold where the investment in gold prove
to be more risky than the silver.

As we observe the percentage change in prices of silver commodity, the prices

are less volatile than the gold, which proves that investment in silver are less risky
when compared to the Gold.

89

CHAPTER-V

FINDINGS
CONCLUSIONS
SUGGESTIONS

FINDINGS

90

The investment in this for short period of time and most of the trading is intra-day

in nature i.e., Buy and Sell on same day to make profits. Here daily volumes and
trends are considered.

Investments in commodities market is less risky, science the prices of

commodities are more stable than that of other instruments of capital market.

There exists a high degree of positive correlation between Spot Commodity

Market and Commodity Future Market. If an amount of small change in the spot gold
market prices has the direct impact on the future prices of gold in commodity market.

Though future price and spot prices are positively co-related, but at major

instances spot prices are at lower level than the future prices.

As the delivery month of future contract is approached, the future prices converge

to the spot prices of the underlying asset.

In case of rising price trends, long position trader (Buyer) earns profits where as

short position trader (Seller) faces the loss.

In case of decreasing price trends,short position traders (Sellers) earn profits

whereas long position traders (Buyer) face the loss.

CONCLUSION

91

Commodities market, contrary to the beliefs of many people has been in existence

in India through the ages. However the recent attempt by the Government to permit
Multi-commodity National levels exchanges has indeed given it, a shot in the arm.
Commodity includes all kinds of goods.

The price movements are more predictable in commodity markets, unlike in other

markets where price manipulations are very much possible. Hence to that extent
market pricerisk is reduced.

The future contracts available on a wide spectrum of commodities like Gold,

Silver, crude oil , Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Chana etc.,
provide excellent opportunitiesfor hedging the risks of the farmers,importers,
exporters, traders and large scale consumers.

SUGGESTIONS
92

Familiarize yourself with all the provisions of Eorward Contracts (Regulations)


Act,1952dealing with futures trading in commodities and amendments thereof from time
to time
Understand the provisions and rates relating to the sales tax, value added tax,APMC
tax,Mandi Cess and Tax, Octroi, excise duty,stampduty,etc., as applicable on the
underlying commodity of any contrcts offered for trading by MCX.
Read, understand and be updated about he guidelines and circulars of the exchange and
of the Forward markets Commission issued time to time kept on the respective websites.
Read the commodity contracts circulars and issued & kept on MCX website and
carefully note the contract specifications of the commodity in which u wish to trade.
The contract specifications are subject tochange from time to time.
Before entering into buy and sell transactions please be aware of all the factors that go
into the mechanism of pricing, trading,clearing and settlement
Read product and note of the commodity in which you wish to deal to understand the
commodity and parameters that impact onthetrading and settlement of the commodity.
Understand the Delivery&settlement procdures given in the Exchange Circular of the
commodity kept on the exachange website that you wish to deal in the futures market.
Study historical and seasonal price movements of the commodity that you wish to deal
in the futures market.

93

BIBILIOGRAPHY

BIBILIOGRAPHY

94

Dubofsky, David.A& Miller, Thomas .W (2007), Derivatives valuation & Risk


Management,
1st Edition, Oxford University Press, New York.
John C.Hull(2006), Options, Futures and Other Derivatives, 6th Edition, PHI
Learning Pvt.
Ltd., New Delhi.
Seethapathi.k&Subbulakshmi.V. (2002), Financial Derivatives, 1st Edition,
ICFAI Press,
Hyderabad.
Kumar.S.S.S (2007), Financial Derivatives, 1st Edition, PHI Learning Pvt. Ltd.,
New Delhi.
Psanna chandana derivatrives

JOURNALS

95

Opportunities in Indian derivatives & Commodities Market Indian Journal of


Finance,
April-May(2008), Volume XI, No.1. (pp No. 3).
Commodity Markets All set to take on Equity Markets Osmania Journal of
Management,
June (2006), Volume II, No.2.
The farmers perspective of commodity futures in India The Road Ahead
Indian Journal of
Finance, September(2008), Volume XI, No.5, (pp No.3).
Commodity Boom Chartered Financial Analyst, June(2006),(pp No.29).

96

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