INTRODUCTION:

COMMODITY: A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. It is fungible, i.e. the same no matter who produces it. Examples are petroleum, notebook paper, milk or copper. In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining. DEFINITION: A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling.

COMMODITY MARKET:
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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 investor could have done very little to actually invest in commodities such as gold and silver or oilseeds in the future 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 investors, arbitragers 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 commodity futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of the commodities in India is also quite significant. Of the countrys GDP of Rs.13,20,730 crore (Rs.13,207.3 billion), commodities related ( and dependent) industries constitute about 58%.Currently, the various commodities across the country clock an annual turnover of Rs.1,40,000 crore ( Rs.1,400 billion). With the introduction of futures trading, the size of the commodities market grow many folds here on.

NEED OF THE STUDY

As crude oil is the largest traded commodity in the global market. In India also the commodity futures trading are gaining importance in the markets.

Lack of awareness and understanding of future trading could be one of the reason for the failure of commodity futures. So, there is need to bridge this knowledge gap among the traders community..

Indian commodity market set for paradigm shift

Four licenses recently issued by Govt. of India to set-up National Online Multi Commodity Exchanges to ensure a transparent price discovery and risk management mechanism List of commodities for futures trade increased from 11 in 1990 to over 100 in 2003 Reforms with regard to sale, storage and movement of commodities initiated Shift from administered pricing to free market pricing WTO regime Overseas hedging has been allowed in metals

Petro-products marketing companies have been allowed to hedge prices Institutionalization of agriculture
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OBJECTIVES OF THE STUDY

A new energy is coursing through a very old industry. The century old commodities market has been bitten by the futures bug and its throbbing opportunity of professionals in research, business development and analysis. At this juncture one can easily exploit a very good opportunity in this market within short period. To understand the basics of commodity market and to discover the emerging prospects in the Indian commodity market To empathize trading and settlement mechanism for commodities in Indian stock exchange. To know how exactly the commodities are traded through the trading desks and what happens in the market.

To identify the working procedures in the commodity trading practices in India. Study aims at understanding the governance and regulatory framework for commodity derivatives exchanges, traders, investors and other participant

SCOPE OF THE STUDY

Petroleum (L. petroleum, from Greek , literally "rock oil") or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights, and other organic compounds, that are found in geologic formations beneath the earth's surface. In its strictest sense, petroleum includes only crude oil, but in common usage it includes both crude oil and natural gas. Both crude oil and natural gas are predominantly a mixture of hydrocarbons. Under surface pressure and temperature conditions, the lighter hydrocarbonsmethane, ethane, propane and butane occur as gases, while the heavier ones from pentane and up are in the form of liquids or solids. However, in the underground oil reservoir the proportion which is gas or liquid varies depending on the subsurface conditions. An oil well produces predominantly crude oil, with some natural gas dissolved in It. The hydrocarbons in crude oil are mostly alkanes, cycloalkanes and various aromatic hydrocarbons while the other organic compounds containnitrogen, oxygen and sulfur, and trace amounts of metals such as iron, nickel, copper and vanadium. The exact molecular composition varies widely from formation to formation but the proportion of chemical elements vary over fairly narrow limits as follws.

RESEARCH METHODOLOGY

Most of the study is theoretical to understand the nuances of the commodity market in past and present in India. The study is more applied in vital areas like pricing & payoffs for the commodity derivatives and illustrations are provided to understand the situations. The language used in project report is more simplified & the lucid explanations are provided where they are necessary. The projects analytical approach is based on the solid understanding of market of institutions. It applied models of exchanges price transmission, margin determination, typical products like gold, cotton & silver. The analysis relied on statistical data published by government and non-government institutions and results of articles and case studies. The first phase of the project report is mainly focused nitty-gritty of the commodity markets, the second phase concentrated on the technical aspects of the commodity trading and the final phase of the study is extended to legislature relating to commodity market in India.

Source of data:
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Primary data: The primary data for this study is collected from interviewing members of Indiabulls. Secondary data: The data used in the project is secondary in nature and is collected from various web Sites.

The data is collected from various news papers. NCFM (NSE Study material). www.mcxindia.com

Tools adopted: Payoffs are used as a tool to make analyze.

REVIEW OF LITERATURE:
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BRIEF ABOUT DEFINITION OF COMMODITIES: Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Forward Contracts (Regulation) Act (FCRA), 1952 defines goods as every kind of movable property other than actionable claims, money and securities. In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals: cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and onions.

ARTICLES: FACTS AND FANTACIES ABOUT COMMODITY FUTURES: GARY GORTON & K.GEERT ROUWENHORST, MARCH/APRIL 2006 Abstract: For this study of the simple properties of commodity futures as an asset class, an equally weighted index of monthly returns of commodity futures was constructed for the July 1959 through December 2004 period. Fully collateralized commodity futures historically have offered the same return and Sharpe ratio as U.S. equities. Although the risk premium on commodity futures is essentially the same as that on equities for the study period, commodity futures returns are negatively correlated with equity returns and bond returns. The negative correlation is the result, primarily, of commodity futures' different behavior over a business cycle. Commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation. http://www.jstor.org/pss/4480744 Commodity Index Investing and Commodity Futures Prices Hans Vanderbilt Robert Vanderbilt University R. University E. Owen Graduate School of Stoll Finance Whaley Management

September 10, 2009

Abstract: Recently, commodity index investing has come under attack. A Staff Report by the U.S. Senate Permanent Subcommittee on Investigation (hereafter, the "subcommittee report") "finds that there is significant and persuasive evidence to conclude that these commodity index traders, in the aggregate, were one of the major causes of 'unwarranted changes' - here increases - in the price of wheat futures contracts relative to the price of wheat in the cash market". The purpose of this study is to provide a comprehensive
9

evaluation of whether commodity index investing is a disruptive force not only in the wheat futures market in particular but in the commodity futures market in general. We conclude that: (a) commodity index investing is not speculation; (b) commodity index rolls have little futures price impact, and inflows and outflows from commodity index investment do not cause futures prices to change; and, (c) the failure of the wheat futures price to converge to the cash price at the contracts expiration has not undermined the futures contracts effectiveness as a risk management tool. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478195

3. FUTURES TRADING AND INVESTOR RETURNS: An Investigation of Commodity Market Risk Premiums, by Katherine Dusak 1973 The University of Chicago Press.

Abstract:
The long-standing controversy over whether speculators in a futures market earn a risk premium is analyzed within the context of the capital asset pricing model recently developed by Sharpe, Lintner, and others. Under that approach the risk premium required on a futures contract should depend not on the variability of prices but on the extent to which the variations in prices are systematically related to variations in the return on total wealth. The systematic risk was estimated for a sample of wheat, corn, and soybean futures contracts over the period 1952 to 1967 and found to be close to zero in all three cases. Average realized holding period returns on the contracts over the same period were close to zero.
The Optimal Approach to Futures Contract Roll in Commodity Portfolios

Tammam Mouakhar, Mathieu Roberge To order reprints of this article, at dpalmieri@iijournals.com or 212-224-3675. please contact Dewey Palmieri

This article discusses the necessity of managing the futures contract roll and argues that most commodity index providers set futures rollover rules in an inefficient manner. Generally, most index providers roll futures by replacing the next futures contract to reach maturity with the subsequent futures contract to do so. Depending on the curvature of the commodity futures term structure, such a practice might be acceptable or might lead to automatic losses. This article presents an optimal approach that maximizes gains with a term structure in backwardation and minimizes losses with a term structure in contango. The proposed approach is independent of the position held by
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the investor, i.e., it dictates the optimal way to roll a short or a long position. The benefits of this approach are illustrated by comparing the performance using this approach to that of the standard approach to rollover. The comparison is done both at the individual commodity level and at the portfolio level. Results confirm the crucial importance of handling roll operations in commodity futures investing and show that an optimized approach to roll could improve performance. http://www.iijournals.com/doi/abs/10.3905/JAI.2010.12.3.051?journalCode=jai

What Can Be Said About the Rise and Fall in Oil Prices?
Victoria Bank of England Merxe Bank of England Matt affiliation not Market provided Infrastructure to Saporta Tudela Division Trott SSRN

Bank of England Quarterly Bulletin 2009 Q3 , SEP 28 ,2009. Abstract: The price of oil rose steadily between the middle of 2003 and the end of 2007, rose further and more rapidly until mid-2008 and fell sharply until the end of that year. Commentators agree that a significant part of the increase in the oil price over that period was due to rapid demand growth from emerging markets, but there are substantial differences of view about the relative importance of other factors, and limited work thus far in explaining the large fall in oil prices in the second half of 2008. The purpose of this article is to analyse the main explanations for the rise and fall in oil prices in the five years until the end of 2008. It argues that shocks to oil demand and supply, coupled with the institutional factors of the oil market, are qualitatively consistent with the direction of price movements, although the magnitude of the rise and subsequent fall during 2008 is more difficult to justify. The available empirical evidence suggests that financial flows into oil markets have not been an important factor over the period as a whole. Nonetheless, one cannot rule out the possibility that some part of the sharp rise and fall in the oil price in 2008 might have had some of the characteristics of an asset price bubble. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1479503

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INDUSTRY PROFILE: 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. In fact, the size of the commodities markets in India is also quite significant. Of the countrys GDP of Rs.13,20,730 crore( Rs.13,207.3 billion), commodities related ( and dependent) industries constitute about 58 per cent.

12

Currently, the various commodities across the country clock an annual turnover of Rs.1,40,000 crore ( 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 COMMODITY MARKET IN INDIA:

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 contact 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
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efficiency of a futures contract for hedging depends on the prevalence of such an ideal price relationship between the spot and futures markets. ABOUT THE COMMODITIES EXCHANGES: A brief description of commodity exchanges are those which trade in particular commodities, neglecting the trade of securities, stock index futures and options etc., In the middle of 19th century in the United States, businessmen began organizing market forums to make the buying and selling of commodities easier. These central market places provided a place for buyers and sellers to meet, set quality and quantity standards, and establish rules of business. The major commodity markets are in the United Kingdom and in the USA. In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities.

THE THREE EXCHANGES ARE:

National Commodity & Derivatives Exchange Limited ( NCDEX) Multi Commodity Exchange of India Limited ( MCX)
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 National Multi-Commodity Exchange of India Limited ( NMCEIL) All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India. National Commodity & Derivatives Exchanges Limited ( NCOEX): National Commodity & Derivatives Exchanges Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations on December 15, 2003. This is the only commodity exchange in the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life Insurance Corporation and National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). It is a professionally managed online multi commodity exchange.

NCDEX is regulated by Forward Market Commission and is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act., Forward Commission ( Regulation) Act and * various other legislations.

Multi Commodity Exchange of India Limited ( MCX): Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutualised exchange with a permanent recognition from Government of India. Key shareholders of MCX are Financial Technologies ( India)
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Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement. All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India. Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. A big difference between a typical auction, where a single auctioneer announces the bids, and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than some one elses lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do.

INTERNATIONAL COMMODITIES EXCHANGES

Chicago board of trade (cbot) 1848 Chicago mercantile exchanges (cme) 1898 New york mercantile exchanges (nymex) 1872 London metal exchange (lme) 1877
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London international financial futures exchange (life) 1979 Tokyo commodity exchange (tocom) 1984 Shanghai metal exchange (shme) Dahlian commodity exchange (dce) 1993

EMERGING TRENDS IN COMMODITY MARKET IN INDIA:

Commodity markets have existed in India for a long time, below Table gives the list of registered commodities exchanges in India. annualized volumes on various exchanges. While the implementation of the Kara committee recommendations were rather slow, today, the commodity derivative market in India seems poised for a transformation. National level commodity derivatives exchanges seem to be the new phenomenon. The Forward Markets Commission accorded in principle approval for the following national level multi commodity exchanges. The increasing volumes on these exchanges suggest that commodity markets in India seem to be a promising game. Above Table gives the total

National Board of Trade: Multi Commodity Exchange of India National Commodity & Derivatives Exchanges of India Ltd., Commodity Exchange National board of trade, Indore
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Products Soya, mustard

National multi commodity exchange, Ahmedabad Multiple Ahmedabad commodity exchange Rajadhani Oil & Oil seeds Vijai Beopar Chamber Ltd., Muzzaffarnagar Rajkot seeds, Oil & bullion exchange IPSTA, Cochin Chamber of commerce, Hapur Bhatinda Om and Oil Exchange Other ( mostly inactive) Castor, cotton Mustard Gur Castor, groundnut Pepper Gur, mustard Gur

Commodity Exchanges Registered in India: Commodity Exchange Bhatinda Om & Oil Exchange Ltd., Products Traded Gur Sunflower Oil Cotton ( Seed and Oil)
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Safflower ( Seed , Oil and Oil Cake) The Bombay commodity Exchange Groundnut ( Nut and Oil) Ltd Castor Oil, Castor seed Sesamum ( Oil and Oilcake) Rice bran, rice bran oil and oil cake Crude palm oil The Rajkot Seeds Oil & Bullion Groundnut Oil, Castro Seed Merchants Association Ltd. The Kanpur Commodity Exchange Rapeseed / Mustard seed oil and cake. Ltd., Te Meeerut Agro commodities Gur Exchange Co., Ltd. The Spices and Oilseeds exchange Turmeric Ltd., Sangli Ahmedabad Exchange Ltd Vijay Beopar Muzaffarnagr Commodities Cottonseed, castor seed Chamber Spice Ltd., Gur Trade Pepper

India Pepper & Association, Kochi

Rajadhani Oils and Oil seeds Gur, Rapeseed / Mustard Seed Sugar Grade M Exchange Ltd.,Delhi Rapeseed / Mustard Seed / Oil / Cake Soyabean / Meal / Oil / Crude Palm Oil National Board of Trade, Indore

The Chamber of Commerce, Hapur

Gur, Rapeseed / Mustard seed

The East India Cotton Association, Cotton Mumbai

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The central India Commercial Gur Exchange Ltd Gwaliar The east India Jute & Hessain Hessain, Sacking Exchange Ltd., Kolkata First Commodity Exchange of India Copra, Coconut Oil & Copra Cake Ltd., Kochi The Coffee Futures Exchange India Coffee Ltd Bangalore Gur RBD Pamolien Crude Palm Oil, Copra Rapeseed / Mustard Seed, Soy Bean Cotton ( Seed, Oil, Oil Cake) National Multi Commodity Safflower ( Seed, Oil, and Oil cake) Exchange of India Ltd., / Ground nut ( Seed, Oil, and Oil cake) Ahmedabad Sugar, Sacking, Gram Coconut ( Oil and Oilcake) Castor ( Oil and Oilcake) Sesamum ( Seed, Oil, and Oil cake) Linseed ( Seed, Oil, and Oil cake) Rice Bran Oil, Pepper, Guar seed Aluminum ingots, Nickel, tin Vanaspati, Rubber, Copper, Zinc, Lead

National commodity & Derivatives Soy Bean, Refined Soy oil, Mustard Seed Exchange Limited Expeller Mustard Oil RBD Palmolein Crude Palm Oil Medium staple cotton
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Long Staple Cotton Gold, Silver

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. PARTICIPANS: The following three board categories of participants in the derivatives market.

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HEDGERS: Hedgers face risk associated with the price of an asset. They use futures or option market to reduce or eliminate this risk.

SPECULATORS: Speculators wish to bet on future movements in the of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both potential gains and potential losses in a speculative venture.

ARBITRAGERS: Arbitragers are in business to take of a discrepancy between prices in two different market, if, for instant, they see the futures price of an asset getting out of line with the cash price, they will take offsetting position in the two markets to lock in a profit. HEDGING: Many participants in the commodity futures market are hedgers. The use the futures market to reduce a particular risk that they face. This risk might relate to the price of wheat or oil or any other 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
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companies and even other participants in the value chain, for instance farmers, extractors, ginners, processors etc., who are influenced by the commodity prices. BASIC PRINCIPLES OF HEDGING: When an individual or a company decides to use the futures markets to hedge a risk, the objective is to take a position that neutralizes the risk as much as possible. Take the case of a company that knows that it will gain Rs.1,00,000 for each 1 rupee increase in the price of a commodity over the next three months and will lose Rs.1,00,000 for each 1 rupee decrease in the price of a commodity ovez the same period. The hedge, the company should take a short futures position that is designed to offset this risk. TheFutures position should lead to a loss of Rs.1,00,000a for each 1 rupees increase in the price of the commodity over the next three months and a gain of Rs.1,00,000 for each 1 rupee decrease in the price during this period. If the price of the commodity goes down, the gain on the futures position offsets the loss on the commodity. HEDGE RATIO: Hedge ratio is the ratio of the size of position taken in the futures contracts to the size of the exposure in the underlying asset. So far in the examples we used, we assumed that the hedger would take exactly the same amount of exposure in there futures contract as in the underlying asset. For example, if the hedgers exposure in the underlying was to the extent of 11 bales of cotton, the futures contracts entered into were exactly for this amount of cotton. We were assuming here that the optimal hedge ratio is one. In situations where the underlying asset in which the hedger has an exposure is exactly the same as the asset underlying the futures contract he uses, and the spot and futures market are perfectly correlated, a hedge ratio of one could be assumed. In all other cases, a
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hedge ratio of one may not be optimal. Below equation gives the optimal hedge ratio, one that minimizes the variance of the hedgers position. Where: A C*. = Change in spot price, S, during a period of time equal to the life of the hedge AF = Change in futures price, F, during a period of time equal to the life of the hedge deviation of AS aF: = Standard deviation of AF Coefficient of correlation between as and AF h = hedge ratio

ADVANTAGES OF HEDGING : Besides the basic advantage of risk management/hedging also has other advantages: 1. Hedging stretches the marketing period. For example, a livestock feeder does not have to wait until his cattle are ready to market before he can self them. Them futures market permits him to sell futures contracts to establish the approximate sale price at any time between the time he buys his calves for feeding and the time the fed cattle are ready to market, some four to six months later. He can take advantage of good prices even though the cattle are not ready for market.

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2.

Hedging protects inventory values. For example, a merchandiser with a large, unsold inventory can sell futures contracts that will protect the value of the inventory, even if the price of the commodity drops.

Hedging permits forward pricing of products. For example, a jewelry manufacturer can determine the cost for gold, silver or platinum by buying a futures contract, translate that to a price for the finished products, and make forward sales to stores at firm prices. Having made the forward sales, the manufacturer can use his capital to acquire only as much gold, silver, or platinum as may be needed to make the products that will fill its orders.

SPECULATION: 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. For a speculator who thinks the shares of a given company will rise. 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.

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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). We look here at how the commodity futures markets can be used for speculation. Today a speculator can take exactly the same position on gold by using gold futures contracts. Let us see how this works. Gold trades at Rs.6000 per 10 gms and threemonths gold futures trades at Rs.6150. Tables 7.3 gives the contract specifications for gold futures. The unit of trading is 100 gms and the delivery unit for the gold futures contract on the NCDEX is 1 kg. He buys one kg of gold futures which have a value of Rs.6,15,000. Buying an asset in the futures markets only require making margin

payments. To take this position, he pays a margin of Rs.1,20,000. Three months later gold trades at Rs.6400 per10 gms. As we know, on the day of expiration, the futures price converges to the spot Price (else there would be a risk-free arbitrage opportunity). He closes his long futures position at Rs.64,000 in the process making a profit of Rs.25,000 on an initial margin investment of Rs.1,20,000. This works out to an annual return of 83 percent. Because of the leverage they provide, commodity futures form an attractive tool for speculators.

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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, involves the simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices. The buying cheap and swelling expensive continues till prices in the two markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore market efficiency. F = (S+U)eeT Where: Cost of financing (annualized) T U = = Time till expiration present value of all storage costs.

REGULATORY FRAMEWORK FOR COMMODITY TRADING IN INDIA: At present there are three tiers of regulations of forward/futures trading system in India, namely, government 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
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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.

BRIEF ABOUT THE DERIVATIVES: The emergence of the market for derivatives products, most notably forward, futures and options, can be tracked back to the willingness of risk-averse economic to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are market by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risk by lockingin asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset price. However, by locking-in asset prices, derivative
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product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situated of risk-averse investors. Derivatives are risk management instrument instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, interest, etc.. Banks, securities firms, companies and investors to hedge risk, to gain access to cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.

FUNCTION OF DERIVATIVES MARKETS: The following are the various functions that are performed by the derivatives markets. They are: Prices in an organized derivatives market reflect the perception of market

participants about the future and lead the price of underlying to the perceived future level. Derivatives market helps to transfer risks from those who have them but

may not like them to those who have an appetite for them. Derivatives trading acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase saving and investment in long run.

TYPES OF DERIVATIVES: The following are the various types of derivatives. They are: FORWARDS: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. FUTURES:
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A futures contract is an agreement between two parties to buy or sell an asset in a certain time at a certain price, they are standardized and traded on exchange. OPTIONS: Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. WARRANTS: Options generally have lives of up to one year; the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the counter. LEAPS: The acronym LEAPS means long-term Equity Anticipation securities. These are options having a maturity of up to three years.

BASKETS: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options.

SWAPS: Swaps are private agreements between two parties to exchange cash floes in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used Swaps are: INTRODUCTION TO FUTURES AND OPTIONS
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In recent years, derivatives have become increasingly important in the field of finance. While futures and options are now actively traded on many exchanges, forward contracts are popular on the OTC market. In this chapter we shall study in detail these three derivative contracts. FORWARD CONTRACTS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges.

LIMITATIONS OF FORWARD MARKETS: Forward markets world-wide are afflicted by several problems: Lack of centralization of trading,
Liquidity, and

Counter party risk INTRODUCTION TO FUTURES Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain
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time in the future at a certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way.

DISTINCTION BETWEEN FUTURES AND FORWARDS

Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. Table 3.1 lists the distinction between the two

DEFINITION: A Futures contract is an agreement between two parties to buy or sell an asset a certain time in the future at a certain price. To facilitate liquidity in the futures contract, the exchange specifies certain standard features of the contract. Quantity and Quality of the underlying of the underlying.
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The date and the month of delivery The units of price quotations and minimum price change Location of settlement

FEATURES OF FUTURES: Futures are highly standardized. The contracting parties need not pay any down payments. Hedging of price risks. They have secondary markets to.

TYPES OF FUTURES: On the basis of the underlying asset they derive, the futures are divided into two types: 1. Stock futures:
2. Index futures:

PARTIES IN THE FUTURES CONTRACT: There are two parties in a future contract, the buyer and the seller. The buyer of the futures contract is one who is LONG on the futures contract and the seller of the futures contract is who is SHORT on the futures contract. DEFINITION:
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Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
1)

Securities Contracts (Regulation) Act, 1956 (SCR Act) defines

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

underlying securities. Emergence of financial derivative products Derivative products initially emerged as hedging devices against fluctuations in commodity prices, financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease of use. 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
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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 promote interest of customers/ nonmembers. It prescribes the following regulatory measures: 1. Limit on net open position as on close of the trading houses. Some times 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.

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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 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:
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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 the trading member and users Trading members are entitled to appoint, (subject to such terms and

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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/such certification program has to be passed by at least one of their directors/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.

INDIA IN WORLD CRUDE OIL INDUSTRY: Petroleum and Natural Gas; the recent exploration and production activities in the country have led to a dramatic increase in the output of oil. The country currently produces 35 million tones of crude oil, two-thirds of which is from offshore areas, and
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imports another 27 million tones. Refinery production in terms of crude throughput of the existing refineries is about 54 million tones. Natural gas production has also increased substantially in recent years, with the country producing over 22,000 million cubic meters. Natural gas is rapidly becoming an important source of energy and feedstock for major industries. By the end of the Eighth Five-Year Plan, production was likely to reach 30 billion cubic metres.

FACTORS INFLUENCING CRUDE OIL MARKETS:

shortage of oil supplies

Taxation When oil taxes are raised, end consumers often mistakenly blame, the oil producers, but it is really their own governments that are responsible. Balance of demand and supply in the short term Rate of investment in the longer term Accidents Bad weather Increasing demand Halting transport of oil from producers Labour disputes.
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If traders in the oil market believe there will be a Jffirtage of oil supplies, they may raise prices before a shortage occurs. CAUSES OF LOW OIL PRICES: Imbalance between supply and demand. If oil production rises faster than demand. If the oil industry is unprofitable and discourages investors. CAUSES OF HIGH OIL PRICES: Shortage of oil supplies Balance of demand and supply in the short term Rate of investment in the longer term If traders in the oil market believe there will be a shortage of oil supplies, they may raise prices before a shortage occurs. War, Natural disasters CRUDE OIL RESERVES: World crude oil reserves are estimated at more than one trillion barrels/of which the 11 OPEC Member Countries hold more than 75 percent. OPECs Members currently produce around 27 million to 28 million barrels per day of oil, or some 40 per cent of the world total output, which stands at about 75 million barrels per day.

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Is the world running out of oil? Oil is a limited resource, so it may eventually run out, although not for many years to come, OPECs oil reserves are sufficient to last another 80 years at the current rate of production, while non-OPEC oil producers reserves might last less than 20 years. The worldwide demand for oil is rising and OPEC is expected to be an increasingly important source of that oil. If we manage our resources well, use the oil efficiently and develop new fields, then our oil reserves should last for many more generations to come. USES OF CRUDE OIL: Gasoline, petrol liquefied, petroleum gas (LPG), naphtha, kerosene, gas oil, fuel oil, lubricants, asphalt(used in paving roads), naphtha, gas oil, ethane, ethylene, propylene, butadiene, benzene, ammonia, methanol, plastics, synthetic fibers, synthetic rubbers, detergents, chemical fertilizers.

EXCHANGES DEALING IN CRUDE FUTURES APART FROM MCX: The New York Mercantile Exchange (NYMEX) The International Petroleum Exchange of London (IPE) The Tokyo Commodity Exchange (TOCOM)

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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.

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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 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.
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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. 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. 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 prescribes from time to time the commodities/derivatives contracts, the settlement periods and trade types for which margin would be attracted. 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
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on 99% of the days. Additional margins may be levied for deliverable 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 TRADING 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.

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 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. 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.

CLEARING: As mentioned earlier, National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX, All deals executed on the Exchange are cleared and settled by the trading members on the settlement date by the trading members themselves as clearing members or through other professional clearing members in accordance with these regulations/bye laws and rules of 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
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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. member cannot operate the clearing account for any other purpose. The clearing

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.

INFORMATION ABOUT COMMODITIES TRADING:

If you're looking to get into commodities trading, you should first understand what it means. Commodities are products that are bought, sold and usually not processed. Some examples of commodities are financial investments and agricultural products. Foreign currencies Are also in that group. A lot of products that used to trade locally have now expanded into the global market. Thanks to technology, more money can be made by the global expansion. Many countries, including the United States, have become one big melting pot for global trading.
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When commodities first evolved, not a lot of people were using them. When people found out that it was better to take a risk on this as opposed to stocks and bonds, more people jumped on board. Now anyone can get involved in commodities trading. When you're involved in a commodity transaction, it is set up through futures contracts. Futures contracts are purchased and/or sold on the date specified for the future. A price is put in place and the transaction is completed at a later time. There are also contracts called spot contracts. These are contracts that are used for transferred commodities. They get shifted when a contract is created then instead of a future date. This type of contract can be used for a future contract after a specific time period. The type of commodities investing can vary. When you invest in commodities, you don't have to endure a lot of risks. That's why people like to invest in them. When you get an increase in commodities, it can offset any losses you may have. The risks in commodities are minimal because you're investing in different things. When you have contracts for later dates, you don't encounter a lot of risks. There is not a problem when you're watching how your commodities work out. Even when stocks and other stuff aren't going so good, you can at least count on your commodities to hang tough. Unlike stocks, you can tell how well commodities are going to do. You should never compare stocks and bond with commodities because they are two different entities. Plus, stocks and bonds are more volatile because of their uncertainty in the daily market. If you're not familiar with investing in commodities, you should find someone who is knowledgeable in it. Commodity trading advisors can assist you on what to do in the market. They will also let you know when it's time to get rid of that commodity. When choosing an advisor, look at what you what to accomplish. After you've done that, find someone who would be able to help you with your goals. You don't necessarily have to go to a brick and mortar facility. Since people are so busy these days, it might be better if you contact them by phone or e-mail first. Then you can set up a time to meet, if necessary. You can do other things besides trading in commodities. You can also make investments using a diverse package of funds.

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With commodities, you are less likely to lose money than you would if you were strictly investing in stocks and bonds. That's why it's important to diversify your money if you're planning on creating a nice financial portfolio.

COMPANY PROFILE
Company History India Infoline was originally incorporated on October 18, 1995 as Probity Research and Services private limited at Mumbai under the Companies Act, 1956 with Registration No. 11 93797. It commenced operations as an independent provider of information, analysis and research covering Indian businesses, financial markets and economy, to institutional customers. It became a public limited company on April 28, 2000 and the name of the Company was changed to Probity Research and Services Limited. The name of the Company was changed to India Infoline.com Limited on May 23, 2000 and later to India Infoline Limited on March 23, 2001.In 1999, it identified the potential of the Internet to cater to a mass retail segment and transformed its business model from providing information services to institutional customers to retail customers. Hence it launched its Internet portal, www.indiainfoline.com in May 1999 and started providing news and
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market information, independent research, interviews with business leaders and other specialized features. In May 2000, the name of the Company was changed to India Infoline.com.Limited to reflect the transformation of business. Over a period of time, it has emerged as one of the leading business and financial information services provider in India. In the year 2000, it leveraged its position as a provider of financial information and analysis by diversifying into transactional services, primarily for online trading in shares and securities and online as well as offline distribution of personal financial products, like mutual funds and RBI Bonds. These activities were carried on by its wholly owned subsidiaries. Its broking services was launched under the brand name of 5paisa.com through their subsidiary, India Infoline Securities Private Limited and www.5paisa.com, the e-broking portal, was launched for online trading in July 2000. It combined competitive brokerage rates and research, supported by Internet technology. Besides investment advice from an experienced team of research analysts, they also offer real time stock quotes, market news and price charts with multiple tools for technical analysis. Acquisition of Agri Marketing Services Limited (Agri) In March 2000, it acquired 100% of the equity shares of Agri Marketing Services Limited, from their owners in exchange for the issuance 508,482 of its equity shares. Agri was a direct selling agent of personal financial products including mutual funds, fixed deposits, corporate bonds and post-office instruments. At the time of its acquisition, Agri operated 32 branches in South and West India serving more than 30,000 customers with a staff of, approximately 180 employees. After the acquisition, they changed the company name to India Infoline.com Distribution Company Limited. Management- India Infoline
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Mr. Nirmal Jain, Chairman& Managing Director, India Infoline Ltd. Nirmal Jain, MBA (IIM, Ahmedabad) and a Chartered and Cost Accountant, founded Indias leading financial services company India Infoline Ltd. in 1995, providing globally acclaimed financial services in equities and commodities broking, life insurance and mutual funds distribution, among others. Mr. Jain began his career in 1989 with Hindustan Levers commodity export business, contributing tremendously to its growth. He was also associated with Inquire-Indian Equity Research, which he co-founded in 1994 to set new standards in equity research in India.

Mr. R Venkataraman, Executive Director, India Infoline Ltd. R Venkataraman, co-promoter and Executive Director of India Infoline Ltd., is a B. Tech (Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined the India Infoline board in July 1999. He previously held senior managerial positions in ICICI Limited, including ICICI Securities Limited, their investment banking joint venture with J P Morgan of USA and with BZW and Taib Capital Corporation Limited. He was also Assistant Vice President with G E Capital Services India Limited in their private equity division, possessing a varied experience of more than 16 years in the financial services sector. The Board of Directors Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline Ltd. comprises: Mr. Nilesh Vikamsey, Independent Director, India Infoline Ltd.
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Mr. Vikamsey, Board member since February 2005 - a practicing Chartered Accountant and partner (Khimji Kunverji & Co., Chartered Accountants), a member firm of HLB International, headed the audit department till 1990 and thereafter also handles financial services, consultancy, investigations, mergers and acquisitions, valuations etc; an ICAI study group member for Proposed Accounting Standard 30 on Financial Instruments Recognition and Management, Finance Committee of The Chamber of Tax Consultants (CTC), Law Review, Reforms and Rationalization Committee and Infotainment and Media Committee of Indian Merchants Chamber (IMC) and Insurance Committee and Legal Affairs Committee of Bombay Chamber of Commerce and Industry (BCCI). Mr. Vikamsey is a director of Miloni Consultants Private Limited, HLB Technologies (Mumbai) Private Limited and Chairman of HLB India. Mr. Sat Pal Khattar, Non Executive Director, India Infoline Ltd. Mr. Sat Pal Khattar, - Board member since April 2001 - Presidential Council of Minority Rights member, Chairman of the Board of Trustee of Singapore Business Federation, is also a life trustee of SINDA, a non profit body, helping the under-privileged Indians in Singapore. He joined the India Infoline board in April 2001. Mr. Khattar is a Director of public and private companies in Singapore, India and Hong Kong; Chairman of Guocoland Limited listed in Singapore and its parent Guoco Group Ltd listed in Hong Kong, a leading property company. Mr. Kranti Sinha, Independent Director, India Infoline Ltd. Mr. Kranti Sinha Board member since January 2005 completed his masters from the Agra University and started his career as a Class I officer with Life Insurance Corporation of India. He served as the Director and Chief Executive of LIC Housing
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Finance Limited from August 1998 to December 2002 and concurrently as the Managing Director of LICHFL Care Homes (a wholly owned subsidiary of LIC Housing Finance Limited). He retired from the permanent cadre of the Executive Director of LIC; served as the Deputy President of the Governing Council of Insurance Institute of India and as a member of the Governing Council of National Insurance Academy, Pune apart from various other such bodies. Mr. Sinha is also on the Board of Directors of Hindustan Motors Limited, Larsen & Toubro Limited, LICHFL Care Homes Limited, Gremach Infrastructure Equipments and Projects Limited and Cinemax (India) Limited.

Mr. Arun K. Purvar, Independent Director, India Infoline Ltd. Mr. A.K. Purvar Board member since March 2008 completed his Masters degree in commerce from Allahabad University in 1966 and a diploma in Business Administration in 1967. Mr. Purwar joined the State Bank of India as a probationary officer in 1968, where he held several important and critical positions in retail, corporate and international banking, covering almost the entire range of commercial banking operations in his illustrious career. He also played a key role in co-coordinating the work for the Bank's entry into the field of insurance. After retiring from the Bank at end May 2006, Mr. Purwar is now working as Member of Board of Governors of IIM-Lucknow, joined IIMIndore as a visiting professor, joined as a Hon.-Professor in NMIMS and he is also a member of Advisory Board for Institute of Indian Economic Studies (IIES), Waseda University, Tokyo, Japan. He has now taken over as Chairman of IndiaVenture Advisors Pvt. Ltd., as well as IL & FS Renewable Energy Limited. He is also working as

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Independent Director in leading companies in Telecom, Steel, Textiles, Auto parts, Engineering and Consultancy. About Us We are a one-stop financial services shop, most respected for quality of its advice, personalized service and cutting-edge technology. Vision Our vision is to be the most respected company in the financial services space.

India Infoline Group The India Infoline group, comprising the holding company, India Infoline Limited and its wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging from Equity research, Equities and derivatives trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other small savings instruments to loan products and Investment banking. India Infoline also owns and manages the websites www.indiainfoline.com and www.5paisa.com The company has a network of 976 business locations (branches and sub-brokers) spread across 365 cities and towns. It has more than 800,000 customers. India Infoline Ltd India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a
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member of both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and Portfolio Management Services. It offers broking services in the Cash and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients trading in the equities market. It has recently launched its Investment banking and Institutional Broking business.

India Infoline Media and Research Services Ltd. The content services represent a strong support that drives the broking, commodities, mutual fund and portfolio management services. It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the Web' and 'a must read for investors in Asia'. India Infoline's research is available not just over the internet but also on international wire services like Bloomberg (Code: IILL), Thomson First Call and Internet Securities where India Infoline is amongst the most read Indian brokers.

India Infoline Commodities Ltd. India Infoline Commodities Pvt Limited is engaged in the business of commodities broking. Our experience in securities broking empowered us with the requisite skills and technologies to allow us offer commodities broking as a contra-cyclical alternative to equities broking. We enjoy memberships with the MCX and NCDEX, two leading Indian
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commodities exchanges, and recently acquired membership of DGCX. We have a multichannel delivery model, making it among the select few to offer online as well as offline trading facilities. India Infoline Marketing & Services India Infoline Marketing and Services Limited is the holding company of India Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited. a) India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest private Life Insurance Company. India Infoline was the first corporate agent to get licensed by IRDA in early 2001. b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is a newly formed subsidiary which will carry out the business of Insurance broking. We have applied to IRDA for the insurance broking licence and the clearance for the same is awaited. Post the grant of license, we propose to also commence the general insurance distribution business.

India Infoline Investment Services Ltd. Consolidated shareholdings of all the subsidiary companies engaged in loans and financing activities under one subsidiary. Recently, Orient Global, a Singapore-based investment institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services. This will help focused expansion and capital raising in the said subsidiaries for various lending businesses like loans against securities, SME financing, distribution of retail loan products, consumer finance business and housing finance
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business. India Infoline Investment Services Private Limited consists of the following step-down subsidiaries. (a) India Infoline Distribution Company Limited (distribution of retail loan products) (b) Moneyline Credit Limited (consumer finance) (c) India Infoline Housing Finance Limited (housing finance)

IIFL (Asia) Pte Ltd. IIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated in Singapore to pursue financial sector activities in other Asian markets. Further to obtaining the necessary regulatory approvals, the company has been initially capitalized at 1 million Singapore dollars.

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DATA ANALYSIS :
Crude Oil: General Characteristics Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Oil and gas account for about 60 per cent of the total world's primary energy consumption. Almost all industries including agriculture are dependent on oil in one way or other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides, paints, perfumes, etc. are largely and directly affected by the oil prices. Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil, residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke, asphalt and other products are obtained from the processing of crude and other hydrocarbon compounds. The prices of crude are highly volatile. High oil prices lead to inflation that in turn increases input costs; reduces non-oil demand and lower investment in net oil importing countries. Categories of Crude oil: West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6 degrees (making it a "light" crude oil), and it contains only about 0.24 percent of sulphur (making a "sweet" crude oil). WTI is generally priced at about a $2-4 per-barrel premium to OPEC Basket price and about $1-2 per barrel premium to Brent, although on a daily basis the pricing relationships between these can very greatly. Brent Crude Oil stands as a benchmark for Europe.

India is very much reliant on oil from the Middle East (High Sulphur). The OPEC has identified China & India as their main buyers of oil in Asia for several years to come. Crude Oil Units (average gravity) 1 US barrel = 42 US gallons. 1 US barrel = 158.98 liters. 1 tone = 7.33 barrels. 1 short ton = 6.65 barrels. Note: barrels per tone vary from origin to origin. Global Scenario Oil accounts for 40 per cent of the world's total energy demand. The world consumes about 76 million bbl/day of oil.
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United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan (5.4 million bbl/d) are the top oil consuming countries. Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002), of which OPEC was 112 billion tones.

OPEC fact sheet: OPEC stands for 'Organization of Petroleum Exporting Countries'. It is an organization of eleven developing countries that are heavily dependent on oil revenues as their main source of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. OPEC controls almost 40 percent of the world's crude oil. It accounts for about 75 per cent of the world's proven oil reserves. Its exports represent 55 per cent of the oil traded internationally.

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US Oil Price Controls - Bad Policy? The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.S. consumer. Did the policy achieve its goal? In the short-term, the recession induced by the 19731974 crude oil price spike was somewhat less severe because U.S. consumers faced lower prices than the rest of the world. However, it had other effects as well. In the absence of price controls, U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have achieved higher miles per gallon sooner, homes and commercial buildings would have has better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. Consequently, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less.

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OPEC Fails to Control Crude Oil Prices:

Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to falling crude prices. Unfortunately for OPEC only the global recession was temporary. Nobody rushed to remove insulation from their homes or to replace energy efficient plants and equipment -- much of the reaction to the oil price increase of the end of the decade was permanent and would never respond to lower prices with increased consumption of oil. Higher prices also resulted in increased exploration and production outside of OPEC. From 1980 to 1986 non-OPEC production increased 10 million barrels per day. OPEC was faced with lower demand and higher supply from outside the organization.
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OPEC continued to have mixed success in controlling prices. There were mistakes in timing of quota changes as well as the usual problems in maintaining production discipline among its member countries. The price increases came to a rapid end in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or severely underestimated by OPEC. In December, 1997 OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD effective January 1, 1998. The rapid growth in Asian economies had come to a halt. In 1998 Asian Pacific oil consumption declined for the first time since 1982. The combination of lower consumption and higher OPEC production sent prices into a downward spiral. In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July. Price continued down through December 1998.

INDIAN SCENARIO:

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India ranks among the top 10 largest oil-consuming countries.

Oil accounts for about 30 per cent of India's total energy consumption. The country's total oil consumption is about 2.2 million barrels per day. India imports about 70 per cent of its total oil consumption and it makes no exports.

India faces a large supply deficit, as domestic oil production is unlikely to keep pace with demand. India's rough production was only 0.8 million barrels per day.

The oil reserves of the country (about 5.4 billion barrels) are located primarily in Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.

Balance recoverable reserve was about 733 million tones (in 2003) of which offshore was 394 million tones and on shore was 339 million tones.

India had a total of 2.1 million barrels per day in refining capacity. Government has permitted foreign participation in oil exploration, an activity restricted earlier to state owned entities.

Indian government in 2002 officially ended the Administered Pricing Mechanism (APM). Now crude price is having a high correlation with the international market price. As on date, even the prices of crude bi-products are allowed to vary +/- 10% keeping in line with international crude price, subject to certain government laid down norms/ formulae.

Disinvestment/restructuring of public sector units and complete deregulation of Indian retail petroleum products sector is under way.

Prevailing Duties & Levies on Crude Oil

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Particulars Basic Customs Duty Cess NCCD* Education cess Octroi War fedge

Rates 10% Rs.1800 per metric tonne Rs.50 per metric tonne 2% 3% Rs.57 per metric tonne

MARKET INFLUENCING FACTORS:

OPEC output and supply . Terrorism, Weather/storms, War and any other unforeseen geopolitical factors that causes supply disruptions.

Global demand particularly from emerging nations. Dollar fluctuations. DOE / API imports and stocks. Refinery fires & funds buying.

EXCHANGES DEALING IN CRUDE FUTURES: The New York Mercantile Exchange (NYMEX) . The International Petroleum Exchange of London (IPE).

The Tokyo Commodity Exchange (TOCOM).

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International oil price variation: Particular Frequency of % variation 0 to 3.1% 3.2 to 6.2% Refiner acquisition cost for Crude oil (composite) 8 - Average monthly price from Apr 01 to Mar 04 16

6.3 to 9.3%

More than 9.3%

>8

Maximum price variation Period considered (Based on data from Apr 94 to Mar 04 Monthly Yearly

Percentage 23.25 28.73

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
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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-ofcarry model to understand the dynamics of pricing that constitute the estimation of fair value of futures the cost of carry model. PRICING FUTURES CONTRACTS ON CONSUMPTION COMMODITIES: We used the arbitrage argument to price futures on investment commodities. For commodities that are consumption commodities rather than investment assets, the arbitrage arguments used to determine futures prices need to be reviewed carefully. Suppose we have. F > (S + U)erT

To take advantage of this opportunity, an arbitrager can implement the following strategy. 1. Borrow an amount S + U at the risk-free interest rate and use it to purchase one unit of the commodity and pay storage costs. 2. Short a forward contract on one unit of the commodity

If we regard the futures contract as a forward contract, this strategy leads to a profit of F (S + U)erT at the expiration of the futures contract. As arbitragers
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exploit this opportunity, the spot price will increase and the futures price will decrease until Equation F> (S + U)erT does not hold good. Suppose next that. F < (S + U )erT In case of investment assets such as gold and silver, many investors hold the commodity purely for investment. When they observe the inequality in equation G.G. they will find it profitable to trade in the following manner. 1. Self the commodity, save the storage costs, and invest the proceeds at the risk-free interest rate. 2. Take a long position in a forward contract.

This would result in a profit at maturity of (S + U )erT relative to the position that the investors would have been in had they held the underlying commodity. As

arbitragers exploit this opportunity, the spot price will decrease and the futures price will increase until equation 6.6 does not hold god. This means that for investment assets, equation 6, 4 holds good. However, for commodities like cotton or wheat that are held for consumption purpose, this argument cannot be used. Individuals and companies, who keep such a commodity in inventory, do so, because of its consumption value not because of its value as an investment. They are reluctant to sell these commodities and buy forward or futures contracts because these contracts cannot be consumed. Therefore there is unlikely to be arbitrage when equation 6.6 holds good. consumption commodity therefore F < = (S + U )erT That is the futures price is less than or equal to the spot price plus the cost of carry.
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In short, for a

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: The figure shows how basis changes 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. Opportunity for traders. 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.

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BENEFITS OF COMMODITIES FUTURES TRADING: Commodity futures are beneficial to a large section of society, be it farmer, businessmen, industrialist, importer, exporter, consumer. Investors: commodities futures represent a good form of investment because of following reasons. Diversification the returns from commodities market are free form 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. Less manipulation commodities markets, as they are governed by international price movements are less prone to rigging or price manipulation by individuals. High leverage the margins in commodity futures market are less than the forward and option section of the equity market.

PAYOFF FOR BUYER OF A SHORT HEDGE: The figure shows the payoff for a soy oil producer who takes a short hedge. Irrespective of what the spot price of soy oil is three months later, by going in for a short hedge he locks on to a price of Rs450 per MT.

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Profit

Long position in soya oil

46.5

Short position in soya oil future Loss The price of the commodity goes up, the loss on the futures position is offset by the gain on the commodity. 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. 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. We will study these two hedges in detail short hedge.
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Short poition in soya oil oil Long position in soya futures

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. For example a short hedge could be used by a cotton farmer who expects the cotton crop to be ready for sale in the next two months. A short hedge can also be used when the asset is not owned at the moment but is likely to be owned in the future. INSIGHTS OF MARKET & TRADING SPECIFICATIONS FORCOMMODITIES CRUDE OIL: A mineral oil consisting of a mixture of hydrocarbons of natural origin, yellow to black in color/ of variable specific gravity and viscosity; often referred to simply as crude. VARIETIES OF CRUDE OIL: The petroleum industry often characterizes crude oils according to their geographical source. E.g. / Alaska North Slope Crude. Oils from different geographical areas have unique properties; they can vary in consistency from a light volatile fluid to a semi-solid. The classification scheme provided below is more useful in a response scenario. Class A : Light /Volatile Oils These oils are highly fluid, often clear/spread rapidly on solid or water surfaces/have a strong odor/ a high evaporation rate/sand/ and may be persistent in such a matrix. They do not tend to adhere to surfaces; flushing with water generally removes them. Class A oils may be highly toxic to humans/fish/and other biota. Most refined products and many of the highest quality light crudes can be included in this class.
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Class B : Non-Sticky Oils These oils have a waxy or oily feel. Class B oils are less toxic and adhere more firmly to surfaces than Class A oils/although they can be removed from surfaces by vigorous flushing. As temperatures rise/their tendency to penetrate porous substrates increases and they can be persistent. Evaporation of volatilize may lead to a Class C or D residue. Medium to heavy paraffin-based oils fall into this class. Class C: Heavy/Sticky Oils Class C oils are characteristically viscous/sticky or tarry/and brown or black. Flushing with water will not readily remove this material from surfaces/but the oil does not readily penetrate porous surfaces. The density of Class C oils may be near that of water and they often sink. Weathering or evaporation of volatilize may produce solid or tarry Class D oil. Toxicity is low/ but wildlife can be smothered or drowned when contaminated. This class includes residual fuel oils and medium to heavy crudes. Class D: No fluid Oils Class D oils are relatively non-toxic/do not penetrate porous substrates and are usually black or dark brown in color. When heated, Class D oils may melt and coat surfaces making cleanup very difficult. Residual oils, heavy crude

oils/some high paraffin oils/and some weathered oils fall into this class. These classification are dynamic for spilled oils, weather conditions and water temperature greatly influence the behavior of oil and refined petroleum products in the environment. For example, as volatiles evaporate from as Class B oil, it may become Class C oil. If a significant temperature drop occurs (e.g., at night), a Class C oil may solidify and resemble a Class D oil. Upon warming the Class D oil may revert back to Class C oil.
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CATEGORIES OF CRUDE OIL; West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6 degrees (making it a light crude oil). WTI is generally priced at about a $2-4 per-barrel premium to OPEC Basket price and about #1-2 per barrel premium to Brent, although on a daily basis the pricing relationships between these can very greatly. Brent Crude Oil stands as a benchmark for Europe. India is very much reliant on oil from the Middle East (High Sulphur). The OPEC has identified China & India as their main buyers of oil in Asia for several years to come. CRUDE OIL UNITS (AVERAGE GRAVITY): 1 US barrel = 42 US gallons 1 US barrel = 158.98 liters
1 tone = 7.33 barrels

1 short ton = 6.65 barrel Note: barrels per tone vary from origin to origin.

GENERAL CHARACTERISTICS: Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Oil and gas account for about 60 per cent of the total world's primary energy consumption. Almost all industries including agriculture are dependent on oil in one way or other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides, paints, perfumes, etc. are largely and directly affected by the oil prices. Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil, residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke, asphalt and
73

other products are obtained from the processing of crude and other hydrocarbon compounds. The prices of crude are highly volatile. High oil prices lead to inflation that in turn increases input costs; reduces non-oil demand and lower investment in net oil importing countries.

Crude Oil Trading Analysis/Signals

January 28th, 2009 Crude Oil is something that I think has huge potential because of its prolonged down trend without any real bounces and also because there is so much interest from traders and investors around the world who want to catch its bounce. The weekly chart is starting to look amazing and the daily chart looks ready to pop. Crude Oil Weekly Trading Signal Explained: The weekly oil trading chart shows a long 7 month sell off without any bounces on the way down and volume has increased as the price continues is slide lower indicating that there is more and more interest from traders and investors. Prices have now put in a small bounce and will be testing our downward trend line if the price of oil continues to rally this week. Also the MACD (momentum) is about to cross to the upside which is very bullish. If oil prices breakout above our down trend line and the MACD crosses over to the upside then we will have a buy signal in oil on the weekly chart.

WEEKLY CRUDE OIL TRADING CHART WITH POSSIBLE OIL BUY SIGNAL:

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CRUDE OIL DAILY TRADING CHART EXPLAINED: Crude Oils daily chart is very bullish looking as well. The price has broken is downward trend line and has pulled back to a support level over the past 2 weeks. Fridays big bounce gave us a buy signal for USO because everything for my oil trading strategy was in favor (MACD cross, Stochastic, Trend line Break, volume). The only issue was that risk was over 3%, currently at 9% I will wait for a better entry point on a correction which will also confirm the new trend.

CRUDE OIL DAILY TRADING CHART WITH OIL BUY SIGNAL:

75

CRUDE OIL TRADING CONCLUSION: Crude oil as you can see looks to be a picture perfect setup as momentum in the price is slowly shifting direction. While many traders went long on Fridays buy signal I
76

am waiting for risk to decrease before I put my money to work. I dont mind buying things at a higher price if the overall risk is lower and the reversal looks strong

ANALYSIS & INTERPRETATION:

OBJECTIVE: The objective of this analysis is to evaluate the payoffs of Future contract. This analysis is done based on the sample data. . The sample is taken as MCX scripts of JANUARY-MARCH, 2010. The lot size of the scrip is 1. The Future contract starting period is 19 / 01 /10 and its maturity date is on 19/03/10. As the script of MCX EXCHANGE is volatile, they are chosen as the sample for analysis CRUDE OIL FUTURE PRICES ON MCX(19-01-2010 TO 19-2-2010): Commodity Symbol CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL

Date 19-Jan-10 20-Jan-10 21-Jan-10 22-Jan-10 23-Jan-10 25-Jan-10 27-Jan-10 28-Jan-10 29-Jan-10 30-Jan-10 1-Feb-10 2-Feb-10 3-Feb-10 4-Feb-10 5-Feb-10 6-Feb-10
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Contract/Ex Month 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10 19-Apr-10

CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10

8-Feb-10 9-Feb-10 10-Feb-10 11-Feb-10 12-Feb-10 13-Feb-10 14-Feb-10 15-Feb-10 16-Feb-10 17-Feb-10 19-Feb-10

CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10

CASE 1: A person who has entered into futures contract for one lot on19 January,2010 with the objective of buying ,faced on the got on the settlement day the loss.

PAYOFFS : BUYER 3650 3714 SELLER 3650 3714

19-01-2010(buying) 18-02-2010(closing period)

profit Profit = 64*100=Rs 6400

64

LOSS

64

loss = 64*100=Rs 6400

LOSS FOR BUYER OF FUTURES = 6400.Rs

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GAIN FOR SELLER OF FUTURES=6400.Rs

INTERPRETATION : If one investor enters into the contract on 19 th of January month then he suffers loss of an amount 6400Rs. for long position and his gain for short position is 6400.Rs.

CASE 2: A person who has entered into futures contract for one lot on 09 february,2010 with the objective of buying . PAYOFFS : BUYER 3489 3714 SELLER 3489 3714

9-02-2010(buying) 18-02-2010(closing period)

Loss 225 Profit = 225*100=Rs 22500

225

Profit

loss = 225*100=Rs 22500

LOSS FOR BUYER OF FUTURES = 22500.Rs GAIN FOR SELLER OF FUTURES=22500.Rs INTERPRETATION :

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If one investor enter into the contract on the middle day of February month then he loss an amount 22500Rs. for long position and his gain for short position is 22500.Rs

CRUDE OIL FUTURE PRICES ON MCX(19-02-2010 TO 19-03-2010):

19-Feb10 20-Feb10 22-Feb10 23-Feb10 24-Feb10 25-Feb10 26-Feb10 27-Feb10 1-Mar10 2-Mar10 3-Mar10 4-Mar10 5-Mar10 6-Mar10 367 3 371 4 373 6 372 5 368 4 371 4 363 3 369 0 369 0 365 1 372 2 370 8 371 1 374 5 158.300 BBL 33.500 BBL 257.300 BBL 447.200 BBL 334.600 BBL 430.000 BBL 367.400 BBL 18.000 BBL 181.700 BBL 412.900 BBL 428.900 BBL 486.300 BBL 485.700 BBL 17.200 BBL

CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10

3655 3728 3745 3723 3690 3716 3653 3690 3717 3650 3690 3715 3704 3745
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3723 3742 3748 3729 3730 3725 3705 3694 3735 3733 3732 3739 3767 3750

3651 3714 3728 3736 3703 3725 3652 3684 3653 3714 3611 3633 3625 3690 3685 3690 3626 3651 3638 3722 3663 3708 3686 3711 3702 3745 3744 3747

1583 335 2573 4472 3346 4300 3674 180 1817 4129 4289 4863 4857 172

8-Mar10 9-Mar10 10Mar-10 11Mar-10 12Mar-10 13Mar-10 15Mar-10 16Mar-10 17Mar-10 18Mar-10 19Mar-10

CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10 CRUDEOIL 19-Apr-10

3755 3736 3745 3730 3757 3722 3710 3660 3747 3763 3760

3769 3755 3785 3776 3799 3727 3725 3745 3773 3775 3760

3712 3732 3690 3745 3702 3733 3729 3759 3706 3721 3720 3725 3643 3664 3646 3733 3731 3760 3738 3765 3657 3674

374 7 373 2 374 5 373 3 375 9 372 1 372 5 366 4 373 3 376 0 376 5

4895 7300 13787 6770 9870 610 13251 19155 18152 28375 65157

489.500 BBL 730.000 BBL 1378.700 BBL 677.000 BBL 987.000 BBL 61.000 BBL 1325.100 BBL 1915.500 BBL 1815.200 BBL 2837.500 BBL 6515.700 BBL

CASE 1: A person who has entered into futures contract for one lot on19 February,2010 with the objective of buying. PAYOFFS : BUYER 3714 3674 SELLER 3714 3674

19-02-2010(buying) 18-03-2010(closing period)

Loss Loss = 40*100=Rs 4000

40

Profit

40

Profit = 40*100=Rs 4000

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LOSS FOR BUYER OF FUTURES = 4000.Rs GAIN FOR SELLER OF FUTURES=4000.Rs

INTERPRETATION:
If one investor enters into the contract on 19th of February month then he suffers

loss of an amount 4000Rs. for long position and his gain for short position is 4000.Rs. CASE 2: A person who has entered into futures contract for one lot on25 February,2010 with the objective of buying. PAYOFFS : BUYER 3633 3674 SELLER 3633 3674

25-02-2010(buying) 18-03-2010(closing period)

Profit Profit = 41*100=Rs 4100

41

loss

41

Loss = 41*100=Rs 4100

Gain FOR BUYER OF FUTURES = 4100Rs Loss FOR SELLER OF FUTURES=4100.Rs INTERPRETATION:
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If one investor enters into the contract on the middle day of February month then he loss an amount 4100Rs. for long position and his gain for short position is 4100.Rs

FINDINGS :

The commodity market is still in nascent stage in India and it is expected To grow rapidly in future.

The investment made in this market is 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 profit.

The volume of trading is still high in crude oil commodity in spite of its high prices.

The average daily turnover of commodity futures market is $ 1330 million. Presently the available trading commodities are 59 on MCX. In the calculation of payoffs of commodities crude oil, I observed that many of the investors were got profits when they were to go for long position.

Short sellers were not active in the January to march futures contract of commodity crude oil.

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SUMMARY:
The study is based on commodity futures markets (gold, cure oil, silver steel and other agro commodities). The analysis is based on 2 months moving averages of commodity prices on a basis to show the trends in the bullion market. The results give awareness of commodity trading mechanism suggestions for the investors to trade in commodity markets. Based on the trend movements how investors can analyze and take correct decisions towards their investments and reducing the risk. Achieving hedging efficiency is the main need to opt for futures contracts. The efficiency of a futures contract for hedging depends on the prevalence of such an ideal price relationship between the spot and futures markets. The future contract available on a wide spectrum of commodities like Gold, Silver, crude oil and steel etc, provide excellent opportunities for hedging the risk of the importers, exporters and large scale consumer. Commodity includes all kinds of goods. FCRA defines goods as every kind of movable property other than actionable claims, money and securities. Futures trading are organized in such goods or commodities as are permitted by the central government.

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CONCLUSION:
At present scenario the commodities future market increased to great extent. Demand and supply crude oil physical market depends on the movements of crude oill in the commodity market. By studying the payoffs crude oil, it is clear that commodities are mostly used for hedging purpose. An investor would go for derivatives to minimize the risk. Firstly the price movements are more predictable, purely based on demand and supply of that commodity, unlike in other markets where price manipulations are very much possible, hence the investor is fixed. To that extent market price risk is reduced.

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SUGGESTIONS:
India has a deep ingrained knowledge in commodity trading particularly forward trading in commodities. For last 40 years or so, such forward (futures) trading was banned in the country for variety of reasons and it is being revived now. The ban has meant that two generations have lost touch with the trading skills and the relates knowledge levels in the commodity space. Fortunately much of the skills have migrated to stock exchange. In these intervening years some regional exchange specializing in specific commodities where the bans were lifted, have carried on the baton. Also large informal trading primarily by the speculative segment of the universe of market participants has remained. This has led to mindset in common man in country that commodity exchanges are purely speculative in nature. The hedging and price discovery function that they perform are largely ignored today by the cross section of the population. We need our exchange to reach to the producers, end users and even retain investors at a grass root level. Education and awareness has a key role to play in achieving this vision. Though commodity futures were introduced in 1988 in India, but still the Indian commodity traders have not started their participation in full enthusiasm. They are apprehensive about the unfamiliar instrument. Lack of awareness, understanding of futures trading could be one of the reasons for the failure of commodity futures. So, there is need to bridge this knowledge gap between the traders community. There are about 26 commodity exchanges in India. But only a few of them are active. About 24 of them do not have modern communication facilities. This is a serious problem of concern, necessary steps is to be taken to bring out commodity exchanges with the required infrastructure, employees and sophisticated technology.

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BIBLIOGRAPHY:

BOOK NAME
1)

EDITION 6 th edition, 1999 publishing

AUTHOR William f

Investments sharpe

2)

International finance

7th edition, 2004 publishing

Jeff madura

WEBSITES: 1) 2) 3) 4) 5) 6) 7) www.ncdex.com www.mcxindia.com www.commodityindia .com www.google.com www.stockcharts.com www.cbot.com www.commoditiescontrl.com

NEWS PAPERS: BISINESS STANDARD BUSINESS LINE

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