Escolar Documentos
Profissional Documentos
Cultura Documentos
MARKETS
Sharyn
MBA
Bangera, Roll no
(PHARMA-
06. Kanaka
T E C H )Gaonkar,
5TH Roll
YEAR
no 17. Kadambari Narang,
1 2 / 9 / 2 0 1 0
Roll no 43.
TABLE OF CONTENTS
TOPIC PAGE NO
1) Introduction 2
1.1) Commodity 2
1.2)Commodity Markets 2
1.3)Evolution of commodity market in India 2
1.4)Types of commodities traded 3
1.5)Regulatory body 3
1) Segments of Commodity market 4
2.1) OTC commodity market 4
2) Commodity Exchanges 5
3.1) Largest commodity exchanges 5
3.2) Structure of Indian Exchange-based commodity market 5
3.3) Leading Indian commodity exchanges 6
3.4) Trading volumes 6
3.5)MCX 6
3.6) NCDEX 8
3.7) NMCE 10
3.8) ICEX 11
3) Commodity Derivatives 12
4.1) Difference between commercial and financial derivatives 12
4.2) Benefits of commodity futures 12
4.3) Why commodity futures 13
4.4)Commodity trading 14
4) Future Trends in commodity markets: India 15
INTRODUCTION
COMMODITY
A commodity may be defined as an article, a product or material that is bought and sold. It can
be classified as every kind of movable property, except Actionable Claims, Money & Securities.
Any good that is unbranded and is commonly traded in the market is a commodity.
Commodities actually offer immense potential to become a separate asset class for market-savvy
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.
COMMODITY MARKETS
Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they are bought and sold
in standardized contracts. 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.
Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized futures market.
Bombay Cotton Exchange Ltd. was established in 1893 following the widespread discontent
amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade
Association. The Futures trading in oilseeds started in 1900 with the establishment of the
Gujarati Vyapari Mandali, which carried on futures trading in groundnut, castor seed and cotton.
Futures' trading in wheat was existent at several places in Punjab and Uttar Pradesh. But the most
notable futures exchange for wheat was chamber of commerce at Hapur set up in 1913. Futures
trading in bullion began in Mumbai in 1920. Calcutta Hessian Exchange Ltd. was established in
1919 for futures trading in raw jute and jute goods. But organized futures trading in raw jute
began only in 1927 with the establishment of East Indian Jute Association Ltd. These two
associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. to conduct
organized trading in both Raw Jute and Jute goods. Forward Contracts (Regulation) Act was
enacted in 1952 and the Forwards Markets Commission (FMC) was established in 1953 under
the Ministry of Consumer Affairs and Public Distribution. In due course, several other exchanges
were created in the country to trade in diverse commodities.
REGULATORY BODY
The commodity futures market is regulated under the provisions of the Forward Contracts
(Regulation) Act, 1952 (FCR Act).
SEGMENTS OF COMMODITY
MARKET
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market. Also, as in equities, there exists the spot and the
derivatives segment. The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer,
processor, wholesaler etc. Derivative trading takes place through exchange-based markets with
standardized contracts, settlements etc.
The OTC markets are essentially spot markets and are localized for specific commodities.
Almost all the trading that takes place in these markets is delivery based.
The buyers as well as the sellers have their set of brokers who negotiate the prices for them. This
can be illustrated with the help of the following example: A farmer, who produces castor,
wishing to sell his produce, would go to the local ‘mandi’. There he would contact his broker
who would in turn contact the brokers representing the buyers. The buyers in this case would be
wholesalers or refiners. In event of a deal taking place the goods and the money would be
exchanged directly between the buyer and the seller.
This market is restricted to only those people who are directly involved with the commodity. In
addition to the spot transactions, forward deals also take place in these markets. However, they
too happen on a delivery basis and hence are restricted to the participants in the spot markets.
COMMODITY EXCHANGES
LARGEST COMMODITY EXCHANGES:
• CME- USA
• NYXE Euronext- EU
TRADING VOLUMES
• The trading volumes in India's commodity exchanges have risen by 65.81% on a yearly
basis as on May 15, 2010 compared to previous year.
• Total value of trading at the Commodity Exchanges during the fortnight from 1st May
2010 to 15th May 2010 was Rs. 4,35,312.59 crore.
• Agri-commodities volume at Rs 42,639.17 cr in the fortnight ended May 15, 2010 was
17.38% higher than Rs 36,326 cr recorded in corresponding period last year.
• Gold futures trading volume at Rs 20,7178 cr for fortnight ended May 15, was higher by
91% compared to previous year's level of Rs 108455.24 cr. Base metals trading volumes
rose 116.87% at Rs 112, 312.66 cr as against 51788.69 cr last year.
MCX
Having started operations in November 2003, today, MCX holds a market share of over 80% of
the Indian commodity futures market, and has more than 2000 registered members operating
through over 100,000 trader work stations, across India. The Exchange has also emerged as the
sixth largest and amongst the fastest growing commodity futures exchange in the world, in terms
of the number of contracts traded in 2009 and the turnover of the exchange for the fiscal year
2009 was US$ 1.24 trillion
MCX has also set up in joint venture the MCX Stock Exchange. Earlier spin-offs from the
company include the National Spot Exchange, an electronic spot exchange for bullion and
agricultural commodities, and National Bulk Handling Corporation (NBHC) India's largest
collateral management company which provides bulk storage and handling of agricultural
products.
MCX offers more than 40 commodities across various segments such as:
METAL BULLION
Aluminium, Copper, Lead, Nickel, Steel Long Gold, Gold HNI, Gold M, i-gold, Silver, Silver
(Bhavnagar), Steel Long (Govindgarh), Steel HNI, Silver M
Flat, Tin, Zinc
FIBER ENERGY
Cotton L Staple, Cotton M Staple, Cotton S Brent Crude Oil, Crude Oil, Furnace Oil,
Staple, Cotton Yarn, Kapas Natural Gas, M. E. Sour Crude Oil, ATF,
Electricity(Now delisted), Carbon Credit
SPICES PLANTATION
Cardamom, Jeera, Pepper, Red Chilli Arecanut, Cashew Kernel, Coffee (Robusta),
Rubber
PULSES PETROCHEMICALS
Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut
Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein,
Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed,
Soymeal, Soy Bean, Soy Seeds
CEREALS OTHERS
MCX has been certified to three ISO standards including ISO 9001:2000 Quality Management
System standard, ISO 14001:2004 Environmental Management System standard and ISO
27001:2005 Information Security Management System standard. The Exchange’s platform
enables anonymous trades, leading to efficient price discovery. Moreover, for globally-traded
commodities, MCX’s platform enables domestic participants to trade in Indian currency.
The Exchange strives to be at the forefront of developments in the commodities futures industry
and has forged strategic alliances with various leading International Exchanges, including
Euronext-LIFFE, London Metal Exchange (LME), New York Mercantile Exchange, Shanghai
Futures Exchange (SHFE), Sydney Futures Exchange, The Agricultural Futures Exchange of
Thailand (AFET), among others. For MCX, staying connected to the grassroots is imperative. Its
domestic alliances aid in improving ethical standards and providing services and facilities for
overall improvement of the commodity futures market. Key shareholders Promoted by FTIL,
MCX enjoys the confidence of blue chips in the Indian and international financial sectors.
NCDEX
NCDEX headquarters are located in Mumbai and offers facilities to its members from the centres
located throughout India.
The top 5 commodities, in terms of volume traded at the Exchange, were Rape/Mustard Seed,
Gaur Seed, Soyabean Seeds, Turmeric and Jeera.
NMCE 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).
Castor seeds 10MT, Copra, Rape/ Mutard Pepper, Cardamom, Turmeric, Chana
seeds, Soya bean oil
Gold Guinea, Gold (100gms), Gold (1kg), Aluminium, Copper, Lead, Nickel, Zinc
Silver
Rubber, Raw jute, Methol, Isabgul seeds, Kalyan Kapas V-797, Sacking, Coffee REP bulk, Guar
seeds, Guar gum, Wheat
NMCE was the first commodity exchange to provide trading facility through internet, through
Virtual Private Network (VPN).
NMCE follows best international risk management practices. The contracts are marked to market
on daily basis. The system of upfront margining based on Value at Risk is followed to ensure
financial security of the market.
The unique strength of NMCE is its settlements via a Delivery Backed System, an imperative in
the commodity trading business. These deliveries are executed through a sound and reliable
Warehouse Receipt System, leading to guaranteed clearing and settlement.
ICEX
Indian Commodity Exchange Limited is a screen based on-line derivatives exchange for
commodities and has established a reliable, time tested, and a transparent trading platform. It is
also in the process of putting in place robust assaying and warehousing facilities in order to
facilitate deliveries. It is jointly promoted by Indiabulls Financial Services Ltd and MMTC
Limited, and has Indian Potash Ltd., KRIBHCO and IDFC among others, as its partners.
This exchange is ideally positioned to tap the huge scope for increasing the depth and size of
commodities’ market and fill in the structural gaps existing in the Indian market. Our head office
is located in North India (Gurgaon), one of the key regions in India's Agri belt, with a vision to
encourage participation of farmers, traders and actual users to hedge their positions against the
wild price fluctuations.
Aluminium, Copper, Lead, Nickel, Zinc Mustard seed, Soybean, Soya oil, Palm oil
Black pepper, Jeera, Turmeric, Chana, Raw Guar Seed, Mentha oil
Jute
COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets. Commodity
future is a derivative instrument for the future delivery of a commodity on a fixed date at a
particular price. The underlying in this case is a particular commodity. If an investor purchases
an oil future, he is entering into a contract to buy a fixed quantity of oil at a future date. The
future date is called the contract expiry date. The fixed quantity is called the contract size. These
futures can be bought and sold on the commodity exchanges.
• To producer: A producer of a commodity can sell the futures of the commodity, thereby
ensuring that he can sell a particular quantity of his commodity at a particular price at a
particular date.
In India agriculture has traditionally been an area with heavy government intervention.
Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they have
import-export restrictions and a host of other interventions. Many economists think that we could
have major benefits from liberalization of the agricultural sector.
In this case, the question arises about who will maintain the buffer stock, how will we smoothen
the price fluctuations, how will farmers not be vulnerable that tomorrow the price will crash
when the crop comes out, how will farmers get signals that in the future there will be a great
need for wheat or rice. In all these aspects the futures market has a very big role to play.
If you think there will be a shortage of wheat tomorrow, the futures prices will go up today, and
it will carry signals back to the farmer making sowing decisions today. In this fashion, a system
of futures markets will improve cropping patterns.
Next, if I am growing wheat and am worried that by the time the harvest comes out prices will
go down, then I can sell my wheat on the futures market. I can sell my wheat at a price, which is
fixed today, which eliminates my risk from price fluctuations. These days, agriculture requires
investments -- farmers spend money on fertilizers, high yielding varieties, etc. They are worried
when making these investments that by the time the crop comes out prices might have dropped,
resulting in losses. Thus a farmer would like to lock in his future price and not be exposed to
fluctuations in prices.
The third is the role about storage. Today we have the Food Corporation of India, which is
doing a huge job of storage, and it is a system, which -- in my opinion -- does not work. Futures
market will produce their own kind of smoothing between the present and the future. If the future
price is high and the present price is low, an arbitrager will buy today and sell in the future. The
converse is also true, thus if the future price is low the arbitrageur will buy in the futures market.
These activities produce their own "optimal" buffer stocks, smooth prices. They also work very
effectively when there is trade in agricultural commodities; arbitrageurs on the futures market
will use imports and exports to smooth Indian prices using foreign spot markets.
In totality, commodity futures markets are a part and parcel of a program for agricultural
liberalization. Many agriculture economists understand the need of liberalization in the sector.
Futures markets are an instrument for achieving that liberalization.
COMMODITY TRADING
• Commodity trading is done through the exchanges, especially the national exchanges, which
have electronic trading and settlement systems.
• Both delivery and settlement in cash is permitted. If you want your contract to be cash
settled, you have to indicate at the time of placing the order that you don't intend to deliver
the item. If you plan to take or make delivery, you need to have the required warehouse
receipts. The option to settle in cash or through delivery can be changed as many times as
one wants till the last day of the expiry of the contract.
• Sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller's
responsibility to collect and pay sales tax. The sales tax is applicable at the place of delivery.
FUTURE TRENDS IN COMMODITY
MARKETS: INDIA
India: Being in a time-zone that falls in the gap left by the major commodity exchanges in the
US, Europe and Japan has also worked in India’s favour because commodity business by its very
nature is a 24/7 business. Innovation coupled with modern and successful financial market
environment has ensured the beginning of a success story in commodities which will eventually
see India becoming a price-setter in major commodities on the strength of its large production
and consumption.
It is pertinent to note that India and China are being projected as the major drivers for the
initiation of yet another commodity super-cycle. Tracking price trends and analysing the
statistics have always been key areas of economic research; but in each cycle – whether defined
by Jim Rogers, Kondratieff or Dewey & Dakin – the trigger is always different, and in this case
it may well be increase in regional consumption, some of which we have already seen.
One outcome of the recent boom-bust cycle has been that mergers and acquisitions have gained
speed and the biggest beneficiaries will likely be large companies from historically conservative
countries, like India. This phase is likely to propel India into the international big league quicker
and on a firmer footing. In fact, India did well to weather the global financial crisis over the last
year and a half, with GDP growing at 6% at the worst of times, compared to almost every other
country which showed negative growth in one or more quarters during this period. Growth did
fall from 9% to 6% but was way above the World Bank’s forecast of 4%, demonstrating
economic resilience, a sure sign of things to come. It would seem that the alignment of growth
with commodities is the most likely outcome to underline the changing world economic order.
In addition to futures trading, the number of Indians looking at commodities as part of their
investment portfolio is fast reaching critical mass, as gold demonstrates. Add to that a state-of-
the-art infrastructure for trading and the availability of trained personnel, and you have a ready
market for businesses wishing to hedge their risks as the markets become more and more
globalised on account of the removal of trade barriers worldwide. With a conducive financial
environment, the commodity markets in India have come of age and benefits are accruing to
those who are most willing to identify consumer needs and service them.