Description
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, bonds and real estate, commodities are the best option.
A STUDY ON
“COMMODITIES TRADING-INVESTMENT AND
SPECULATION”
SUBMITTED IN THE PARTIAL FULFILMENT OF
THE REQUIREMENT OF
“MASTER OF BUSINESS ADMINISTRATION” IN
DECLARATION
I here by declare that the project report on “COMMODITIES
TRADING-INVESTMENT AND SPECULATION” has been submitted
under the guidance of XXXX, Professor, Department of Commerce,
Vivekananda School of Post Graduate Studies, Panjagutta
I further declare that it is an original !ork done by me as a part
of my academic course and has not been submitted else!here for
any degree or diploma "he observations and conclusions !ritten in
this report are based on the data collected by me
XXXX
ACKNOWLEDGEMENT
I take this opportunity to thank all those !ho have been of help to me
in the completion of this project
I !ould like to appreciate the guidance and co#operation provided to
me by our project guide $$$$ %faculty of &usiness 'anagement( in
the completion of this project
I am also grateful to $$$, Director $$$ and all the faculty members
!ho have directly or indirectly helped me in preparing this project
report
CONTENTS
CHAPTERS PAGE NO:
I INTRODUCTION 5-15
II INDUSTRY PROFILE 16-17
III NEED FOR THE STUDY
OBJECTIVES, METHODOLOGY LIMITATIONS 1!-1"
IV COMMODITY FUTURES CONTRACT #$-#6
V COMMODITY TRADING #7-%&
VI PARTICIPANTS IN COMMODITY MAR'ET %%-%!
VII REGULATORY FRAME(OR' FOR %"-71
COMMODITY TRADING IN INDIA
VIII ANALYSIS 7#-77
X CONCLUSIONS RECOMMENDATIONS 7!-7"
XI BIBLIOGRAPHY !$
INTRODUCTION
Indian markets have recently thro!n open a ne! avenue for retail
investors and traders to participate commodity derivatives )or those !ho !ant
to diversify their portfolios beyond shares, bonds and real estate, commodities
are the best option
"ill some months ago, this !ouldn*t have made sense )or retail investors
could have done very little to actually invest in commodities such as gold and
silver or oilseeds in the futures market "his !as nearly impossible in
commodities e+cept for gold and silver as there !as practically no retail avenue
for pumping in commodities
,o!ever, !ith the setting up of three multi#commodity e+changes in the
country, retail investors can no! trade in commodity futures !ithout having
physical stocks
Commodities actually offer immense potential to become a separate asset
class for market#savvy investors, arbitrageurs and speculators -etail investors,
!ho claim to understand the e.uity markets, may find commodities an
unfathomable market &ut commodities are easy to understand as far as
fundamentals of demand and supply are concerned -etail should understand
the risk advantages of trading in commodities futures before taking a leap
,istorically, pricing in commodities futures has been less volatile compared !ith
e.uity and bonds, thus providing an efficient portfolio diversification option
In fact, the si/e of the commodities markets in India is also .uite
significant 0f the country*s GDP of -s12,34,524 crore% -s12,3452 billion(,
commodities related
% and dependent( industries constitute about 67 per cent
Currently, the various commodities across the country clock an annual
turnover of -s1,84,444 crore % -s1,844 billion( 9ith the introduction of futures
trading, the si/es of the commodities market gro! many folds here on
DEFINITION OF COMMODITIES
:ny product that can be used for commerce or an article of commerce
!hich is traded on an authori/ed commodity e+change is kno!n as commodity
"he article should be movable of value, something !hich is bought or sold and
!hich is produced or used as the subject or barter or sale In short commodity
includes all kinds of goods )or!ard Contracts %-egulation( :ct %)C-
, 1;63
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 allo!ed for commodity trading
recogni/ed under the )C-: "he national commodity e+changes, recogni/ed by
the Central Government, permits commodities !hich include precious %gold and
silver( and non#ferrous metals> cereals and pulses? ginned and un#ginned cotton?
oilseeds, oils and oilcakes? ra! jute and jute goods? sugar and gur?potatoes and
onions? coffee and tea? rubber and spices @tc
In the !orld of business, a commodity is an undifferentiated product
!hose market value arises from the o!ner*s right to sell rather than to use
@+ample commodities from the financial !orld include oil %sold by the barrel(,
!heat, bulk chemicals such as sulfuric acid and even pork bellies
NEED OF COMMODITY MAR'ET IN INDIA
:chieving hedging efficiency is the main reason to opt for futures
contracts )or instance, in )ebruary, 3445, India had to pay A 63 per barrel more
for importing oil than !hat they had to pay a !eek ago "he utility of a futures
contact for hedging or risk management presupposes parallel or near#parallel
relationship bet!een the spot and futures prices over time In other !ords, the
efficiency of a futures contract for hedging essentially envisages that the prices in
the physical and futures markets move in close unison 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
0f course, such a price relationship bet!een the spot and futures markets
is subject to the amount of carrying or storage costs till the maturity month of the
futures contract "heoretically % and ideally(, in a perfectly competitive market
!ith surplus supplies and abundant stocks round the year, the futures price !ill
e+ceed the spot price by the cost of storage till the maturity of the futures
contract &ut 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 /ero during the
delivery month !hen the spot and futures prices virtually converge "he
efficiency of a futures contract for hedging depends on the prevalence of such an
ideal price relationship bet!een the spot and futures markets
COMMODITIES EXCHANGES
: brief description of commodity e+changes are those !hich trade in
particular commodities, neglecting the trade of securities, stock inde+ futures and
options etc,
In the middle of 1;
th
century in the Bnited States, businessmen began
organi/ing market forums to make the buying and selling of commodities easier
"hese central market places provided a place for buyers and sellers to meet, set
.uality and .uantity standards, and establish rules of business :gricultural
commodities !ere mostly traded but as long as there are buyers and sellers, any
commodity can be traded
"he major commodity markets are in the Bnited Cingdom and in the BS:
In India there are 36 recogni/ed future e+changes, of !hich there are three
national level multi#commodity e+changes :fter a gap of almost three decades,
Government of India has allo!ed for!ard transactions in commodities through
0nline Commodity @+changes, a modification of traditional business kno!n as
:dhat and Vayda Vyapar to facilitate better risk coverage and delivery of
commodities
",@ ",-@@ @$C,
G@S :-@
? Dational Commodity E Derivatives @+change Fimited % DCD@$(
? 'ulti Commodity @+change of India Fimited % 'C$(
? Dational 'ulti#Commodity @+change of India Fimited % D'C@IF(
:ll the e+changes have been set up under overall control of )or!ard 'arket
Commission %)'C( of Government of India
N)*+,-). C,//,0+*1 D23+4)*+425 E678)-925 L+/+*20 : NCDEX (
Dational Commodity E Derivatives @+changes Fimited %DCD@$( located in
'umbai is a public limited company incorporated on
ril 32, 3442 under the
Companies :ct, 1;6G and had commenced its operations on December 16,
3442 "his is the only commodity e+change in the country promoted by national
level institutions It is promoted by ICICI &ank Fimited, Fife Insurance
Corporation and Dational &ank for :griculture and -ural Development
%D:&:-D( and Dational Stock @+change of India Fimited %DS@( It is a
professionally managed online multi commodity e+change DCD@$ is regulated
by )or!ard 'arket Commission and is subjected to various la!s of the land like
the Companies :ct, Stamp :ct, Contracts :ct, )or!ard Commission
% -egulation( :ct and H various other legislations
M;.*+ C,//,0+*1 E678)-92 ,< I-0+) L+/+*20 : MCX=
,ead.uartered in 'umbai 'ulti Commodity @+change of India Fimited
%'C$(, is an independent and de#mutualised e+change !ith a permanent
recognition from Government of India Cey shareholders of 'C$ are )inancial
"echnologies % India( Ftd, State &ank of India, Bnion &ank of India, Corporation
&ank, &ank of India and Canara &ank 'C$ facilitates online trading, clearing
and settlement
:ll the e+changes have been set up under overall control of )or!ard
'arket Commission %)'C( of Government of India
Commodity e+change in India plays an important role !here the prices of
any commodity are not fi+ed, in an organi/ed !ay @arlier only the buyer of
produce and its seller in the market judged upon the prices 0thers never had a
say "oday, commodity e+changes are purely speculative in nature &efore
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
: big difference bet!een a typical auction, !here a single auctioneer
announces the bids, and the @+change is that people are not only competing to
buy but also to sell &y @+change rules and by la!, no one can bid under a
higher bid, and no one can offer to sell higher than some one else*s lo!er offer
"hat 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
Dational &oard of "rade
'ulti Commodity @+change of India
N)*+,-). C,//,0+*1 D23+4)*+425 E678)-925 ,< I-0+) L*0>,
Commodity @+change Products
Dational board of trade, Indore Soya, mustard
Dational multi commodity e+change, :hmedabad 'ultiple
:hmedabad commodity e+change Castor, cotton
-ajadhani 0il E 0il seeds 'ustard
Vijai &eopar Chamber Ftd, 'u//affarnagar Gur
-ajkot seeds, 0il E bullion e+change Castor, groundnut
IPS":, Cochin Pepper
Chamber of commerce, ,apur Gur, mustard
&hatinda 0m and 0il @+change Gur
0ther % mostly inactive(
C,//,0+*1 E678)-925 R29+5*2320 +- I-0+)
Commodity @+change Products "raded
&hatinda 0m E 0il @+change
Ftd,
Gur
"he &ombay commodity
@+change Ftd
Sunflo!er 0il
Cotton % Seed and 0il(
Safflo!er % Seed , 0il and 0il Cake(
Groundnut % Dut and 0il(
Castor 0il, Castor seed
Sesamum % 0il and 0ilcake(
-ice bran, rice bran oil and oil cake
Crude palm oil
"he -ajkot Seeds 0il E &ullion
'erchants :ssociation Ftd
Groundnut 0il, Castro Seed
"he Canpur Commodity
@+change Ftd,
-apeseed I 'ustard seed oil and cake
"e 'eeerut :gro commodities
@+change Co, Ftd
Gur
"he Spices and 0ilseeds
e+change Ftd, Sangli
"urmeric
:hmedabad Commodities
@+change Ftd
Cottonseed, castor seed
Vijay &eopar Chamber Ftd,
'u/affarnagr
Gur
India Pepper E Spice "rade
:ssociation, Cochi
Pepper
-ajadhani 0ils and 0il seeds
@+change Ftd,Delhi
Gur, -apeseed I 'ustard Seed Sugar Grade J
'
Dational &oard of "rade, Indore
-apeseed I 'ustard Seed I 0il I Cake
Soya bean I 'eal I 0il I Crude Palm 0il
"he Chamber of Commerce,
,apur
Gur, -apeseed I 'ustard seed
"he @ast India Cotton
:ssociation, 'umbai
Cotton
"he central India Commercial
@+change Ftd G!aliar
Gur
"he east India Kute E ,essain
@+change Ftd, Colkata
,essain, Sacking
)irst Commodity @+change of
India Ftd, Cochi
Copra, Coconut 0il E Copra Cake
"he Coffee )utures @+change
India Ftd &angalore
Coffee
Dational 'ulti Commodity
@+change of India Ftd, I
:hmedabad
Gur -&D Pamolien
Crude Palm 0il, Copra
-apeseed I 'ustard Seed, Soy &ean
Cotton % Seed, 0il, 0il Cake(
Safflo!er % Seed, 0il, and 0il cake(
Ground nut % Seed, 0il, and 0il cake(
Sugar, Sacking, Gram
Coconut % 0il and 0ilcake(
Castor % 0il and 0ilcake(
Sesamum % Seed, 0il, and 0il cake(
Finseed % Seed, 0il, and 0il cake(
-ice &ran 0il, Pepper, Guar seed :luminum
ingots, Dickel, tin Vanaspati, -ubber, Copper,
Linc, Fead
Dational commodity E
Derivatives @+change Fimited
Soy &ean, -efined Soy oil, 'ustard Seed
@+peller 'ustard 0il
-&D Palmolein Crude Palm 0il
'edium staple cotton
Fong Staple Cotton
Gold, Silver
C)58 C,//,0+*1
: cash commodity must meet three basic conditions to be successfully traded in
the futures market>
1 It has to be standardi/ed and, for agricultural and industrial commodities,
must be in a basic, ra!, unprocessed state "here are futures contracts on
!heat, but not on flour 9heat is !heat %although different types of !heat have
different futures contracts( "he miller !ho needs !heat futures to help him
avoid losing money on his flour transactions !ith customers !ouldn*t need flour
futures : given amount of !heat yields a given amount of flour and the cost of
converting !heat to flour is fairly fi+ed hence predictable
3 Perishable commodities must have an ade.uate shelf life, because delivery on
a futures contract is deferred
2 "he cash commodity*s price must fluctuate enough to create uncertainty, !hich
means both rise and potential profit
Bnlike a stock, !hich represents e.uity in a company and can be held for along
time, if not indefinitely, futures contracts have finite lives "hey are primarily used
for hedging commodity price#fluctuation risks or for taking advantage of price
movements, rather than for the buying or selling of the actual cash commodity
"he !ord <contract= is used because a futures contract re.uires delivery of the
commodity in a stated month in the future unless the contract is li.uidated before
it e+pires
"he buyer of the futures contract %the party !ith a long position( agrees on a
fi+ed purchase price to buy the underlying commodity % !heat, gold or "#bills, for
e+ample( form the seller at the e+piration of the contract "he seller of the
futures contract %the party !ith a short position( agrees to sell the underlying
commodity to the buyer at e+piration at the fi+ed sales price :s time passes, the
contract*s price changes relative to the fi+ed price at !hich the trade !as
initiated "his creates profits or losses for the trader
In most cases, delivery never takes place Instead, both the buyer and the seller,
acting independently of each other, usually li.uidate their long and short positions
before the contract e+pires> the buyer sell futures and the seller buys futures
"he &retton 9oods system of fi+ed e+change rates
"he chief features of the &retton 9oods system !ere an obligation for each
country to adopt a monetary policy that maintained the e+change rate of its
currency !ithin a fi+ed value#plus or minus one percent J in terms of gold? and
the ability of the I') to bridge temporary imbalances of payments
"he <pegged rate= or <par value= currency regime
9hat emerged !as the <pegged rate= currency regime 'embers !ere re.uired
to establish a parity of their national currencies in terms of gold %a <peg=( and to
maintain e+change rates !ithin plus or minus 1M of parity % a <band=( by
intervening in their foreign e+change markets %that is, buying or selling foreign
money(
"he <reserve currency=
In practice, ho!ever, since the principal < -eserve currency= !ould be the BS
dollar, this meant that other countries !ould pet their currencies to the BS dollar,
and J once convertibility !as restored J !ould buy and sell BS dollars to keep
market e+change rates !ithin plus or minus 1M of parity "hus, the BS dollar
took over the role that gold had played under the gold standard in the
international financial system
'ean!hile, in order to bolster faith in the dollar, the BS agreed separately to
link the dollar to gold at the rate of A 26 per ounce of gold 'ember countries
could only change their par value !ith I') approval, !hich !as contingent on
I') determination that its balances of payments !as in a <fundamental
dise.uilibrium=
&>1INDUSTRY PROFILE
Dational Commodity and Derivatives @+change Fimited %DCD@$( is a
professionally managed on#line multi commodity e+change promoted by ICICI
&ank Fimited %ICICI &ank(, Fife Insurance Corporation of India %FIC(, Dational
&ank for :griculture and rural Development %D:&:-D( and Dational Stock
@+change of India Fimited %DS@( Canara &ank %PD&(, C-ISIF Fimited %formerly
the Credit -ating Information Services of India Fimited(, Goldman Sachs, Indian
)armers )ertiliser Cooperative Fimited %I))C0( and Punjab Dational &ank by
subscribing to the e.uity shares have joined the initial promoters as shareholders
of the @+change DCD@$ is the only commodity e+change in the country
promoted by national level institutions "his uni.ue parentage enables it to offer a
bou.uet of benefits, !hich are currently in short supply in the commodity
markets "he institutional promoters and shareholders of DCD@$ are prominent
players in their respective fields and bring !ith them institutional building
e+perience, trust, nation!ide reach, technology and risk management skills
DCD@$ is a public limited company incorporated onril 32, 3442 under the
Companies :ct, 1;6G It obtained its certificate for commencement of &usiness
on 'ay ;, 3442 It commenced its operations on December 16, 3442
DCD@$ is a nation#level, technology driven de#mutualised on#line commodity
e+change !ith an independent &oard of Directors and professional management
J both not having any vested interest in commodity markets It is committed to
provide a !orld#class commodity e+change platform for market participants to
trade in a !ide spectrum of commodity derivatives driven by best global
practices, professionalism and transparency DCD@$ is regulated by )or!ard
'arkets Commission DCD@$ is subjected to various la!s of the land like the
)or!ard Contracts %-egulation( :ct, Companies :ct, Stamp :ct, Contract :ct and
various other legislations
DCD@$ is located in 'umbai and offers facilities to its members about 664
centres throughout India "he reach !ill gradually be e+panded to more centres
DCD@$ currently facilities trading of 65 commodities J
A93+7;.*;32
&arley, Cashe!, Castor seed, Chana, Chilli, Coffee J :rabica, Coffee
J -obusta, Crude Palm 0il, Cotton Seed 0ilcake, @+peller 'ustard 0il,
Groundnut %in shell(, Groundnut @+peller 0il, Guar gum, Guar Seeds, Gur, Keera,
Kute sacking bags, Indian Parboiled -ice, Indian Pusa &asmati -ice, Indian
"raditional &asmati -ice, Indian -a! -ice, Indian 376 mm Cotton, Indian 21 mm
Cotton, 'asoor Grain &old, 'edium Staple Cotton, 'entha 0il, 'ulberry Green
Cocoons, 'ulberry -a! Silk, 'ustard Seed, Pepper, Potato, -a! Kute,
-apeseed#'ustard Seed 0ilcake, -&D Palmolein, -efined Soy 0il, -ubber,
Sesame Seeds, Soya bean, Sugar, Nello! Soybean 'eal, "ur, "umeric, Brad, V
J 5;5 Capas, 9heat, Nello! Peas, Nello! -ed 'ai/e
M2*).5
:luminium Ingot, @lectrolytic Copper Cathode, Gold, 'ild Steel Ingots, Dickel
Cathode, Silver, Sponge Iron, Linc Ingot
@nergy
&rent Crude 0il, )urnace 0il
:t subse.uent phases trading in more commodities !ould be facilitated
'ulti Commodity @+change %'C$( is an independent commodity e+change
based in
India It !as established in 3442 and is based in 'umbai It has an average daily
turnover of around BSA166 billion 'C$ offers futures trading in :gricultural
Commodities, &ullion,)errous E Don#ferrous metals, Pulses, 0ils E 0ilseeds,
@nergy,
NEED FOR THE STUDY
"he study of commodity is undertaken to analy/e the trading
Practices !ith special reference to commodity as tool of risk
'anagement techni.ues
OBJECTIVES
• "o study the concepts of commodities "rading in India
• "o study of "he Various "rends In Commodity "rading
• "o Study "he -ole of Commodities In Indian )inancial
'arkets
• "o study In detail "he -ole of )utures :nd )or!ards
• "o analy/e the present situation of the commodities in
Indian market and suggest for any improvements there
after
METHODOLOGY
"o achieve the object of studying the commodities market in stock market data
have
been collected -esearch
methodology carried for this study is purely from Secondary data from various
!eb sites mentioned belo!
9@&SI"@S>
!!!!ikipediacom
!!!investopediacom
!!!googlecom
LIMITATIONS OF THE STUDY
"he study is limited to <Commodity "rading J Investment and Speculation= in the
Indian conte+t
1 "he study can not say as totally perfect as it is subjected to any alteration
3 "he study is not based on the international perspective of
commodity markets It is limited to national level only
5>1 COMMODITY FUTURES CONTRACT
Commodity )uture "rading is regulated by the for!ard 'arket Commission and
commodity future Contracts are regulated under the )'C :ct 1;;6
@+change traded commodity futures contracts are traded of
specific commodity to be delivered at the contracted price Irrespective of any
changes of market price &ut both buyers and sellers are allo!ed to li.uidate the
contract by cash settlement of price differences bet!een the contracted price and
li.uidated price not later than the last trading session of the contract month
S*)-0)30+?)*+,- +- C,//,0+*1 F;*;325 C,-*3)7*>
In the futures trading Industry, a commodity is an article of commerce or a
product that lends itself to standardi/ation for the purpose of a futures contract
Commodities popularly traded on e+changes are in its ra! formtly futures are
traded on !heat not on flour, coffee futures are traded, but there are no futures
traded on tea, crude oil futures are traded but petrol futures are not, gold futures
are traded but diamonds are not
C,//,0+*1 F;*;325 V@S EA;+*1 I-425*/2-*5
Individuals !ho purchase e.uity or e.uity#based mutual funds are purchasing
shares of o!nership !ill increase over time : future contract is an agreement to
buy or sell a specific amount of a commodity at a specific date in the future It is
typically a short#term %1#24 month( transaction that has to be carried for!ard at
the end of the contract tenure 0!nership is of the underlying commodity, !hich
has to gain value for the commodity futures buyer to gain profit
D2.+423)B.2 V@S C)58 S2**.20 C,//,0+*+25
"!o classes of agricultural commodities typically referred to in trading agricultural
commodities are deliverable and cash settled commodities Deliverable
commodities referred to those commodities that the short position %seller( as right
to make delivery for !hich the long position %buyer( as the right to take the
delivery 'ost commodities traded on India*s national multi commodity
e+changes are deliverable commodities
DISTINCTION BET(EEN FUTURES FOR(ARDS CONTRACTS
F,3C)30 C,-*3)7*>
)or!ard Contract is an agreement to buy or sell an asset on a specified date for
specified price 0ne 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 "he other party assumes a short position and agrees to sell the
asset on the same date for the same price 0ther contract details like delivery
date, price and .uantity are negotiated bilaterally by the parties to the contract
are normally traded outside the e+change
F2)*;325:
"he salient features of for!ard contracts are>
• "hey are bilateral contracts and hence e+posed to counter#party risk
• @ach contract is custom designed, and hence is uni.ue in terms of
contract si/e e+piration date and the asset type .uality
• "he contract price is generally not available in public domain
• 0n the e+piration date, the contract has to be settled by delivery of the
asset
• If the party !ishes to reverse the contract, it has to compulsorily go to the
same counter party, !hich often results in high prices being changed
,o!ever for!ard contract in certain markers have become very standardi/ed, as
in the case of foreign e+change, there by reducing transaction costs and
increasing transaction volume "his process of standardi/ation reaches its limit in
the organi/ed futures market
)or!ard contracts are very useful in hedging and speculation "he classic
hedging application !ould be that of an e+porter !ho e+perts to receive payment
in dollars three months later ,e is e+posed to the risk of e+change rate
fluctuations &y using the currency for!ard market to sell dollars for!ard, he can
lock on to a rate today and reduce his uncertainty Similarly an imports !ho is
re.uired to make a payment in dollars t!o months hence can reduce his
e+posure to e+change rate fluctuations by dollars for!ard
If a speculator has information or analysis, !hich forecasts an upturn in a price,
then he can go long on the for!ard market instead of the cash market "he
speculator !ould go long on the for!ard, !ait for the price to rise, and then take
a reversing transaction to book profits Speculators may !ell be re.uired to
deposit a martin upfront ,o!ever, this is generally a relatively small proportion of
the value of the assets underlying the for!ard contact the use of for!ard markets
here supplies leverage to the speculator
L+/+*)*+,-5 ,< F,3C)30 M)3D2*5
)or!ard markets !orld#!ide are afflicted by several problems>
• Fack of centrali/ation trading
• Illi.uidity, and
• Counter party risk
In the first t!o of these, the basic problem is that of too much fle+ibility and
generality "he for!ard market is like a real estate market in that any t!o
consenting adults can form contracts against each other "his often makes them
design terms of deal, !hich are very convenient in that specific situation, but
makes the contracts non#trade able
Counter party risk arises from the possibility of default by any one party to the
transaction 9hen one of the t!o sides to the transaction declares bankruptcy,
the other suffers @ven !hen for!ard markets trade standardi/ed contracts, and
hence avoid the problem of li.uidity, still the counter party risk remains a very
serious issue
F;*;325 C,-*3)7*5:
)utures markets !ere designed to solve the problems that e+it in for!ard
markets : futures contract is an agreement bet!een t!o parties to buy or sell an
asset at a certain time in the future at a certain price &ut unlike for!ard
contracts, the futures contracts are standardi/ed and e+change traded "o
facilitate li.uidity in the futures contacts, the e+change specifies certain standard
features of contract It is a standardi/ed contract !ith standard underlying
instrument, a standard .uantity and .uality of underlying instrument that can be
delivered, %or !hich can be used for reference purposes in settlement( and a
standard timing of such settlement : futures contract may be offset prior to
maturity by entering into an e.ual and opposite transaction 'ore than ;;M of
futures transactions are offset this !ay
"he standardi/ed items in a futures contract are>
• Ouantity of underlying
• Ouality of underlying
• "he date and month of delivery
• "he units of price .uotation and minimum price change
• Focation of settlement
D+5*+-7*+,- B2*C22- <;*;325 )-0 <,3C)305 7,-*3)7*5
)B"B-@S )0-9:-DS
"rade on an organi/ed e+change 0"C in nature
Standardi/ed contract terms Customi/ed contract terms
,ence more li.uid ,ence less li.uid
-e.uires margin payment Do margin happens attends of
period
)or!ard contracts are often confused !ith futures contracts "he confusion is
primarily because both serve essentially the same economic function of
allocating risk in the presence of future price uncertainty ,o!ever futures are a
significant improvement over the for!ard contracts as they eliminate counterparty
risk and offer more li.uidity
COMMODITY FUTURES TERMINOLOGY
&asic> "he difference bet!een the current cash price and the future price of the
same commodity for a given contract month
B2)3 M)3D2*: : period of declining market prices
B;.. M)3D2*> : period of rising market prices
B3,D23> : company or individual that e+ecutes futures and options orders on
behalf of financial and commercial institutions and or the general public
C)58 :5E,*= M)3D2*: : place !here people buy and sell the actual cash
commodities, ie, grain elevator, livestock market, etc
F;*;325 P3+72: "he price at !hich the futures contract trades in the futures
market
E6E+31 0)*2: It is the date specified in the futures contract "his is the last day on
!hich the contract !ill be traded, at the end of !hich it !ill cease to e+it
C,//+55+,- :B3,D23)92= <22: : fee changed by a broker for e+ecuting a
transaction
C,-42392-72: : term referring to cash and futures prices tending to come
together as the futures contract nears e+piration
C3,55 F 8209+-9> ,edging a commodity using a different but related futures
contract !hen there is no futures contract for the cash commodity being hedged
and the cash and future markets follo! similar price trends
Daily "rading Fimit> "he ma+imum price change set by the e+change each day
for a contract
D)1 T3)0235: Speculators !ho take positions in futures or options contracts and
li.uidate them prior to the close of the same trading day
Delivery> "he transfer of the cash commodity from the seller of a futures contract
the buyer of a futures contract
F,3C)30 :7)58= 7,-*3)7*: : cash contract on !hich a seller agrees to deliver a
specific cash commodity t a buyer at a specific time in the future
F;-0)/2-*). A-).15+5: : method of anticipating futures price movement using
supply and demand information
COMMODITY TRADING
COMMODITY MAR'ET TRADING MCHANISM
@very market transaction consists of three components J
trading, clearing and settlement
TRADING
"he trading system on the Commodities e+change provides a fully
automated screen#based trading for futures on commodities on a nation!ide
basis as !ell as an online monitoring and surveillance mechanism It supports
an order driven market and provides complete transparency of trading
operations :fter hours trading has also been proposed for implementation at a
later stage
"he DCD@$ system supports an order driven market, !here orders match
automatically 0rder matching is essentially on the basis of commodity, its price,
time and .uantity :ll .uantity fields are in units and price in rupees "he
e+change specifies the unit of trading and the delivery unit for futures contracts
on various commodities "he e+change notifies the regular lot si/e and tick si/e
for each of the contracts traded from time to time 9hen any order enters the
trading system, it is an active order It tries to find a match on the other side of
the book If it finds a match, a trade is generated If it does not find a match, the
order becomes passive and gets .ueued in the respective outstanding order
book in the system, "ime stamping is done for each trade and provides the
possibility for a complete audit trail if re.uired
C OMMODITY FUTURES TRADING CYCLE
DCD@$ trades commodity futures contracts having one#month, t!o#month and
three#month e+piry cycles :ll contracts e+pire on the 34
th
of the e+piry month
"hus a Kanuary e+piration contract !ould e+pire on the 34
th
of Kanuary and a
)ebruary e+piry contract !ould cease trading on the 34
th
)ebruary If the 34
th
of
the e+piry month is a trading holiday, the contracts shall e+pire on the previous
trading day De! contracts !ill be introduced on the trading day follo!ing the
e+piry of the near month contract )ollo!ing )igure sho!s the contract cycle for
futures contracts on DCD@$
Kan )eb 'arr
"ime
Kan 34 contract
)eb 34 contract
'arch 34 contract
ril 34 contract
'ay 34 contract
Kune 34 contra
ORDER TYPES AND TRADING PARAMETERS
:n electronic trading system allo!s the trading members to enter orders
!ith various conditions attached to them as per their re.uirement "hese
conditions are broadly divided into the follo!ing categories>
• "ime conditions
• Price conditions
• 0ther conditions
Several combinations of the above are possible thereby providing
enormous fle+ibility to users "he order types and conditions are summari/ed
belo! 0f these, the order types available on the DCD@$ system are regular lot
order, stop loss order, immediate or cancel order, good till day order, good till
cancelled order, good till order and spread order
TIME CONDITIONS
1> G,,0 *+.. 0)1 ,3023:
: day order, as the name suggests is an order !hich is valid for the day on
!hich it is entered If the order is not e+ecuted during the day, the system
cancels the order automatically at the end of the day @+ample> : trader !ants to
go long on 'arch 1, 3448 in refined palm oil on the commodity e+change : day
order is placed at -s284I# 14 kg If the market does not reach this price the
order does not get filled even if the market touches -s281 and closes In other
!ords day order is for a specific price and if the order does not get filled that day,
one has to place the order gain the ne+t day
#> G,,0 *+.. 7)-72..20 :GTC=
: G"C order remains in the system until the user cancels it
Conse.uently, it spans trading days, if not traded on the day the order is entered
"he ma+imum number of days an order can remain in the system is notified by
the e+change from time to time after !hich the order is automatically cancelled
by the system @ach day counted is a calendar day inclusive of holidays "he
days counted are inclusive of the day on !hich the order is placed and the order
is cancelled from the system at the end of the day of the e+piry period @+ample>
: trader !ants to go long on refined palm oil !hen the market touches -s844I#
14 kg "heoretically, the order e+ists until it is filled up, even if it takes months for
it to happen "he G"C order on the DCD@$ is cancelled at the end of a period of
seven calendar days from the date of entering an order or !hen the contract
e+pires, !hichever is earlier
&> G,,0 *+.. 0)*2 :GTD=
: G"D order allo!s the user to specify the date till !hich the order should
remain in the system if not e+ecuted "he ma+imum days allo!ed by the system
are the same as in G"C order :t the end this day I date, the order is cancelled
from the system @ach day I date counted are inclusive of the day I date on
!hich the order is placed and the order is Cancelled from the system at the end
of the day I date of the e+piry period
%> I//20+)*2 ,3 C)-72. :IOC=:
:n I0C order allo!s the user to buy or sell a contract as soon as the order
is released into the system, failing !hich the order is cancelled from the system
Partial match is possible for the order, and the unmatched portions of the order is
cancelled immediately
5> A.. ,3 -,-2 ,3023:
:ll or none order %:0D( is a limit order, !hich is to be e+ecuted in its
entirety, or not at all Bnlike a fill#or#kill order, an all#or#none order is not
cancelled if it is not e+ecuted as soon as it is represented in the e+change :n
all#or#none order position can be closed out !ith another :0D order
6> F+.. ,3 '+.. ,3023:
"his order is a limit order that is placed to be e+ecuted immediately and if
the order is unable to be filed immediately, it gets cancelled
PRICE CONDITIONS
1> L+/+* O3023:
:n order to buy or sell a stated amount of a commodity at a specified
price, or at a better price, if obtainable at the time of e+ecution "he
disadvantage is that the order may not get filled at all if the price of that day does
not reach specified price
#> S*,E-.,55:
: stop#loss order is an order, placed !ith the broker, to buy or sell a
particular futures contract at the market price if and !hen the price reaches a
specified level )utures traders often use stop orders in an effort to limit the
amount they might lose if the futures price moves against their position Stop
orders are not e+ecuted until the price reaches the specified point 9hen the
price reaches that point the stop order becomes a market order 'ost of the
time, stop orders are used to e+it a trade &ut, stop orders can be e+ecuted for
buying I selling positions too : buy stop order is initiated !hen one !ants to buy
a contract or go long and a sell stop order !hen one !ants to sell or go short
"he order gets filled at the suggested stop order price or at a better price
@+ample> : trader has purchased crude oil futures at -s564 per barrel ,e
!ishes to limit his loss to -s64 a barrel : stop order !ould then be placed to
sell an offsetting contract if the price falls to -s544 per barrel 9hen the market
touches this price, stop order gets e+ecuted and the trader !ould e+it the market
)or the stop#loss sell order, the trigger price has to be greater than the limit price
OTHER CONDITIONS
M)39+-5 <,3 *3)0+-9 +- <;*;325:
'argin is the deposit money that needs to be paid to buy or sell each
contract "he margin re.uired for a futures contract "he margin re.uired for a
futures contract is better described as performance bond or good faith money
"he margin levels are set by the e+changes based on volatility%market
conditions( and can be changed at any time "he margin re.uirements for most
futures contracts range from 3M to 16M of the value of the contract
In the futures market, there are different types of margins that a trader has
to maintain 9e !ill discuss them in more details !hen !e talk about risk
management in the ne+t chapter :t this stage !e look at the types of margins as
they apply on most futures e+changes
? I-+*+). /)39+-: "he amount that must be deposited by a customer at the
time of entering into a contract is called initial margin "his margin is meant to
cover the largest potential loss in one day "he margin is a mandatory
re.uirement of parties !ho are entering into the contract
? M)+-*2-)-72 /)39+-: : trader is entitled to !ithdra! any balance in the
margin account in e+cess of the initial margin "o ensure that the balance in the
margin account never becomes negative, a maintenance margin, !hich is
some!hat lo!er than the initial margin, is set If the balance in the margin
account falls belo! the maintenance margin, the trader receives a margin call
and is re.uested to deposit e+tra funds to bring it to the initial margin level !ithin
a very short period of time "he e+tra funds deposited are kno!n as a variation
margin If the trader does not provide the variation margin, the broker closes out
the position by offsetting the contract
? A00+*+,-). /)39+-: In case of sudden higher than e+pected volatility, the
e+change calls for an additional margin, !hich is a preemptive move to prevent
breakdo!n "his is imposed !hen the e+change fears that the markets have
become too volatile and may result in some payments crisis, etc,
? M)3D-*,-M)3D2* /)39+- :MTM=: :t the end of each trading day, the
margin account is adjusted to reflect the trader*s gain or loss "his is kno!n as
marking to market the account of each trader :ll futures contracts are settled
daily reducing the credit e+posure to one day*s movement &ased on the
settlement price, the value of all positions is marked#to#market each day after the
official close, ie, the accounts are either debited or credited based on ho! !ell
the positions fared in that day*s trading session If the account falls belo! the
maintenance margin level the trader needs to replenish the account by giving
additional funds 0n the other hand, if the position generates a gain, the funds
can be !ithdra!n % those funds above the re.uired initial margin( or can be used
to fund additional trades
Kust as a trader is re.uired to maintain a margin account !ith a breaker, a
clearing house member is re.uired to maintain a margin account !ith the
clearing house "his is kno!n as clearing margin In the case of clearing house
member, there is only an original margin and no maintenance margin Clearing
house and clearing house margins have been discussed further in detail under
the chapter on clearing and settlement
SETTLEMENT
)utures contracts have t!o types of settlements, the '"' settlement
!hich happens on a continuous basis at the end of each day, and the final
settlement !hich happens on the last trading day of the futures contract 0n the
DCD@$, daily '"' settlement and final '"' settlement in respect of admitted
deal in futures contracts are cash settled by debitingIcrediting the clearing
accounts of C's !ith the respective clearing bank :ll positions of a C',
brought for!ard, created during the day or closed out during the day, are marked
to market at the daily settlement price or the final settlement price at the close of
trading hours on a day
• D)+.1 52**.2/2-* E3+72: Daily settlement price is the consensus closing price
as arrived after closing session of the relevant futures contract for the trading
day ,o!ever, in the absence of trading for a contract during closing sessions,
daily settlement price is computed as per the methods prescribed by the
e+change from time to time
• F+-). 52**.2/2-* E3+72: )inal settlement price is the closest price of the
underlying commodity on the last trading day of the futures contract :ll open
positions in a futures contract cease to e+ist after its e+piration day
S2**.2/2-* /278)-+5/:
Settlement of commodity futures contracts is a little different from
settlement of financial futures, !hich are mostly cash settled "he possibility of
physical settlement makes the process a little more complicated
P
Types of
Settlement
Daily Settlement
Final Settlement
Daily Settlement Price
Hanles aily price fl!ct!ation
for all traes "mar# to mar#et$
Daily process at en of ay
Final Settlement Price
Hanles final settlement of all
open oppositions
On contract e%piry ate
D)+.1 /)3D *, /)3D2* 52**.2/2-*:
Daily mark to market settlement is done till the date of the contract e+piry
"his is done to take care of daily price fluctuations for all trades :ll the open
positions of the members are marked to market at the end of the day and
profitIloss is determined as belo!>
• 0n the day of entering into the contract, it is the difference bet!een the entry
value and daily settlement price for that day
• 0n any intervening days, !hen the member holds an open position, it is the
different bet!een the daily settlement price for that day and the previous day*s
settlement price
F+-). 52**.2/2-*
0n the date of e+piry, the final settlement price is the spot price on the
e+piry day "he spot prices are collected from members across the country
through polling "he polled bidIask prices are bootstrapped and the mid of the
t!o bootstrapped prices is taken as the final settlement price "he responsibility
of settlement is on a trading cum clearing member for all trades done on his o!n
account and his client*s trades : professional clearing member is responsible
for settling all the participants trades, !hich he has confirmed to the e+change
0n the e+piry date of a futures contract, members are re.uired to submit
delivery information through delivery re.uest !indo! on the trader !orkstations
provided by DCD@$ for all open positions for a commodity for all constituents
individually DCD@$ on receipt of such information matches the information and
arrives at a delivery position for a member for a commodity : detailed report
containing all matched and unmatched re.uests is provided to members through
the e+tranet
Pursuant to regulations relating to submission of delivery information, failure to
submit delivery information for open positions attracts penal charges as
stipulated by DCD@$ from time to time DCD@$ also adds all such open
positions for a member, for !hich no delivery information is submitted !ith final
settlement obligations of the member concerned and settled in cash
Don#fulfillment of either the !hole or part of the settlement obligations is
treated as a violation of the rules, bye#la!s and regulations of DCD@$, and
attracts penal charges as stipulated by DCD@ from time to time In addition
DCD@$ can !ithdra! any or all of the membership rights of clearing member
including the !ithdra!al of trading facilities of all trading members clearing
through such clearing members, !ithout any notice )urther, the outstanding
positions of such clearing member andIor trading members andIor constituents,
clearing and settling through such clearing member, may be closed out forth!ith
or any thereafter by the e+change to the e+tent possible, by placing at the
e+change, counter orders in respect of the outstanding position of clearing
member !ithout any notice to the clearing member and I or trading member and I
or constituent DCD@$ can also initiate such other risk containment measures,
as it deems appropriate !ith respect to the open positions of the clearing
members It can also take additional measures like imposing penalties,
collecting appropriate deposits, invoking bank guarantees or fi+ed deposit
receipts, reali/ing money by disposing off the securities and e+ercising such
other risk containment measures as it deems fit or take
further disciplinary action
S2**.2/2-* /2*8,05
Settlement of futures contracts on the DCD@$ can be done in three !ays
Jby physical delivery of the underlying asset, by closing out open positions and
by cash settlement 9e shall look at each of these in some detail 0n the
DCD@$ all contracts settling in cash are settled on the follo!ing day after the
contract e+piry date :ll contracts materiali/ing into deliveries are settled in a
period 3#5 days after e+piry "he e+act settlement day for each commodity is
specified by the e+change
Physical delivery of the underlying asset
)or open positions on the e+piry day of the contract, the buyer and the
seller can announce intentions for delivery Deliveries take place in the electronic
form :ll other positions are settled in cash
9hen a contract comes to settlementIthe e+change provides alternatives
like delivery place, month and .uality specifications "rading period, delivery
date etc are all defined as per the settlement calendar : member is bound to
provide delivery information If he fails to give information, it is closed out !ith
penalty as decided by the e+change : member can choose an alternative mode
of settlement by providing counter party clearing member and constituent "he
e+change is ho!ever not responsible for, nor guarantees settlement of such
deals "he settlement price is calculated and notified by the e+change "he
delivery place is very important for commodities !ith significant transportation
costs "he e+change also specifies the precise period %date and time( during
!hich the delivery can be made )or many commodities, the delivery period may
be an entire month "he party in the short position %seller( gets the opportunity to
make choices from these alternatives "he e+change collects delivery
information "he price paid is normally the most recent settlement price %!ith a
possible adjustment for the .uality of the asset and J the delivery location( "hen
the e+change selects a party !ith an outstanding long position to accept delivery
:s mentioned above, after the trading hours on the e+piry date, based on
the available information, the matching for deliveries is done, firstly, on the basis
of locations and then randomly keeping in vie! factors such as available capacity
of the vaultI!arehouse, commodities already deposited and demateriali/ed and
offered for delivery and any other factor as may be specified by the e+change
from time to time :fter completion of the matching process, clearing members
are informed of the deliverableIreceivable positions and the unmatched positions
Bnmatched positions have to be settled in cash "he cash settlement is done
only for the incremental gainIloss as determined on the basis of the final
settlement price
:ny buyer intending to take physicals has to put a re.uest to his
depository participant "he DP uploads such re.uests to the specified depository
!ho in turn for!ards the same to the registrar and transfer agent %-E" agent(
concerned :fter due verification of the authenticity, the -E" agent for!ards
delivery details to the !arehouse !hich in turn arranges to release the
commodities after due verification of the identity of recipient 0n a specified day,
the buyer !ould go to the !arehouse and pick up the physicals
"he seller intending to make delivery has to take the commodities to the
designated !arehouse "hese commodities have to be assayed by the e+change
specified assayer "he commodities have to meet the contract specifications !ith
allo!ed variances If the commodities meet the specifications, the !arehouse
accepts them 9arehouses then ensure that the receipts get updated in the
depository system giving a credit in the depositor*s electronic account "he seller
then gives the invoice to his clearing member, !ho !ould courier the same to the
buyer*s clearing member
DCD@$ contracts provide a standardi/ed description for each commodity
"he description is provided in terms of .uality parameters specific to the
commodities :t the same time, it is reali/ed that !ith commodities, there could
be some amount of variances in .ualityI!eight etc, due to natural causes, !hich
are beyond the control of any person ,enceI DCD@$ contracts also provide
tolerance limits for variances : delivery is treated as good delivery and
accepted if the delivery lies !ithin the tolerance limits ,o!ever, to allo! for the
difference, the concept of premium and discount has been introduced Goods
that come to the authori/ed !arehouse for delivery are tested and graded as per
the prescribed parameters "he premium and discount rates apply depending on
the level of variation "he price payable by the party taking delivery is then
adjusted as per the premiumIdiscount rates fi+ed by the e+change "his ensures
that some amount of lee!ay is provided for delivery, but at the same time, the
buyer taking delivery does not face !indfall lossIgain due to the .uantityI.uality
variation at the time of taking delivery "his, to some e+tent, mitigates the
difficulty in delivering and receiving e+act .ualityI.uantity of commodity
C.,5+-9 ,;* B1 ,<<52**+-9 E,5+*+,-5
'ost of the contracts are settled by closing out open positions In closing
out, the opposite transaction is effected to close out the original futures position
: buy contract is closed out by a sale and a sale contract is closed out by a buy
)or e+ample, an investor !ho took a long position in t!o gold futures contracts
on the Kanuary 24, 3448 at G4;4, can close his position by selling t!o gold
futures contracts on )ebruary 35, 3448 at -s6;37 In this case, over the period
of holding the position he has suffered a loss of -s1G3 per unit "his loss !ould
have been debited from his margin account over the holding period by !ay of
'"' at the end of each day, and finally at the price that he closes his position,
that is -s 6;37 in this case
CASH SETTLEMENT
Contracts held till the last day of trading can be cash settled 9hen a
contract is settled in cash, it is marked to the market at the end of the last trading
day and all positions are declared closed "he settlement prince on the last
trading day is set e.ual to the closing spot price of the underlying asset ensuring
the convergence of future prices and the spot prices )or e+ample an investor
took a short position in five long staple cotton futures contracts on December 16
at -s G;64 0n 34
th
)ebruary, the last trading day of the contract, the spot price
of long staple cotton is -s G536 "his is the settlement price for his contract :s
a holder of a short position on cotton, he does not have to actual deliver the
underlying cotton but simply takes a!ay the profit of -s 336 per trading unit of
cotton in the form of cash entities involved in physical settlement
ENTITLES INVOLVED IN PHYSICAL SETTLEMENT:
Physical settlement of commodities involves the follo!ing three entities J
an accredited !arehouse, registrar E transfer agent and an assayer 9e !ill
briefly look at the functions of each accredited !arehouse
ACCREDITED (AREHOUSE
DCD@$ specified accredited !arehouses through !hich delivery of a
specific commodity can be affected and !hich !ill facilitate for storage of
commodities )or the services provided by them, !arehouses charge a fee that
constitutes storage and other charges such as insurance, assaying and handling
charges or any other incidental charges follo!ing are the functions of an
accredited !arehouse
THE FUTURES BASIS
"he cost#of#carry model e+plicitly defines the relationship bet!een the
futures price and the related spot price "he difference bet!een the spot price
and the futures price is called the basis 9e see that as a futures contract nears
e+piration, the basis reduces to /ero "his means that there is a convergence of
the futures price to the price of the underlying asset "his happens because if
the futures price is above the spot price during the delivery period it gives rise to
a clear arbitrage
V)3+)*+,- ,< B)5+5 ,423 *+/2
"he figure sho!s ho! basis changes over time :s the time to e+piration of a
contract reduces, the basis reduces "o!ards the close of trading on the day of
settlement, the futures price and the spot price converge "he closing price for
theril gold futures contract is the closing value of gold in the spot market on
that day
0pportunity 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 "his
!ill lead to a profit e.ual to the difference bet!een the futures price and spot
price :s traders start e+ploiting this arbitrage opportunity the demand for the
contract !ill increase and futures prices !ill fall leading to the convergence of the
future price !ith the spot price If the futures price is belo! the spot price during
the delivery period all parties interested in buying the asset in the spot marked
making a profit e.ual to the difference bet!een the future price and the spot
price :s more traders take a long position the demand for the particular asset
!ould increase and the futures price !ould rise nullifying the arbitrage
opportunity
? :s the date of e+piration comes near, the basis reduces Q there is a
convergence of the futures price to!ards the spot price %)igure G, 1( 0n the
date of e+piration, the basis is /ero If it is not, then there is an arbitrage
opportunity :rbitrage opportunities can also arise !hen the basis %difference
bet!een spot and futures price( or the spreads difference bet!een prices of t!o
futures contracts( during the life of a contract are incorrect :t a later stage !e
shall look at ho! these arbitrage opportunities can be e+ploited
? "here is nothing but cost of carry related arbitrage that drives the behavior of
the futures price in the case of investment assets In the case of consumption
assets, !e need to factor in the benefit provided by holding the physical
commodity
? "ransactions costs are very important in the business of arbitrage
PA&T'C'PANTS 'N COMMOD'T( MA&KET
)or a market to succeedI it must have all three kinds of participant*s J
hedgers, speculators and arbitragers "he confluence of these participants
ensures li.uidity and efficient price discovery on the market Commodity markets
give opportunity for all three kinds of participants
H209+-9
'any participants in the commodity futures market are hedgers "he use
the futures market to reduce a particular risk that they face "his risk might relate
to the price of !heat or oil or any other commodity that the person deals in "he
classic hedging e+ample is that of !heat farmer !ho !ants to hedge the risk of
fluctuations in the price of !heat around the time that his crop is ready for
harvesting &y selling his crop for!ard, he obtains a hedge by locking in to a
predetermined price ,edging does not necessarily improve the financial
outcome? indeed, it could make the outcome !orse 9hat it does ho!ever is that
it makes the outcome more certain ,edgers could be government institutions,
private corporations like financial institutions, trading companies and even other
participants in the value chain, for instance farmers, e+tractors, ginners,
processors etc, !ho are influenced by the commodity prices
H2092 R)*+,
,edge ratio is the ratio of the si/e of position taken in the futures contracts to the
si/e of the e+posure in the underlying asset So far in the e+amples !e used, !e
assumed that the hedger !ould take e+actly the same amount of e+posure in
there futures contract as in the underlying asset )or e+ample, if the hedgers
e+posure in the underlying !as to the e+tent of 11 bales of cotton, the futures
contracts entered into !ere e+actly for this amount of cotton 9e !ere assuming
here that the optimal hedge ratio is one In situations !here the underlying asset
in !hich the hedger has an e+posure is e+actly 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 hedge
ratio of one may not be optimal &elo! e.uation gives the optimal hedge ratio,
one that minimi/es the variance of the hedger*s position
9here>
: CH <== R Q Change in spot price, S, during a period of time e.ual to the life of the
hedge
Q Change in futures price, ), during a period of time e.ual to the life of the
hedge deviation of :S
a
)> Q Standard deviation of
Coefficient of correlation bet!een :s and h Q hedge ratio
SE27;.)*+,-
:n entity having an opinion on the price movements of a given commodity
can speculate using the commodity market 9hile the basics of speculation
apply to any market, speculating in commodities is not as simple as speculating
on stocks in the financial market )or a speculator !ho thinks the shares of a
given company !ill rise It is easy to buy the shares and hold them for !hatever
duration he !ants to ,o!ever, commodities are bulky products and come !ith
all the costs and procedures of handling these products "he commodities
futures markets provide speculators !ith an easy mechanism to speculate on the
price of underlying commodities
"o trade commodity futures on the DCD@$, a customer must open a
futures trading account !ith a commodity derivatives broker &uying futures
simply involves putting in the margin money "his enables futures traders to take
a position in the underlying commodity !ithout having to actually hold that
commodity 9ith 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 e+piration date of the contract( 9e look
here at ho! the commodity futures markets can be used for speculation
"oday a speculator can take e+actly the same position on gold by using gold
futures contracts Fet us see ho! this !orks Gold trades at -sG444 per 14
gms and three#months gold futures trades at -sG164 "ables 52 gives the
contract specifications for gold futures "he unit of trading is 144 gms and the
delivery unit for the gold futures contract on the DCD@$ is 1 kg ,e buys one kg
of gold futures !hich have a value of -sG,16,444 &uying an asset in the futures
markets only re.uire making margin payments "o take this position, he pays a
margin of -s1,34,444 "hree months later gold trades at -sG844 per14 gms
:s !e kno!, on the day of e+piration, the futures price converges to the spot
Price %else there !ould be a risk#free arbitrage opportunity( ,e closes his long
futures position at -sG8,444 in the process making a profit of -s36,444 on an
initial margin investment of -s1,34,444 "his !orks out to an annual return of
72percent &ecause of the leverage they provide, commodity futures form an
attractive tool for speculators
SE27;.)*+,-: B2)3+58 C,//,0+*1, S2.. F;*;325:
"his can also be used by a speculator !ho believes that there is likely to
be e+cess supply of a particular commodity in the near future and hence the
prices are likely to see a fall ,o! can he trade based on this opinionS In the
absence of a deferral product, there !asn*t much he could do to profit from his
opinion "oday all he needs to do is sell commodity futures
Fet us understand ho! this !orks Simple arbitrage ensures that the price
of a futures contract on a commodity moves correspondingly !ith the price of the
underlying commodity If the commodity price rises, so !ill the futures price If
the commodity price fallsIso !ill the futures price Do! take the case of the
trader !ho e+pects to see a fall in the price of cotton ,e sells ten t!o#months
cotton futures contract !hich is for delivery of 664 bales of cotton "he value of
the contract is -s8,44,444 ,e pays a small margin on the same "hree months
later If his hunch !ere correct the price of cotton falls So does the price of
cotton futures ,e close out his short futures position at -s2,64,444, making a
profit of -s64,444
A3B+*3)92
: central idea in modern economics is the la! of one price "his states
that in a competitive market, if t!o assets are e.uivalent from the point of vie! of
risk and return, they should sell at the same price If the price of the same asset
is different in t!o markets, there !ill be operators !ho !ill buy in the market
!here the asset sells cheap and sell in the market !here it is costly "his activity
termed as arbitrage, involves the simultaneous purchase and sale of the same or
essentially similar security in t!o different markets for advantageously different
prices "he buying cheap and s!elling e+pensive continues till prices in the t!o
markets reach e.uilibrium ,ence, arbitrage helps to e.uali/e prices and restore
market efficiency
) Q %STB(e
e"
9here>
Cost of financing %annuali/ed(
" Q "ime till e+piration
B Q present value of all storage costs
REGULATORY FRAME(OR' FOR COMMODITY TRADING IN INDIA
:t present there are three tiers of regulations of for!ardIfutures trading
system in India, namely, government of India, )or!ard 'arkets
Commission%)'C( and commodity e+changes "he 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 "his could have undesirable influence on the
spot prices, thereby affecting interests of society at large -egulation 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
"he resultant financial crisis in a futures market could create systematic
risk -egulation is also needed to ensure fairness and transparency in trading,
clearing, settlement and management of the e+change so as to protect and
promote the interest of various stakeholders, particularly non#member users of
the market
RULES GOVERNING COMMODITY DERIVATIVES EXCHANGES
"he trading of commodity derivatives on the DCD@$ is regulated by
)or!ard 'arkets Commission %)'C( Bnder the )or!ard Contracts %-egulation(
:ct, 1;63, for!ard trading in commodities notified under section 16 of the :ct can
be conducted only on the e+changes, !hich are granted recognition by the
central government %Department of Consumer :ffairs, 'inistry of Consumer
:ffairs, )ood and Public Distribution( :ll the e+changes, !hich deal !ith for!ard
contracts, are re.uired to obtain certificate of registration from the )'C &esides,
they are subjected to various la!s of the land like the Companies :ct, Stamp :ct,
Contracts :ct, )or!ard Commission %-egulation( :ct and various other
legislations, !hich impinge on their !orking
)or!ard 'arkets Commission provides regulatory oversight in order to
ensure financial integrity %ie to prevent systematic risk of default by one major
operator or group of operators(, market integrity %ie to ensure that futures prices
are truly aligned !ith the prospective demand and supply conditions( and to
protect and promote interest of customersI nonmembers It prescribes the
follo!ing regulatory measures>
1 Fimit on net open position as on close of the trading houses Some
times limit is also imposed on intra#day net open position "he limit is imposed
operator#!iseI and in some cases, also member !ise
3 Circuit filters or limit on price fluctuations to allo! cooling of market
in the event of abrupt ups!ing or do!ns!ing in prices
2 Special margin deposit to be collected on outstanding purchases or
sales !hen price moves up or do!n sharply above or belo! the previous day
closing price &y making further purchasesIsales relatively costly, the price rise
or fall is sobered do!n "his measure is imposed only on the re.uest of the
e+change
8 Circuit breakers or minimumIma+imum prices "hese are
prescribed to prevent futures prices from failing belo! as rising above not
!arranted by prospective supply and demand factors "his measure is also
imposed on the re.uest of the e+change
6 Skipping trading in certain derivatives of the contract closing the
market for a specified period and even closing out the contract "hese e+treme
are taken only in emergency situations
&esides these regulatory measures, the )C(-( :ct provides that a client*s
position cannot be appropriated by the member of the e+change, e+cept !hen a
!ritten consent is taken !ithin three days time "he )'C is persuading
increasing number of e+changes to s!itch over to electronic trading, clearing and
settlement !hich is more customerIfriendly "he )'C has also prescribed
simultaneous reporting system for the e+changes follo!ing open out cry system
"hese steps facilitate audit trail and make it difficult for the members to indulge
in malpractice like trading ahead of clients, etc "he )'C has also mandated all
the e+changes follo!ing open outcry system to display at a prominent place in
e+change premises, the name, address, telephone number of the officer of the
commission !ho can be contacted for any grievance "he !ebsite of the
commission also has a provision for the customers to make complaint and send
comments and suggestions to the )'C 0fficers of the )'C have been
instructed to meet the members and clients on a random basis, !henever they
visit e+changes, to ascertain the situation on the ground, instead of merely
attending meetings of the board of directors and holding discussions !ith the
office bearers
TRADING DAYS
"he e+change operates on all days e+cept Saturday and Sunday and on
holidays that it declares from time to time 0ther than the regular trading hours,
trading members are provided a facility to place orders offline ie outside trading
hours "hese are stored by the system but get traded only once the market
opens for trading on the follo!ing !orking day
"he 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
e+change to the members via its circulars or notices issued from time to time
'embers can place orders on the trading system during these sessions, !ithin
the regulations prescribed by the e+change as per these bye la!s, rules and
regulations, from time to time
TERMS AND CONDITIONS OF COMMODITIES>
"he basic terms and conditions of commodities are as follo!s
Commodity "rading
Session
Fot si/e Initial
'argins
Gold 14am to
1124pm
1kg 6M
Gold mini 14am to
1124pm
144kg 6M
Silver 14am to
1124pm
24kg 6M
Silver mini 14am to
1124pm
6kg 6M
Steel long 14am to
644pm
36mt 6M
Steel flat 14am to
644pm
36mt 6M
Fight s!eet
Crudeoil
14am to
1124pm
144bbls 8M
Datural gas 14am to
1124pm
644mmbt
u
8M
-&D
palmolein
14am to
644pm
1mt 8M
-efined
soyoil
1mt 8M
-ubber 14am to
1124pm
1mt 6M
Soy seed 1mt 8M
&lack
paper
14am to
644pm
1mt 7M
Capas 14am to
644pm
8mt 6M
Castor oil 14am to
644pm
1mt 8M
Castor
seed
14am to
644pm
1mt 8M
Copper 14am to
1124pm
1mt 6M
Dickel 14am to
1124pm
644kg 6M
"in 14am to
1124pm
364kg 7M
Guar seed 14am to
644pm
6mt 5M
Chana
%Gram(
14am to
644pm
6mt 6M
Brad
%black
'atpe(
14am to
644pm
34mt 6M
Nello!
peas
14am to
644pm
34mt 6M
"ur %pigeon
peas(
14am to
644pm
14mt 6M
Dote> in !inter timings from 1444am to 1166pm
T3)0+-9 8,;35 )-0 *3)0+-9 717.2
"he e+change announces the normal trading hoursIopen period in
advance from time to time In case necessary, the e+change can e+tend or
reduce the trading hours by notifying the members "rading cycle for each
commodityIderivative contract has a standard period, during !hich it !ill be
available for trading
C,-*3)7* 26E+3)*+,-
Derivatives contracts e+pire on a pre#determined date and time up to
!hich the contract is available for trading "his is notified by the e+change in
advance "he contract e+piration period !ill not e+ceed t!elve months or as the
e+change may specify from time to time
T3)0+-9 E)3)/2*235
"he e+change from time to time specifies various trading parameters
relating to the trading system @very trading member is re.uired to specify the
buy or sell orders as either an open order or a close order for derivatives
contracts "he e+change also prescribes different order books that shall be
maintained on the trading system and also specifies various conditions on the
order that !ill make it eligible to place it in those books
"he e+change specifies the minimum disclosed .uantity for orders that !ill
be allo!ed for each commodityIderivatives contract It also prescribed the
number of days after !hich Good "ill Cancelled orders !ill be cancelled by the
system It specifies parameters like lot si/e in !hich orders can be placed, price
steps in !hich shall be entered on the trading system, position limits in respect of
each commodity etc
F)+.;32 ,< *3)0+-9 /2/B23 *23/+-).
In the event of failure of trading members !orkstation andI or the loss of
access to the trading system, the e+change can at its discretion undertake to
carry out on behalf of the trading member the necessary functions !hich the
trading member is eligible for 0nly re.uests made in !riting in a clear and
precise manner by the trading member !ould be considered "he trading
member is accountable for the functions e+ecuted by the e+change on its behalf
and has to indemnity the e+change against any losses or costs incurred by the
e+change
T3)02 ,E23)*+,-5
"rading members have to ensure that appropriate confirmed order instructions
are obtained from the constituents before placement of an order on the system
"hey have to keep relevant records or documents concerning the order and
trading system order number and copies of the order confirmation
slipImodification slip must be made available to the constituents
"he trading member has to disclose to the e+change at the time of order entry
!hether the order is on his o!n account or on behalf of constituents and also
specify orders for buy or sell as open or close orders "rading members are
solely responsible for the accuracy of details of orders entered into the trading
system including orders entered on behalf of their constituents "raders
generated on the system are irrevocable and blocked in 1 "he e+change
specifies from time to time the market types and the manner if any, in !hich trade
cancellation can be effected
9here a trade cancellation is permitted and trading member !ishes to cancel a
trade, it can be done only !ith the approval of the e+change
M)39+- 32A;+32/2-*5
Subject to the provisions as contained in the e+change bye#la!s and such other
regulations as may be in force, every clearing memberIin respect of the trades in
!hich he is party to, has to deposit a margin !ith e+change authorities
"he e+change prescribes from time to time the commoditiesIderivatives
contracts, the settlement periods and trade types for !hich margin !ould be
attracted
"he e+change levies initial margin on derivatives contracts using the concept of
Value at -isk %Va-( or any other concept as the e+change may decide from time
to time "he margin is charged so as to cover one#day loss that can be
countered on the position on ;;M of the days :dditional margins may be levied
for deliverable positions, on the basis of Va- from the e+piry of the contract till
the actual settlement date plus a mark#up for default
"he margin has to be deposited !ith the e+change !ithin the time notified by the
e+change "he e+change also prescribes categories of securities that !ould be
eligible for a margin deposit, as !ell as the method of valuation and amount of
securities that !ould be re.uired to be deposited against the margin amount
"he procedure for refundIadjustment of margins is also specified by the
e+change from time to time "he e+change can impose upon any particular
trading member or category of trading member any special or other margin
re.uirement 0n failure to deposit marginIs as re.uired under this clause, the
e+changeIclearing house can !ithdra! the trading facility of the trading member
:fter the pay#out, the clearing house releases all margins
U-<)+3 *3)0+-9 E3)7*+725
Do trading member should buy, sell, deal in derivatives contracts in a fraudulent
manner, or indulge in any unfair trade practices including market manipulation
"his includes the follo!ing? if @ffect, take part either directly or indirectly in
transactions, !hich are likely to have effect of artificially, raising or depressing the
prices of spotIderivatives contracts
Indulge in any act, !hich is calculated to create a false or misleading
appearance of trading, resulting in reflection of prices, !hich are not genuine
? &uy, sell commoditiesIcontract on his o!n behalf or on behalf of a person
associated !ith him pending the e+ecution 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
? 9hen acting as an agent, e+ecute a transaction !ith a constituent at a price
other than the price at !hich it !as e+ecuted on the e+change
? @ither take opposite position to an order of a constituent or e+ecute opposite
orders !hich he is holding in respect of t!o constituents e+cept in the manner
laid do!n by the e+change
CLEARING
:s mentioned earlier, Dational Securities Clearing Corporation Fimited
%DSCCF( undertakes clearing of trades e+ecuted on the DCD@$, :ll deals
e+ecuted on the @+change 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 !ith these
regulationsIbye la!s and rules of the e+change
LAST DAY OF TRADING
Fast trading day for a derivative contract in any commodity is the date as
specified in the respective commodity contract If the last trading day as
specified in the respective commodity contract is a holiday, the last trading day is
taken to be the previous !orking day of e+change 0n the e+piry date of
contracts, the trading membersI clearing members have to give delivery
information as prescribed by the e+change from time to time If a trading
memberIclearing member fails to submit such information during the trading
hours on the e+piry date for the contractIthe deals have to be settled as per the
settlement calendar applicable for such deals, in cash#together !ith penalty as
stipulated by the e+change deals entered into through the e+change "he
clearing member cannot operate the clearing account for any other purpose
RULES GOVERNING INVESTOR GRIEVANCES, ARBITRATION
In matters !here the e+change is a party to the dispute, the civil courts at
'umbai have e+clusive jurisdiction and in all other matters, proper courts !ithin
the area covered under the respective regional arbitration center have jurisdiction
in respect of the arbitration proceedings fallingIconducted in that regional
arbitration center
PROCEDURE FOR ARBITRATION:
"he application has to submit to the e+change application for arbitration in
the specified form %)orm Do1I1 along !ith the follo!ing enclosures
1 "he statement of case%containing all the relevant facts about the
dispute and relief sought(
3 "he statement of accounts
2 Copies of members J constituent agreement
8 Copies of the relevant contract notes, invoice and delivery challan
DELIVERY PROCEDURE
"he client should follo! the follo!ing procedure to take delivery of the commodity
1
st
day J &uyerIseller informs the e+change about their intentions
6
th
day J &uyer is re.uired to make payment in accordance to the .uantity
allocated to him
G
th
day J seller is re.uired to deliver the goods at the delivery centers specified
by the
@+change by 1344 noon &uyer can pick up the delivery from 1344 noon to
844pm
5
th
day J "he Payment !ill be released to the seller
COST PHYSICAL DELIVERY
)i+ed Costs -s
Group 8 receipt charges 264
Group 8 'anagerial charges 2444
Group 8 'ovement charges 6444
Packing :9& Cutting charges 644
Valuation Charges 6444
"otal fi+ed cost 12764
Variable cost
Foading Iunloading charges 4
Insurance on flight 416Iper 1444
ESTIMATED MAR'ET
Physical Physical 2"imes 6 "imes
'ultiple
pa
%-sbn(
Per day multipl
e
Per day
%-s
Crs(
Per
day
&ullion 844 1G4 874 744
'etals G44 384 534 1344
:gri 6444 3444 G444 14444
@nergy 6444 3444 G444 14444
"otal 11444 8844 12344 33444
GOLD PROFILE
"he collapse of e.uity markets and the arrival of lo! interest rates have
increased the investor presence in alternative investments such as gold In India,
gold has traditionally played a multi#faceted roleart from being used for
adornment purpose, it has also served as an asset of the last resort and a hedge
against inflation and currency depreciation &ut most importantly, it has most
often been traded as an investment
Gold supply primarily comes from mine production, official sector sales of global
central banks, old gold scrap and net disinvestments of invested gold 0ut of the
total supply of 2754 tons last year, GGM !as from mine production, 34 M from old
gold scrap and 18M from official sector sales Demand globally emanates from
fabrication %je!ellery and other fabrication(, &ar hoarding, Det producer hedging
and Implied investment
Gold continues to occupy a prominent part in rural Indian economy and a
significant part of the rural credit market revolves around bullion as security India
is the largest consumer of gold in the !orld accounting for more than 32M of the
total !orld demand annually :ccording to unofficial estimates, India has more
than 12,444 tonnes of hoarded gold, !hich translates to around -s G,64,444
crore Inspite of its predominant position, especially in the gold market !here
India is the largest importer, India has traditionally been a price seeker in the
global bullion market
&ullion trading in India received a major fillip )ollo!ing the changes in the Gold
Policy announced by the Government of India, in 1;;5 under e+port#import
Policy 1;;5#3443 :s per the policy, scheduled commercial banks are authori/ed
by the -eserve &ank of India %-&I( to import gold and silver for sale in domestic
market !ithout an Import license or surrendering the Special Import Ficense
%SIF( &ullion is imported into India by banks and four designated trading
agencies acting as canali/ing agents and consignees for overseas suppliers,
!ho in turn sell to domestic !holesale traders, fabricators, etc "he price risk is
borne either by the fabricator or the retail consumer "he !holesale traders,
fabricators and investors do not have any effective tool to hedge their price risk in
gold I silver
India being the largest consumer of gold in the !orld, !ith minimal domestic
supply, the demand is met mainly from imports
Gold is the oldest precious metal kno!n to man "herefore, it is a timely subject
for several reasons It is the opinion of the more objective market e+perts that the
traditional investment vehicles of stocks and bonds are in the areas of their all#
time highs and may be due for a severe correction
"o fully appreciate !hy 7,444 years of e+perience say <gold is foreverU, !e
should revie! !hy the !orld reveres !hat @nglandVs most famous economist,
Kohn 'aynard Ceynes, cynically called the <barbarous relicU
9hy gold is Ugood as goldU is an intriguing .uestion ,o!ever, !e think that the
more pragmatic ancient @gyptians !ere perhaps more accurate in observing that
goldVs value !as a function of its pleasing physical characteristics and its scarcity
• Gold is primarily a monetary asset and partly a commodity
• 'ore than t!o thirds of goldVs total accumulated holdings account as
Vvalue for investmentV !ith central bank reserves, private players and high#carat
Ke!ellery
• Fess than one third of goldVs total accumulated holdings is as a
VcommodityV for Ke!ellery in 9estern markets and usage in industry
• "he Gold market is highly li.uid and gold held by central banks, other
major institutions and retail Ke!ellery keep coming back to the market
• Due to large stocks of Gold as against its demand, it is argued that the
core driver of the real price of gold is stock e.uilibrium rather than flo!
e.uilibrium
• @conomic forces that determine the price of gold are different from, and in
many cases opposed to the forces that influence most financial assets
• South :frica is the !orldVs largest gold producer !ith 2;8 tons in 3441,
follo!ed by BS and :ustralia
• India is the !orldVs largest gold consumer !ith an annual demand of 744
tons
(,3.0 G,.0 M)3D2*5
• Fondon as the great clearing house
• De! Nork as the home of futures trading
• Lurich as a physical turntable
• Istanbul, Dubai, Singapore and ,ong Cong as door!ays to
important
• consuming regions
• "okyo !here "0C0' sets the mood of Kapan
• 'umbai under IndiaVs liberali/ed gold regime
TABLE -
I-0+) +- (,3.0 G,.0 I-0;5*31
%-ounded )igures( India %In "ons( 9orld %In "ons( M Share
"otal Stocks 12444 186444 ;
Central &ank holding 844 37444 18
:nnual Production 3 3G44 447
:nnual -ecycling 144#244 1144#1344 12
:nnual Demand 744 2544 33
:nnual Imports G44 ### ###
:nnual @+ports G4 ### ###
Indian Gold 'arket
• Gold is valued in India as a savings and investment vehicle and is the
second preferred investment after bank deposits
• India is the !orldVs largest consumer of gold in je!ellery as investment
• In Kuly 1;;5 the -&I authori/ed the commercial banks to import gold for
sale or loan to je!ellers and e+porters :t present, 12 banks are active in the
import of gold
• "his reduced the disparity bet!een international and domestic prices of
gold from 65 percent during 1;7G to 1;;1 to 76 percent in 3441
• "he gold hoarding tendency is !ell ingrained in Indian society
• Domestic consumption is dictated by monsoon, harvest and marriage
season Indian je!ellery offtake is sensitive to price increases and even more so
to volatility
• In the cities gold is facing competition from the stock market and a !ide
range of consumer goods
• )acilities for refining, assaying, making them into standard bars in India,
as compared to the rest of the !orld, are insignificant, both .ualitatively and
.uantitatively
'arket 'oving )actors
• :bove ground supply from sales by central banks, reclaimed scrap and
official gold loans
• Producer I miner hedging interest
• 9orld macro#economic factors # BS Dollar, Interest rate
• Comparative returns on stock markets
• Domestic demand based on monsoon and agricultural output
F32A;2-71 D+5*> ,< G,.0 L,-0,- F+6+-9 V,.)*+.+*1 <3,/ 1""5 *+.. 0)*2
Percentage Change W 6M 3 # 6 M X 3M
Daily
Dumber of times 8 68 3185
Percentage times 43 38 ;58
9eekly
Dumber of times 2 G3 25G
Percentage times 45 181 762
&iggest price movement since 1;;6
&et!een September 38 and 0ctober 6, 1;;;, daily prices !itnessed a rally of
more than 31 M, based on surprised announcement by 16 @uropean central
banks of a five#year suspension on all ne! sales of gold from their reserves
(81 I-425* +- G,.0
:dding gold to a portfolio introduces an entirely different asset class# a tangible E
real asset !hich increases the portfolioVs degree of diversification
E<<27*+42 E,3*<,.+, 0+4235+<+23
• :s depicted above, !hile the overall return of a portfolio !ithout gold is
18M, that of a portfolio !ith gold is over 1GM ,ence an allocation of physical
gold in a financial portfolio not just helps reduce the impact of the volatility
created by the other asset classes like e.uity, bonds etc, but also increases the
average return over a period of time
• : financial portfolio containing gold is generally more robust because it
improves the stability and predictability of better average returns
Superior to other alternative asset classes
• Gold is the most li.uid asset class due to its universal acceptance as an
alternative to currency, and also because globally, the gold market is functional
38+5
• Same cannot be said about any other asset class as they take much
longer time to li.uidate %from 1 day to up to 2#8 months(
@ffective hedge against currency risk
• Due to its inverse relationship to dollar, gold has al!ays proved to be an
effective hedge over a period of time
@ffective hedge against Inflation
• : study conducted by 9GC in BC sho!s that one ounce of Gold !ould
consistently purchase the same amount of goods E services as it !ould have
done 844 years ago, making it the perfect hedge against inflation over a long
period of time
O*823 R2)5,-5
• 'ore li.uid as compared to the other asset classes Gold can be bought,
sold or traded globally
• Performance of gold not linked to performance of any company, industry
or government
• Gold needs no professional manager unlike mutual funds
• Gold is an asset, !hich is not simultaneously a liability, unlike stocks
• It doesnVt re.uire political E social stability to survive, in fact it thrives
under !orst societal conditions
• Gold doesnVt ever loose its intrinsic value
Inspite of the gro!ing demand for gold in India, average retail household has
seldom considered <investing in gold= because of the absence of an efficient and
effective platform 'C$ bridges this re.uirement by introducing an ideal
investment platform for investment in gold by retail household <i#gold =
(8)* +5 +-9,.0G
Ui#gold= is a platform !hich facilitates intelligent investment in gold !ith an option
of Physical or Demat holding of gold
F2)*;325 ,< +-9,.0
• "ransparent pricing
• :ssured .uality E purity
• 0ption of Demating
• Do risk of storage
• Simple process
A04)-*)925 *, )- I-425*,3
• :n ideal platform for systematic investment in gold
• "ransparent screen based price at par !ith the prevailing spot price
• 0ptions of loan against Demat gold from &anksI)inancial Institutions
• Convenience of buying gold at the investors discretion # !ithout visiting
the outlet unlike today
• :ssured Ouality E Purity 38 k,;;6 E ;;; fineness gold bars imported from
F&': approved overseas suppliers
• Delivery at 8 locations :hmedabad, Delhi, Colkata E 'umbai
A04)-*)925 *, ) J2C2..23
• : platform to trade in physical gold !ith shorter E 144M guaranteed
delivery cycle vis a vis futures market
• "ransparent screen based price at par !ith the prevailing spot price
• @fficient distribution system %from the custodian to the end user(
• :ssured Ouality E Purity # 38 k, ;;6 E ;;; fineness gold bars F&':
approved
• Seamless platform %buying E selling( for transaction
• @asily accessible through an e+isting stock broker !ho is a member of
'C$
• Delivery at 8 locations :hmedabad, Delhi, Colkata E 'umbai
R2A;+5+*25 <,3 B;1+-9 +-9,.0
• Commodity Demat account !ith DSDFICDSF
• :ccount !ith a member broker of 'C$
• &ank account !ith any one clearing banks of 'C$
H,C 0,25 +* C,3DG
Day 1#G # &uy Isell depending on margin money !ith the brokerIe+change based
on 'ark to 'arket %'"'(
Day 5 # Intimate the status of their respective open position to &uyers E Sellers
Day 7 # Seller members 'BS" deposit the physical gold in the Group 8 vault I
deliver through demat form
Day; # Pay#in of funds by &uyer members against their delivery commitments
%obligation(
Day ; # Pay#out of commodity
Physical delivery of gold %Docs> :uthorisation form filled and signed along !ith
the photograph of the investorIauthori/ed person of the broker, proof of identity
%photo id card(
Demat and hold in demat account %Docs> Commodity Deposit )orm CD) and
0riginal :llocation Fetter(
C,5*5 5*3;7*;32
&rokerage %&uyIsell( 464 J 144M of transaction value
Service "a+ on brokerage 1338M on brokerage
Demat E -emat -s144I# 344I#per transaction
Custody E Insurance -s5,344 pa per %1kg(
V:" 1M of transaction value
Sales "a+ agency charge 464M # 144M %re.uired for selling
physical gold(
Demat and hold in demat account %Docs> Commodity Deposit )orm CD) and
0riginal :llocation Fetter(
C,5*5 5*3;7*;32
&rokerage %&uyIsell( 464 J 144M of transaction value
Service "a+ on brokerage 1338M on brokerage
Demat E -emat -s144I# 344I#per transaction
Custody E Insurance -s5,344 pa per %1kg(
V:" 1M of transaction value
Sales "a+ agency charge 464M # 144M %re.uired for selling
physical gold(
T)6 T32)*/2-*
(2).*8 T)6
• Investment upto -s16 lacs during a financial year is e+empted
• Investment W -s16 lacs !ill attract 1M of the value of assets %including
gold( as on 21st 'arch of every year
C)E+*). 9)+-5 *)6
• Short term if bought and sold !ithin 2G months at the applicable ta+ rate
• Fong term if sold after 2G months at the applicable ta+ rate
ANALYSIS
OBH27*+42: "he objective of the analysis is to evaluate the profitIloss position of
hedger "his analysis is done based on the sample data "he sample is taken as
Gold commodity of December to Kanuary prices "he delivery unit is 1 kg
"rading unit is 144 gm OuotationIbase value -sper 14 gms 0f Gold !ith
;;;;; finess "ick si/e is 6 paise :s the commodity Gold is volatile in nature, it
is chosen as a sample for analysis "he spot price and futures price is taken from
various ne!s papers Fike economic times, business standard and business line
0f course, from the DCD@$ %Dational Commodity E Derivatives @+change
Fimited(
L+/+*)*+,-5:
1( "he sample is chosen as commodity future contract gold 144gm gold
3( "he study is confined to December 3445 to Kanuary 3447 month only
2( "he data gathered is completely restricted to the spot and future prices of
commodity gold 144 gms 0f December to Kanuary 35, 3447 and hence cannot
be taken universally
8( 0ur study is limited to the trading strategies )or hedging, this includes long
hedge and short hedge
G,.0 F;*;32 C,-*3)7* SE27+<+7)*+,-5
"ype of Contract )utures Contract Specifications
Dame of Commodity Gold
"icker symbol G0FD144'B'
"rading system DCD@$Vs "rading System
&asis
@+#'umbai inclusive of Customs Duty and 0ctroi,
e+cluding Sales "a+IV:"
Bnit of trading 144 grams
Delivery unit 144 grams
OuotationIbase value -s per 14 Grams of Gold !ith ;;6 fineness
"ick si/e -e 1
Ouality specification
Bp to ;;;; fineness bearing a serial number and
identifying stamp of a refiner approved by the
@+change
Fist of approved refiners is available at the follo!ing
B-F> !!!ncde+comYdo!nloadsYrefinersZgoldpdf
Ouantity variation Done
Delivery center 'umbai
:dditional delivery centres :hmedabad
"rading hours :s per directions of the )or!ard 'arkets Commission
from time to time, currently #
'ondays through )ridays >
14>44 :' to 11>24 P'H
Saturdays >
14>44 :' to 43>44 P'
0n the e+piry date, contracts e+piring on that day !ill
not be available for trading after 6 P' "he @+change
may vary the above timing !ith due notice
Due date I @+piry Date
34
th
day of delivery month
If 34th happens to be a holiday, a Saturday or a
Sunday then the due date shall be immediately
preceding trading day other than a Saturday of the
@+change
Delivery specification
Bpon e+piry of the contracts all the outstanding
positions should result in compulsory delivery :
penalty of minimum 6 M %of final settlement price(
!ould be imposed on longs and shorts if they fail to
meet their delivery obligation
Closing of Contracts
Bpon the e+piry of the contract all the outstanding open
position should result in compulsory delivery
0pening of Contracts
"rading in a far month contract !ill open on the 14th
day of the month in !hich near month contract is due to
e+pire If the 14th happens to be a non#trading day,
contracts !ould open on the ne+t trading day
Do of active contracts
Contracts !ould be opened as per the launch calendar
given belo!
Price limit Daily price fluctuation limit is %TI#( 8M If the trade hits
the prescribed daily price limit there !ill be a cooling off
period for 16 minutes "rade !ill be allo!ed during this
cooling off period !ithin the price band of %TI#( 8M
"hereafter the price band !ould be raised by another
64M of the e+isting limit ie %T I #( 3M
Do trade I order shall be permitted during the day
beyond the revised limit of %T I #( GM e+cept such
further variations as may be permitted by the
regulators
0n the first day of any ne! contract, the limit on daily
price fluctuation !ill be reckoned !ith reference to the
opening price 0n the second and subse.uent days,
the daily price fluctuation limit !ill be reckoned !ith
reference to the mark#to#market rate of the previous
closing day
Position limits
'ember!ise > G '" or 16 M of market !ide open
position, !hichever is higher Client#!ise # 3 '"
"he above limits !ill not apply to bonafide hedgers )or
bonafide hedgers the @+change !ill decide the limits
on a case#to#case basis
Ouality allo!ance%for
Delivery(
Gold bars of ;;6 I ;;;; fineness
: premium !ill be given for fineness above ;;6 "he
settlement price for more than ;;6 fineness !ill be
calculated at %:ctual finenessI;;6( H )inal Settlement
Price
Special 'argin
In case of additional volatility, a special margin of at
such other percentage, as deemed fit, !ill be imposed
immediately on both buy and sell side in respect of all
outstanding positions, !hich !ill remain in force for
ne+t 3 days, after !hich the special margin !ill be
rela+ed
L);-78 C).2-0)3> G,.0 1$$ G3)/5
Faunch Date Contract @+piring in
31st Dovember 3445
December 3445, Kanuary 3447, )ebruary
3447
December 3445 'arch 3447
Kanuary 3447ril 3447
)ebruary 3447 'ay 3447
'arch 3447 Kune 3447
ril 3447 Kuly 3447
'ay 3447 :ugust 3447
Kune 3447 September 3447
Kuly 3447 0ctober 3447
:ugust 3447 Dovember 3447
September 3447 December 3447
N,*2: Faunch dates for contracts launched in December 3445 and thereafter
!ould be 14th of the month in !hich the near month contract is due to e+pire and
if the 14th happens to be a trading holiday at the @+change, the near contract
!ould be launched on the ne+t trading day
H209+-9
'any participants in the commodity futures market are hedgers "hey use the
futures market to reduce a particular risk that they face "his risk might relate to
the price of !heat or oil or any other commodity that the person deals in "he
classic hedging e+ample is that of !heat farmer !ho !ants to hedge the risk of
fluctuations in the price of !heat around the time that his crop is ready for
harvesting &y selling his crop for!ard, he obtains a hedge by locking in to a
predetermined price ,edging does not necessarily improve the financial
outcome? indeed, it could make the outcome !orse 9hat it does ho!ever is, that
it makes the outcome more certain ,edgers could be government institutions,
private corporations like financial institutions, trading companies and even other
participants in the value chain, for instance farmers, e+tractors, ginners,
processors etc, !ho are influenced by the commodity prices
T1E25 ,< 8209+-9
1( Fong hedge
3( Short hedge
L,-9 82092
,edges that involve taking a long position in a futures contract are kno!n as long
hedges : long hedge is appropriate !hen a company kno!s it !ill have to
purchase a certain asset in the future and !ants to lock in a price no!
S8,3* 82092
: short hedge is a hedge that re.uires a short position in futures contracts :s !e
said, a short hedge is appropriate !hen the hedger already o!ns the asset, or is
likely to o!n the asset and e+pects to sell it at some time in the future )or
e+ample, a short hedge could be used by a cotton farmer !ho e+pects the cotton
crop to be ready for sale in the ne+t t!o months : short hedge can also be used
!hen the asset is not o!ned at the moment but is likely to be o!ned in the
future )or e+ample, an e+porter !ho kno!s that he or she !ill receive a dollar
payment three months later ,e makes a gain if the dollar increases in value
relative to the rupee and makes a loss if the dollar decreases in value relative to
the rupee : short futures position !ill give him the hedge he does
CONCLUSION
• "he trading in commodity derivatives started on Dec J 3442
• 9ithin a short span of 2 years the trading volume in commodity derivatives
increased in a rapid manner, no! it going to e.uali/e !ith the financial
derivatives trading volumes
• )irst derivatives emerged as hedging products in commodities
• "hese commodities are the risk management instruments !hich transfers
the pricing risks to other parties
• Internationally, commodity derivatives are e+change # traded
• In the bullish market, the investors can earn profits by buying the
commodity futures
• In the bearish market, the investors can earn profits by selling the
commodity futures
• "he hedgers can transfer their risks to other parties by !ays of long hedge
and short hedge
• "he speculators can build large positions !ith little margins by !ay of
leverage and their profitIloss potential is unlimited
• "he arbitragers can also earn risk less profits by !ays of cash Jand#carry
arbitrage and reverse cash#in#carry arbitrage
• "hese commodity products are very much ne! to India
• "he S@&I is taking necessary actions to create a!areness into the
investors
RECOMMENDATIONS
• "he commodities are very comple+ financial instruments ,ence the
investor should take at most care !hile trading
• In India, the commodities only have commodity futures, and the options in
commodities should be introduced
• "he S@&I and the Stock @+changes should take more actions %investor*s
a!areness programmes( to create a!areness and kno!ledge in bet!een the
investors
• :ll the persons and intermediaries associated !ith the commodity
derivative markets must fulfill the minimum education %DC)'(
• &y using the trading strategies %long hedge and short hedge( the
producers can transfers the pricing risk
• "he agree commodity producers can get better prices for their production
in the market by !ay of efficient price discovery !ith the help of future prices
• &y using these commodity futures the farmers can benefit by !ay of short#
selling
• &y using commodity futures inventory risk !ill be minimi/ed
BIBLIOGRAPHY
(EBSITES:
!!!!ikipediacom
!!!investopediacom
!!!googlecom
doc_124088912.doc
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, bonds and real estate, commodities are the best option.
A STUDY ON
“COMMODITIES TRADING-INVESTMENT AND
SPECULATION”
SUBMITTED IN THE PARTIAL FULFILMENT OF
THE REQUIREMENT OF
“MASTER OF BUSINESS ADMINISTRATION” IN
DECLARATION
I here by declare that the project report on “COMMODITIES
TRADING-INVESTMENT AND SPECULATION” has been submitted
under the guidance of XXXX, Professor, Department of Commerce,
Vivekananda School of Post Graduate Studies, Panjagutta
I further declare that it is an original !ork done by me as a part
of my academic course and has not been submitted else!here for
any degree or diploma "he observations and conclusions !ritten in
this report are based on the data collected by me
XXXX
ACKNOWLEDGEMENT
I take this opportunity to thank all those !ho have been of help to me
in the completion of this project
I !ould like to appreciate the guidance and co#operation provided to
me by our project guide $$$$ %faculty of &usiness 'anagement( in
the completion of this project
I am also grateful to $$$, Director $$$ and all the faculty members
!ho have directly or indirectly helped me in preparing this project
report
CONTENTS
CHAPTERS PAGE NO:
I INTRODUCTION 5-15
II INDUSTRY PROFILE 16-17
III NEED FOR THE STUDY
OBJECTIVES, METHODOLOGY LIMITATIONS 1!-1"
IV COMMODITY FUTURES CONTRACT #$-#6
V COMMODITY TRADING #7-%&
VI PARTICIPANTS IN COMMODITY MAR'ET %%-%!
VII REGULATORY FRAME(OR' FOR %"-71
COMMODITY TRADING IN INDIA
VIII ANALYSIS 7#-77
X CONCLUSIONS RECOMMENDATIONS 7!-7"
XI BIBLIOGRAPHY !$
INTRODUCTION
Indian markets have recently thro!n open a ne! avenue for retail
investors and traders to participate commodity derivatives )or those !ho !ant
to diversify their portfolios beyond shares, bonds and real estate, commodities
are the best option
"ill some months ago, this !ouldn*t have made sense )or retail investors
could have done very little to actually invest in commodities such as gold and
silver or oilseeds in the futures market "his !as nearly impossible in
commodities e+cept for gold and silver as there !as practically no retail avenue
for pumping in commodities
,o!ever, !ith the setting up of three multi#commodity e+changes in the
country, retail investors can no! trade in commodity futures !ithout having
physical stocks
Commodities actually offer immense potential to become a separate asset
class for market#savvy investors, arbitrageurs and speculators -etail investors,
!ho claim to understand the e.uity markets, may find commodities an
unfathomable market &ut commodities are easy to understand as far as
fundamentals of demand and supply are concerned -etail should understand
the risk advantages of trading in commodities futures before taking a leap
,istorically, pricing in commodities futures has been less volatile compared !ith
e.uity and bonds, thus providing an efficient portfolio diversification option
In fact, the si/e of the commodities markets in India is also .uite
significant 0f the country*s GDP of -s12,34,524 crore% -s12,3452 billion(,
commodities related
% and dependent( industries constitute about 67 per cent
Currently, the various commodities across the country clock an annual
turnover of -s1,84,444 crore % -s1,844 billion( 9ith the introduction of futures
trading, the si/es of the commodities market gro! many folds here on
DEFINITION OF COMMODITIES
:ny product that can be used for commerce or an article of commerce
!hich is traded on an authori/ed commodity e+change is kno!n as commodity
"he article should be movable of value, something !hich is bought or sold and
!hich is produced or used as the subject or barter or sale In short commodity
includes all kinds of goods )or!ard Contracts %-egulation( :ct %)C-
, 1;63defines <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 allo!ed for commodity trading
recogni/ed under the )C-: "he national commodity e+changes, recogni/ed by
the Central Government, permits commodities !hich include precious %gold and
silver( and non#ferrous metals> cereals and pulses? ginned and un#ginned cotton?
oilseeds, oils and oilcakes? ra! jute and jute goods? sugar and gur?potatoes and
onions? coffee and tea? rubber and spices @tc
In the !orld of business, a commodity is an undifferentiated product
!hose market value arises from the o!ner*s right to sell rather than to use
@+ample commodities from the financial !orld include oil %sold by the barrel(,
!heat, bulk chemicals such as sulfuric acid and even pork bellies
NEED OF COMMODITY MAR'ET IN INDIA
:chieving hedging efficiency is the main reason to opt for futures
contracts )or instance, in )ebruary, 3445, India had to pay A 63 per barrel more
for importing oil than !hat they had to pay a !eek ago "he utility of a futures
contact for hedging or risk management presupposes parallel or near#parallel
relationship bet!een the spot and futures prices over time In other !ords, the
efficiency of a futures contract for hedging essentially envisages that the prices in
the physical and futures markets move in close unison 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
0f course, such a price relationship bet!een the spot and futures markets
is subject to the amount of carrying or storage costs till the maturity month of the
futures contract "heoretically % and ideally(, in a perfectly competitive market
!ith surplus supplies and abundant stocks round the year, the futures price !ill
e+ceed the spot price by the cost of storage till the maturity of the futures
contract &ut 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 /ero during the
delivery month !hen the spot and futures prices virtually converge "he
efficiency of a futures contract for hedging depends on the prevalence of such an
ideal price relationship bet!een the spot and futures markets
COMMODITIES EXCHANGES
: brief description of commodity e+changes are those !hich trade in
particular commodities, neglecting the trade of securities, stock inde+ futures and
options etc,
In the middle of 1;
th
century in the Bnited States, businessmen began
organi/ing market forums to make the buying and selling of commodities easier
"hese central market places provided a place for buyers and sellers to meet, set
.uality and .uantity standards, and establish rules of business :gricultural
commodities !ere mostly traded but as long as there are buyers and sellers, any
commodity can be traded
"he major commodity markets are in the Bnited Cingdom and in the BS:
In India there are 36 recogni/ed future e+changes, of !hich there are three
national level multi#commodity e+changes :fter a gap of almost three decades,
Government of India has allo!ed for!ard transactions in commodities through
0nline Commodity @+changes, a modification of traditional business kno!n as
:dhat and Vayda Vyapar to facilitate better risk coverage and delivery of
commodities
",@ ",-@@ @$C,
G@S :-@? Dational Commodity E Derivatives @+change Fimited % DCD@$(
? 'ulti Commodity @+change of India Fimited % 'C$(
? Dational 'ulti#Commodity @+change of India Fimited % D'C@IF(
:ll the e+changes have been set up under overall control of )or!ard 'arket
Commission %)'C( of Government of India
N)*+,-). C,//,0+*1 D23+4)*+425 E678)-925 L+/+*20 : NCDEX (
Dational Commodity E Derivatives @+changes Fimited %DCD@$( located in
'umbai is a public limited company incorporated on
ril 32, 3442 under theCompanies :ct, 1;6G and had commenced its operations on December 16,
3442 "his is the only commodity e+change in the country promoted by national
level institutions It is promoted by ICICI &ank Fimited, Fife Insurance
Corporation and Dational &ank for :griculture and -ural Development
%D:&:-D( and Dational Stock @+change of India Fimited %DS@( It is a
professionally managed online multi commodity e+change DCD@$ is regulated
by )or!ard 'arket Commission and is subjected to various la!s of the land like
the Companies :ct, Stamp :ct, Contracts :ct, )or!ard Commission
% -egulation( :ct and H various other legislations
M;.*+ C,//,0+*1 E678)-92 ,< I-0+) L+/+*20 : MCX=
,ead.uartered in 'umbai 'ulti Commodity @+change of India Fimited
%'C$(, is an independent and de#mutualised e+change !ith a permanent
recognition from Government of India Cey shareholders of 'C$ are )inancial
"echnologies % India( Ftd, State &ank of India, Bnion &ank of India, Corporation
&ank, &ank of India and Canara &ank 'C$ facilitates online trading, clearing
and settlement
:ll the e+changes have been set up under overall control of )or!ard
'arket Commission %)'C( of Government of India
Commodity e+change in India plays an important role !here the prices of
any commodity are not fi+ed, in an organi/ed !ay @arlier only the buyer of
produce and its seller in the market judged upon the prices 0thers never had a
say "oday, commodity e+changes are purely speculative in nature &efore
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
: big difference bet!een a typical auction, !here a single auctioneer
announces the bids, and the @+change is that people are not only competing to
buy but also to sell &y @+change rules and by la!, no one can bid under a
higher bid, and no one can offer to sell higher than some one else*s lo!er offer
"hat 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
Dational &oard of "rade
'ulti Commodity @+change of India
N)*+,-). C,//,0+*1 D23+4)*+425 E678)-925 ,< I-0+) L*0>,
Commodity @+change Products
Dational board of trade, Indore Soya, mustard
Dational multi commodity e+change, :hmedabad 'ultiple
:hmedabad commodity e+change Castor, cotton
-ajadhani 0il E 0il seeds 'ustard
Vijai &eopar Chamber Ftd, 'u//affarnagar Gur
-ajkot seeds, 0il E bullion e+change Castor, groundnut
IPS":, Cochin Pepper
Chamber of commerce, ,apur Gur, mustard
&hatinda 0m and 0il @+change Gur
0ther % mostly inactive(
C,//,0+*1 E678)-925 R29+5*2320 +- I-0+)
Commodity @+change Products "raded
&hatinda 0m E 0il @+change
Ftd,
Gur
"he &ombay commodity
@+change Ftd
Sunflo!er 0il
Cotton % Seed and 0il(
Safflo!er % Seed , 0il and 0il Cake(
Groundnut % Dut and 0il(
Castor 0il, Castor seed
Sesamum % 0il and 0ilcake(
-ice bran, rice bran oil and oil cake
Crude palm oil
"he -ajkot Seeds 0il E &ullion
'erchants :ssociation Ftd
Groundnut 0il, Castro Seed
"he Canpur Commodity
@+change Ftd,
-apeseed I 'ustard seed oil and cake
"e 'eeerut :gro commodities
@+change Co, Ftd
Gur
"he Spices and 0ilseeds
e+change Ftd, Sangli
"urmeric
:hmedabad Commodities
@+change Ftd
Cottonseed, castor seed
Vijay &eopar Chamber Ftd,
'u/affarnagr
Gur
India Pepper E Spice "rade
:ssociation, Cochi
Pepper
-ajadhani 0ils and 0il seeds
@+change Ftd,Delhi
Gur, -apeseed I 'ustard Seed Sugar Grade J
'
Dational &oard of "rade, Indore
-apeseed I 'ustard Seed I 0il I Cake
Soya bean I 'eal I 0il I Crude Palm 0il
"he Chamber of Commerce,
,apur
Gur, -apeseed I 'ustard seed
"he @ast India Cotton
:ssociation, 'umbai
Cotton
"he central India Commercial
@+change Ftd G!aliar
Gur
"he east India Kute E ,essain
@+change Ftd, Colkata
,essain, Sacking
)irst Commodity @+change of
India Ftd, Cochi
Copra, Coconut 0il E Copra Cake
"he Coffee )utures @+change
India Ftd &angalore
Coffee
Dational 'ulti Commodity
@+change of India Ftd, I
:hmedabad
Gur -&D Pamolien
Crude Palm 0il, Copra
-apeseed I 'ustard Seed, Soy &ean
Cotton % Seed, 0il, 0il Cake(
Safflo!er % Seed, 0il, and 0il cake(
Ground nut % Seed, 0il, and 0il cake(
Sugar, Sacking, Gram
Coconut % 0il and 0ilcake(
Castor % 0il and 0ilcake(
Sesamum % Seed, 0il, and 0il cake(
Finseed % Seed, 0il, and 0il cake(
-ice &ran 0il, Pepper, Guar seed :luminum
ingots, Dickel, tin Vanaspati, -ubber, Copper,
Linc, Fead
Dational commodity E
Derivatives @+change Fimited
Soy &ean, -efined Soy oil, 'ustard Seed
@+peller 'ustard 0il
-&D Palmolein Crude Palm 0il
'edium staple cotton
Fong Staple Cotton
Gold, Silver
C)58 C,//,0+*1
: cash commodity must meet three basic conditions to be successfully traded in
the futures market>
1 It has to be standardi/ed and, for agricultural and industrial commodities,
must be in a basic, ra!, unprocessed state "here are futures contracts on
!heat, but not on flour 9heat is !heat %although different types of !heat have
different futures contracts( "he miller !ho needs !heat futures to help him
avoid losing money on his flour transactions !ith customers !ouldn*t need flour
futures : given amount of !heat yields a given amount of flour and the cost of
converting !heat to flour is fairly fi+ed hence predictable
3 Perishable commodities must have an ade.uate shelf life, because delivery on
a futures contract is deferred
2 "he cash commodity*s price must fluctuate enough to create uncertainty, !hich
means both rise and potential profit
Bnlike a stock, !hich represents e.uity in a company and can be held for along
time, if not indefinitely, futures contracts have finite lives "hey are primarily used
for hedging commodity price#fluctuation risks or for taking advantage of price
movements, rather than for the buying or selling of the actual cash commodity
"he !ord <contract= is used because a futures contract re.uires delivery of the
commodity in a stated month in the future unless the contract is li.uidated before
it e+pires
"he buyer of the futures contract %the party !ith a long position( agrees on a
fi+ed purchase price to buy the underlying commodity % !heat, gold or "#bills, for
e+ample( form the seller at the e+piration of the contract "he seller of the
futures contract %the party !ith a short position( agrees to sell the underlying
commodity to the buyer at e+piration at the fi+ed sales price :s time passes, the
contract*s price changes relative to the fi+ed price at !hich the trade !as
initiated "his creates profits or losses for the trader
In most cases, delivery never takes place Instead, both the buyer and the seller,
acting independently of each other, usually li.uidate their long and short positions
before the contract e+pires> the buyer sell futures and the seller buys futures
"he &retton 9oods system of fi+ed e+change rates
"he chief features of the &retton 9oods system !ere an obligation for each
country to adopt a monetary policy that maintained the e+change rate of its
currency !ithin a fi+ed value#plus or minus one percent J in terms of gold? and
the ability of the I') to bridge temporary imbalances of payments
"he <pegged rate= or <par value= currency regime
9hat emerged !as the <pegged rate= currency regime 'embers !ere re.uired
to establish a parity of their national currencies in terms of gold %a <peg=( and to
maintain e+change rates !ithin plus or minus 1M of parity % a <band=( by
intervening in their foreign e+change markets %that is, buying or selling foreign
money(
"he <reserve currency=
In practice, ho!ever, since the principal < -eserve currency= !ould be the BS
dollar, this meant that other countries !ould pet their currencies to the BS dollar,
and J once convertibility !as restored J !ould buy and sell BS dollars to keep
market e+change rates !ithin plus or minus 1M of parity "hus, the BS dollar
took over the role that gold had played under the gold standard in the
international financial system
'ean!hile, in order to bolster faith in the dollar, the BS agreed separately to
link the dollar to gold at the rate of A 26 per ounce of gold 'ember countries
could only change their par value !ith I') approval, !hich !as contingent on
I') determination that its balances of payments !as in a <fundamental
dise.uilibrium=
&>1INDUSTRY PROFILE
Dational Commodity and Derivatives @+change Fimited %DCD@$( is a
professionally managed on#line multi commodity e+change promoted by ICICI
&ank Fimited %ICICI &ank(, Fife Insurance Corporation of India %FIC(, Dational
&ank for :griculture and rural Development %D:&:-D( and Dational Stock
@+change of India Fimited %DS@( Canara &ank %PD&(, C-ISIF Fimited %formerly
the Credit -ating Information Services of India Fimited(, Goldman Sachs, Indian
)armers )ertiliser Cooperative Fimited %I))C0( and Punjab Dational &ank by
subscribing to the e.uity shares have joined the initial promoters as shareholders
of the @+change DCD@$ is the only commodity e+change in the country
promoted by national level institutions "his uni.ue parentage enables it to offer a
bou.uet of benefits, !hich are currently in short supply in the commodity
markets "he institutional promoters and shareholders of DCD@$ are prominent
players in their respective fields and bring !ith them institutional building
e+perience, trust, nation!ide reach, technology and risk management skills
DCD@$ is a public limited company incorporated on
ril 32, 3442 under theCompanies :ct, 1;6G It obtained its certificate for commencement of &usiness
on 'ay ;, 3442 It commenced its operations on December 16, 3442
DCD@$ is a nation#level, technology driven de#mutualised on#line commodity
e+change !ith an independent &oard of Directors and professional management
J both not having any vested interest in commodity markets It is committed to
provide a !orld#class commodity e+change platform for market participants to
trade in a !ide spectrum of commodity derivatives driven by best global
practices, professionalism and transparency DCD@$ is regulated by )or!ard
'arkets Commission DCD@$ is subjected to various la!s of the land like the
)or!ard Contracts %-egulation( :ct, Companies :ct, Stamp :ct, Contract :ct and
various other legislations
DCD@$ is located in 'umbai and offers facilities to its members about 664
centres throughout India "he reach !ill gradually be e+panded to more centres
DCD@$ currently facilities trading of 65 commodities J
A93+7;.*;32
&arley, Cashe!, Castor seed, Chana, Chilli, Coffee J :rabica, Coffee
J -obusta, Crude Palm 0il, Cotton Seed 0ilcake, @+peller 'ustard 0il,
Groundnut %in shell(, Groundnut @+peller 0il, Guar gum, Guar Seeds, Gur, Keera,
Kute sacking bags, Indian Parboiled -ice, Indian Pusa &asmati -ice, Indian
"raditional &asmati -ice, Indian -a! -ice, Indian 376 mm Cotton, Indian 21 mm
Cotton, 'asoor Grain &old, 'edium Staple Cotton, 'entha 0il, 'ulberry Green
Cocoons, 'ulberry -a! Silk, 'ustard Seed, Pepper, Potato, -a! Kute,
-apeseed#'ustard Seed 0ilcake, -&D Palmolein, -efined Soy 0il, -ubber,
Sesame Seeds, Soya bean, Sugar, Nello! Soybean 'eal, "ur, "umeric, Brad, V
J 5;5 Capas, 9heat, Nello! Peas, Nello! -ed 'ai/e
M2*).5
:luminium Ingot, @lectrolytic Copper Cathode, Gold, 'ild Steel Ingots, Dickel
Cathode, Silver, Sponge Iron, Linc Ingot
@nergy
&rent Crude 0il, )urnace 0il
:t subse.uent phases trading in more commodities !ould be facilitated
'ulti Commodity @+change %'C$( is an independent commodity e+change
based in
India It !as established in 3442 and is based in 'umbai It has an average daily
turnover of around BSA166 billion 'C$ offers futures trading in :gricultural
Commodities, &ullion,)errous E Don#ferrous metals, Pulses, 0ils E 0ilseeds,
@nergy,
NEED FOR THE STUDY
"he study of commodity is undertaken to analy/e the trading
Practices !ith special reference to commodity as tool of risk
'anagement techni.ues
OBJECTIVES
• "o study the concepts of commodities "rading in India
• "o study of "he Various "rends In Commodity "rading
• "o Study "he -ole of Commodities In Indian )inancial
'arkets
• "o study In detail "he -ole of )utures :nd )or!ards
• "o analy/e the present situation of the commodities in
Indian market and suggest for any improvements there
after
METHODOLOGY
"o achieve the object of studying the commodities market in stock market data
have
been collected -esearch
methodology carried for this study is purely from Secondary data from various
!eb sites mentioned belo!
9@&SI"@S>
!!!!ikipediacom
!!!investopediacom
!!!googlecom
LIMITATIONS OF THE STUDY
"he study is limited to <Commodity "rading J Investment and Speculation= in the
Indian conte+t
1 "he study can not say as totally perfect as it is subjected to any alteration
3 "he study is not based on the international perspective of
commodity markets It is limited to national level only
5>1 COMMODITY FUTURES CONTRACT
Commodity )uture "rading is regulated by the for!ard 'arket Commission and
commodity future Contracts are regulated under the )'C :ct 1;;6
@+change traded commodity futures contracts are traded of
specific commodity to be delivered at the contracted price Irrespective of any
changes of market price &ut both buyers and sellers are allo!ed to li.uidate the
contract by cash settlement of price differences bet!een the contracted price and
li.uidated price not later than the last trading session of the contract month
S*)-0)30+?)*+,- +- C,//,0+*1 F;*;325 C,-*3)7*>
In the futures trading Industry, a commodity is an article of commerce or a
product that lends itself to standardi/ation for the purpose of a futures contract
Commodities popularly traded on e+changes are in its ra! form
tly futures aretraded on !heat not on flour, coffee futures are traded, but there are no futures
traded on tea, crude oil futures are traded but petrol futures are not, gold futures
are traded but diamonds are not
C,//,0+*1 F;*;325 V@S EA;+*1 I-425*/2-*5
Individuals !ho purchase e.uity or e.uity#based mutual funds are purchasing
shares of o!nership !ill increase over time : future contract is an agreement to
buy or sell a specific amount of a commodity at a specific date in the future It is
typically a short#term %1#24 month( transaction that has to be carried for!ard at
the end of the contract tenure 0!nership is of the underlying commodity, !hich
has to gain value for the commodity futures buyer to gain profit
D2.+423)B.2 V@S C)58 S2**.20 C,//,0+*+25
"!o classes of agricultural commodities typically referred to in trading agricultural
commodities are deliverable and cash settled commodities Deliverable
commodities referred to those commodities that the short position %seller( as right
to make delivery for !hich the long position %buyer( as the right to take the
delivery 'ost commodities traded on India*s national multi commodity
e+changes are deliverable commodities
DISTINCTION BET(EEN FUTURES FOR(ARDS CONTRACTS
F,3C)30 C,-*3)7*>
)or!ard Contract is an agreement to buy or sell an asset on a specified date for
specified price 0ne 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 "he other party assumes a short position and agrees to sell the
asset on the same date for the same price 0ther contract details like delivery
date, price and .uantity are negotiated bilaterally by the parties to the contract
are normally traded outside the e+change
F2)*;325:
"he salient features of for!ard contracts are>
• "hey are bilateral contracts and hence e+posed to counter#party risk
• @ach contract is custom designed, and hence is uni.ue in terms of
contract si/e e+piration date and the asset type .uality
• "he contract price is generally not available in public domain
• 0n the e+piration date, the contract has to be settled by delivery of the
asset
• If the party !ishes to reverse the contract, it has to compulsorily go to the
same counter party, !hich often results in high prices being changed
,o!ever for!ard contract in certain markers have become very standardi/ed, as
in the case of foreign e+change, there by reducing transaction costs and
increasing transaction volume "his process of standardi/ation reaches its limit in
the organi/ed futures market
)or!ard contracts are very useful in hedging and speculation "he classic
hedging application !ould be that of an e+porter !ho e+perts to receive payment
in dollars three months later ,e is e+posed to the risk of e+change rate
fluctuations &y using the currency for!ard market to sell dollars for!ard, he can
lock on to a rate today and reduce his uncertainty Similarly an imports !ho is
re.uired to make a payment in dollars t!o months hence can reduce his
e+posure to e+change rate fluctuations by dollars for!ard
If a speculator has information or analysis, !hich forecasts an upturn in a price,
then he can go long on the for!ard market instead of the cash market "he
speculator !ould go long on the for!ard, !ait for the price to rise, and then take
a reversing transaction to book profits Speculators may !ell be re.uired to
deposit a martin upfront ,o!ever, this is generally a relatively small proportion of
the value of the assets underlying the for!ard contact the use of for!ard markets
here supplies leverage to the speculator
L+/+*)*+,-5 ,< F,3C)30 M)3D2*5
)or!ard markets !orld#!ide are afflicted by several problems>
• Fack of centrali/ation trading
• Illi.uidity, and
• Counter party risk
In the first t!o of these, the basic problem is that of too much fle+ibility and
generality "he for!ard market is like a real estate market in that any t!o
consenting adults can form contracts against each other "his often makes them
design terms of deal, !hich are very convenient in that specific situation, but
makes the contracts non#trade able
Counter party risk arises from the possibility of default by any one party to the
transaction 9hen one of the t!o sides to the transaction declares bankruptcy,
the other suffers @ven !hen for!ard markets trade standardi/ed contracts, and
hence avoid the problem of li.uidity, still the counter party risk remains a very
serious issue
F;*;325 C,-*3)7*5:
)utures markets !ere designed to solve the problems that e+it in for!ard
markets : futures contract is an agreement bet!een t!o parties to buy or sell an
asset at a certain time in the future at a certain price &ut unlike for!ard
contracts, the futures contracts are standardi/ed and e+change traded "o
facilitate li.uidity in the futures contacts, the e+change specifies certain standard
features of contract It is a standardi/ed contract !ith standard underlying
instrument, a standard .uantity and .uality of underlying instrument that can be
delivered, %or !hich can be used for reference purposes in settlement( and a
standard timing of such settlement : futures contract may be offset prior to
maturity by entering into an e.ual and opposite transaction 'ore than ;;M of
futures transactions are offset this !ay
"he standardi/ed items in a futures contract are>
• Ouantity of underlying
• Ouality of underlying
• "he date and month of delivery
• "he units of price .uotation and minimum price change
• Focation of settlement
D+5*+-7*+,- B2*C22- <;*;325 )-0 <,3C)305 7,-*3)7*5
)B"B-@S )0-9:-DS
"rade on an organi/ed e+change 0"C in nature
Standardi/ed contract terms Customi/ed contract terms
,ence more li.uid ,ence less li.uid
-e.uires margin payment Do margin happens attends of
period
)or!ard contracts are often confused !ith futures contracts "he confusion is
primarily because both serve essentially the same economic function of
allocating risk in the presence of future price uncertainty ,o!ever futures are a
significant improvement over the for!ard contracts as they eliminate counterparty
risk and offer more li.uidity
COMMODITY FUTURES TERMINOLOGY
&asic> "he difference bet!een the current cash price and the future price of the
same commodity for a given contract month
B2)3 M)3D2*: : period of declining market prices
B;.. M)3D2*> : period of rising market prices
B3,D23> : company or individual that e+ecutes futures and options orders on
behalf of financial and commercial institutions and or the general public
C)58 :5E,*= M)3D2*: : place !here people buy and sell the actual cash
commodities, ie, grain elevator, livestock market, etc
F;*;325 P3+72: "he price at !hich the futures contract trades in the futures
market
E6E+31 0)*2: It is the date specified in the futures contract "his is the last day on
!hich the contract !ill be traded, at the end of !hich it !ill cease to e+it
C,//+55+,- :B3,D23)92= <22: : fee changed by a broker for e+ecuting a
transaction
C,-42392-72: : term referring to cash and futures prices tending to come
together as the futures contract nears e+piration
C3,55 F 8209+-9> ,edging a commodity using a different but related futures
contract !hen there is no futures contract for the cash commodity being hedged
and the cash and future markets follo! similar price trends
Daily "rading Fimit> "he ma+imum price change set by the e+change each day
for a contract
D)1 T3)0235: Speculators !ho take positions in futures or options contracts and
li.uidate them prior to the close of the same trading day
Delivery> "he transfer of the cash commodity from the seller of a futures contract
the buyer of a futures contract
F,3C)30 :7)58= 7,-*3)7*: : cash contract on !hich a seller agrees to deliver a
specific cash commodity t a buyer at a specific time in the future
F;-0)/2-*). A-).15+5: : method of anticipating futures price movement using
supply and demand information
COMMODITY TRADING
COMMODITY MAR'ET TRADING MCHANISM
@very market transaction consists of three components J
trading, clearing and settlement
TRADING
"he trading system on the Commodities e+change provides a fully
automated screen#based trading for futures on commodities on a nation!ide
basis as !ell as an online monitoring and surveillance mechanism It supports
an order driven market and provides complete transparency of trading
operations :fter hours trading has also been proposed for implementation at a
later stage
"he DCD@$ system supports an order driven market, !here orders match
automatically 0rder matching is essentially on the basis of commodity, its price,
time and .uantity :ll .uantity fields are in units and price in rupees "he
e+change specifies the unit of trading and the delivery unit for futures contracts
on various commodities "he e+change notifies the regular lot si/e and tick si/e
for each of the contracts traded from time to time 9hen any order enters the
trading system, it is an active order It tries to find a match on the other side of
the book If it finds a match, a trade is generated If it does not find a match, the
order becomes passive and gets .ueued in the respective outstanding order
book in the system, "ime stamping is done for each trade and provides the
possibility for a complete audit trail if re.uired
C OMMODITY FUTURES TRADING CYCLE
DCD@$ trades commodity futures contracts having one#month, t!o#month and
three#month e+piry cycles :ll contracts e+pire on the 34
th
of the e+piry month
"hus a Kanuary e+piration contract !ould e+pire on the 34
th
of Kanuary and a
)ebruary e+piry contract !ould cease trading on the 34
th
)ebruary If the 34
th
of
the e+piry month is a trading holiday, the contracts shall e+pire on the previous
trading day De! contracts !ill be introduced on the trading day follo!ing the
e+piry of the near month contract )ollo!ing )igure sho!s the contract cycle for
futures contracts on DCD@$
Kan )eb 'ar
r"ime
Kan 34 contract
)eb 34 contract
'arch 34 contract
ril 34 contract'ay 34 contract
Kune 34 contra
ORDER TYPES AND TRADING PARAMETERS
:n electronic trading system allo!s the trading members to enter orders
!ith various conditions attached to them as per their re.uirement "hese
conditions are broadly divided into the follo!ing categories>
• "ime conditions
• Price conditions
• 0ther conditions
Several combinations of the above are possible thereby providing
enormous fle+ibility to users "he order types and conditions are summari/ed
belo! 0f these, the order types available on the DCD@$ system are regular lot
order, stop loss order, immediate or cancel order, good till day order, good till
cancelled order, good till order and spread order
TIME CONDITIONS
1> G,,0 *+.. 0)1 ,3023:
: day order, as the name suggests is an order !hich is valid for the day on
!hich it is entered If the order is not e+ecuted during the day, the system
cancels the order automatically at the end of the day @+ample> : trader !ants to
go long on 'arch 1, 3448 in refined palm oil on the commodity e+change : day
order is placed at -s284I# 14 kg If the market does not reach this price the
order does not get filled even if the market touches -s281 and closes In other
!ords day order is for a specific price and if the order does not get filled that day,
one has to place the order gain the ne+t day
#> G,,0 *+.. 7)-72..20 :GTC=
: G"C order remains in the system until the user cancels it
Conse.uently, it spans trading days, if not traded on the day the order is entered
"he ma+imum number of days an order can remain in the system is notified by
the e+change from time to time after !hich the order is automatically cancelled
by the system @ach day counted is a calendar day inclusive of holidays "he
days counted are inclusive of the day on !hich the order is placed and the order
is cancelled from the system at the end of the day of the e+piry period @+ample>
: trader !ants to go long on refined palm oil !hen the market touches -s844I#
14 kg "heoretically, the order e+ists until it is filled up, even if it takes months for
it to happen "he G"C order on the DCD@$ is cancelled at the end of a period of
seven calendar days from the date of entering an order or !hen the contract
e+pires, !hichever is earlier
&> G,,0 *+.. 0)*2 :GTD=
: G"D order allo!s the user to specify the date till !hich the order should
remain in the system if not e+ecuted "he ma+imum days allo!ed by the system
are the same as in G"C order :t the end this day I date, the order is cancelled
from the system @ach day I date counted are inclusive of the day I date on
!hich the order is placed and the order is Cancelled from the system at the end
of the day I date of the e+piry period
%> I//20+)*2 ,3 C)-72. :IOC=:
:n I0C order allo!s the user to buy or sell a contract as soon as the order
is released into the system, failing !hich the order is cancelled from the system
Partial match is possible for the order, and the unmatched portions of the order is
cancelled immediately
5> A.. ,3 -,-2 ,3023:
:ll or none order %:0D( is a limit order, !hich is to be e+ecuted in its
entirety, or not at all Bnlike a fill#or#kill order, an all#or#none order is not
cancelled if it is not e+ecuted as soon as it is represented in the e+change :n
all#or#none order position can be closed out !ith another :0D order
6> F+.. ,3 '+.. ,3023:
"his order is a limit order that is placed to be e+ecuted immediately and if
the order is unable to be filed immediately, it gets cancelled
PRICE CONDITIONS
1> L+/+* O3023:
:n order to buy or sell a stated amount of a commodity at a specified
price, or at a better price, if obtainable at the time of e+ecution "he
disadvantage is that the order may not get filled at all if the price of that day does
not reach specified price
#> S*,E-.,55:
: stop#loss order is an order, placed !ith the broker, to buy or sell a
particular futures contract at the market price if and !hen the price reaches a
specified level )utures traders often use stop orders in an effort to limit the
amount they might lose if the futures price moves against their position Stop
orders are not e+ecuted until the price reaches the specified point 9hen the
price reaches that point the stop order becomes a market order 'ost of the
time, stop orders are used to e+it a trade &ut, stop orders can be e+ecuted for
buying I selling positions too : buy stop order is initiated !hen one !ants to buy
a contract or go long and a sell stop order !hen one !ants to sell or go short
"he order gets filled at the suggested stop order price or at a better price
@+ample> : trader has purchased crude oil futures at -s564 per barrel ,e
!ishes to limit his loss to -s64 a barrel : stop order !ould then be placed to
sell an offsetting contract if the price falls to -s544 per barrel 9hen the market
touches this price, stop order gets e+ecuted and the trader !ould e+it the market
)or the stop#loss sell order, the trigger price has to be greater than the limit price
OTHER CONDITIONS
M)39+-5 <,3 *3)0+-9 +- <;*;325:
'argin is the deposit money that needs to be paid to buy or sell each
contract "he margin re.uired for a futures contract "he margin re.uired for a
futures contract is better described as performance bond or good faith money
"he margin levels are set by the e+changes based on volatility%market
conditions( and can be changed at any time "he margin re.uirements for most
futures contracts range from 3M to 16M of the value of the contract
In the futures market, there are different types of margins that a trader has
to maintain 9e !ill discuss them in more details !hen !e talk about risk
management in the ne+t chapter :t this stage !e look at the types of margins as
they apply on most futures e+changes
? I-+*+). /)39+-: "he amount that must be deposited by a customer at the
time of entering into a contract is called initial margin "his margin is meant to
cover the largest potential loss in one day "he margin is a mandatory
re.uirement of parties !ho are entering into the contract
? M)+-*2-)-72 /)39+-: : trader is entitled to !ithdra! any balance in the
margin account in e+cess of the initial margin "o ensure that the balance in the
margin account never becomes negative, a maintenance margin, !hich is
some!hat lo!er than the initial margin, is set If the balance in the margin
account falls belo! the maintenance margin, the trader receives a margin call
and is re.uested to deposit e+tra funds to bring it to the initial margin level !ithin
a very short period of time "he e+tra funds deposited are kno!n as a variation
margin If the trader does not provide the variation margin, the broker closes out
the position by offsetting the contract
? A00+*+,-). /)39+-: In case of sudden higher than e+pected volatility, the
e+change calls for an additional margin, !hich is a preemptive move to prevent
breakdo!n "his is imposed !hen the e+change fears that the markets have
become too volatile and may result in some payments crisis, etc,
? M)3D-*,-M)3D2* /)39+- :MTM=: :t the end of each trading day, the
margin account is adjusted to reflect the trader*s gain or loss "his is kno!n as
marking to market the account of each trader :ll futures contracts are settled
daily reducing the credit e+posure to one day*s movement &ased on the
settlement price, the value of all positions is marked#to#market each day after the
official close, ie, the accounts are either debited or credited based on ho! !ell
the positions fared in that day*s trading session If the account falls belo! the
maintenance margin level the trader needs to replenish the account by giving
additional funds 0n the other hand, if the position generates a gain, the funds
can be !ithdra!n % those funds above the re.uired initial margin( or can be used
to fund additional trades
Kust as a trader is re.uired to maintain a margin account !ith a breaker, a
clearing house member is re.uired to maintain a margin account !ith the
clearing house "his is kno!n as clearing margin In the case of clearing house
member, there is only an original margin and no maintenance margin Clearing
house and clearing house margins have been discussed further in detail under
the chapter on clearing and settlement
SETTLEMENT
)utures contracts have t!o types of settlements, the '"' settlement
!hich happens on a continuous basis at the end of each day, and the final
settlement !hich happens on the last trading day of the futures contract 0n the
DCD@$, daily '"' settlement and final '"' settlement in respect of admitted
deal in futures contracts are cash settled by debitingIcrediting the clearing
accounts of C's !ith the respective clearing bank :ll positions of a C',
brought for!ard, created during the day or closed out during the day, are marked
to market at the daily settlement price or the final settlement price at the close of
trading hours on a day
• D)+.1 52**.2/2-* E3+72: Daily settlement price is the consensus closing price
as arrived after closing session of the relevant futures contract for the trading
day ,o!ever, in the absence of trading for a contract during closing sessions,
daily settlement price is computed as per the methods prescribed by the
e+change from time to time
• F+-). 52**.2/2-* E3+72: )inal settlement price is the closest price of the
underlying commodity on the last trading day of the futures contract :ll open
positions in a futures contract cease to e+ist after its e+piration day
S2**.2/2-* /278)-+5/:
Settlement of commodity futures contracts is a little different from
settlement of financial futures, !hich are mostly cash settled "he possibility of
physical settlement makes the process a little more complicated
P
Types of
Settlement
Daily Settlement
Final Settlement
Daily Settlement Price
Hanles aily price fl!ct!ation
for all traes "mar# to mar#et$
Daily process at en of ay
Final Settlement Price
Hanles final settlement of all
open oppositions
On contract e%piry ate
D)+.1 /)3D *, /)3D2* 52**.2/2-*:
Daily mark to market settlement is done till the date of the contract e+piry
"his is done to take care of daily price fluctuations for all trades :ll the open
positions of the members are marked to market at the end of the day and
profitIloss is determined as belo!>
• 0n the day of entering into the contract, it is the difference bet!een the entry
value and daily settlement price for that day
• 0n any intervening days, !hen the member holds an open position, it is the
different bet!een the daily settlement price for that day and the previous day*s
settlement price
F+-). 52**.2/2-*
0n the date of e+piry, the final settlement price is the spot price on the
e+piry day "he spot prices are collected from members across the country
through polling "he polled bidIask prices are bootstrapped and the mid of the
t!o bootstrapped prices is taken as the final settlement price "he responsibility
of settlement is on a trading cum clearing member for all trades done on his o!n
account and his client*s trades : professional clearing member is responsible
for settling all the participants trades, !hich he has confirmed to the e+change
0n the e+piry date of a futures contract, members are re.uired to submit
delivery information through delivery re.uest !indo! on the trader !orkstations
provided by DCD@$ for all open positions for a commodity for all constituents
individually DCD@$ on receipt of such information matches the information and
arrives at a delivery position for a member for a commodity : detailed report
containing all matched and unmatched re.uests is provided to members through
the e+tranet
Pursuant to regulations relating to submission of delivery information, failure to
submit delivery information for open positions attracts penal charges as
stipulated by DCD@$ from time to time DCD@$ also adds all such open
positions for a member, for !hich no delivery information is submitted !ith final
settlement obligations of the member concerned and settled in cash
Don#fulfillment of either the !hole or part of the settlement obligations is
treated as a violation of the rules, bye#la!s and regulations of DCD@$, and
attracts penal charges as stipulated by DCD@ from time to time In addition
DCD@$ can !ithdra! any or all of the membership rights of clearing member
including the !ithdra!al of trading facilities of all trading members clearing
through such clearing members, !ithout any notice )urther, the outstanding
positions of such clearing member andIor trading members andIor constituents,
clearing and settling through such clearing member, may be closed out forth!ith
or any thereafter by the e+change to the e+tent possible, by placing at the
e+change, counter orders in respect of the outstanding position of clearing
member !ithout any notice to the clearing member and I or trading member and I
or constituent DCD@$ can also initiate such other risk containment measures,
as it deems appropriate !ith respect to the open positions of the clearing
members It can also take additional measures like imposing penalties,
collecting appropriate deposits, invoking bank guarantees or fi+ed deposit
receipts, reali/ing money by disposing off the securities and e+ercising such
other risk containment measures as it deems fit or take
further disciplinary action
S2**.2/2-* /2*8,05
Settlement of futures contracts on the DCD@$ can be done in three !ays
Jby physical delivery of the underlying asset, by closing out open positions and
by cash settlement 9e shall look at each of these in some detail 0n the
DCD@$ all contracts settling in cash are settled on the follo!ing day after the
contract e+piry date :ll contracts materiali/ing into deliveries are settled in a
period 3#5 days after e+piry "he e+act settlement day for each commodity is
specified by the e+change
Physical delivery of the underlying asset
)or open positions on the e+piry day of the contract, the buyer and the
seller can announce intentions for delivery Deliveries take place in the electronic
form :ll other positions are settled in cash
9hen a contract comes to settlementIthe e+change provides alternatives
like delivery place, month and .uality specifications "rading period, delivery
date etc are all defined as per the settlement calendar : member is bound to
provide delivery information If he fails to give information, it is closed out !ith
penalty as decided by the e+change : member can choose an alternative mode
of settlement by providing counter party clearing member and constituent "he
e+change is ho!ever not responsible for, nor guarantees settlement of such
deals "he settlement price is calculated and notified by the e+change "he
delivery place is very important for commodities !ith significant transportation
costs "he e+change also specifies the precise period %date and time( during
!hich the delivery can be made )or many commodities, the delivery period may
be an entire month "he party in the short position %seller( gets the opportunity to
make choices from these alternatives "he e+change collects delivery
information "he price paid is normally the most recent settlement price %!ith a
possible adjustment for the .uality of the asset and J the delivery location( "hen
the e+change selects a party !ith an outstanding long position to accept delivery
:s mentioned above, after the trading hours on the e+piry date, based on
the available information, the matching for deliveries is done, firstly, on the basis
of locations and then randomly keeping in vie! factors such as available capacity
of the vaultI!arehouse, commodities already deposited and demateriali/ed and
offered for delivery and any other factor as may be specified by the e+change
from time to time :fter completion of the matching process, clearing members
are informed of the deliverableIreceivable positions and the unmatched positions
Bnmatched positions have to be settled in cash "he cash settlement is done
only for the incremental gainIloss as determined on the basis of the final
settlement price
:ny buyer intending to take physicals has to put a re.uest to his
depository participant "he DP uploads such re.uests to the specified depository
!ho in turn for!ards the same to the registrar and transfer agent %-E" agent(
concerned :fter due verification of the authenticity, the -E" agent for!ards
delivery details to the !arehouse !hich in turn arranges to release the
commodities after due verification of the identity of recipient 0n a specified day,
the buyer !ould go to the !arehouse and pick up the physicals
"he seller intending to make delivery has to take the commodities to the
designated !arehouse "hese commodities have to be assayed by the e+change
specified assayer "he commodities have to meet the contract specifications !ith
allo!ed variances If the commodities meet the specifications, the !arehouse
accepts them 9arehouses then ensure that the receipts get updated in the
depository system giving a credit in the depositor*s electronic account "he seller
then gives the invoice to his clearing member, !ho !ould courier the same to the
buyer*s clearing member
DCD@$ contracts provide a standardi/ed description for each commodity
"he description is provided in terms of .uality parameters specific to the
commodities :t the same time, it is reali/ed that !ith commodities, there could
be some amount of variances in .ualityI!eight etc, due to natural causes, !hich
are beyond the control of any person ,enceI DCD@$ contracts also provide
tolerance limits for variances : delivery is treated as good delivery and
accepted if the delivery lies !ithin the tolerance limits ,o!ever, to allo! for the
difference, the concept of premium and discount has been introduced Goods
that come to the authori/ed !arehouse for delivery are tested and graded as per
the prescribed parameters "he premium and discount rates apply depending on
the level of variation "he price payable by the party taking delivery is then
adjusted as per the premiumIdiscount rates fi+ed by the e+change "his ensures
that some amount of lee!ay is provided for delivery, but at the same time, the
buyer taking delivery does not face !indfall lossIgain due to the .uantityI.uality
variation at the time of taking delivery "his, to some e+tent, mitigates the
difficulty in delivering and receiving e+act .ualityI.uantity of commodity
C.,5+-9 ,;* B1 ,<<52**+-9 E,5+*+,-5
'ost of the contracts are settled by closing out open positions In closing
out, the opposite transaction is effected to close out the original futures position
: buy contract is closed out by a sale and a sale contract is closed out by a buy
)or e+ample, an investor !ho took a long position in t!o gold futures contracts
on the Kanuary 24, 3448 at G4;4, can close his position by selling t!o gold
futures contracts on )ebruary 35, 3448 at -s6;37 In this case, over the period
of holding the position he has suffered a loss of -s1G3 per unit "his loss !ould
have been debited from his margin account over the holding period by !ay of
'"' at the end of each day, and finally at the price that he closes his position,
that is -s 6;37 in this case
CASH SETTLEMENT
Contracts held till the last day of trading can be cash settled 9hen a
contract is settled in cash, it is marked to the market at the end of the last trading
day and all positions are declared closed "he settlement prince on the last
trading day is set e.ual to the closing spot price of the underlying asset ensuring
the convergence of future prices and the spot prices )or e+ample an investor
took a short position in five long staple cotton futures contracts on December 16
at -s G;64 0n 34
th
)ebruary, the last trading day of the contract, the spot price
of long staple cotton is -s G536 "his is the settlement price for his contract :s
a holder of a short position on cotton, he does not have to actual deliver the
underlying cotton but simply takes a!ay the profit of -s 336 per trading unit of
cotton in the form of cash entities involved in physical settlement
ENTITLES INVOLVED IN PHYSICAL SETTLEMENT:
Physical settlement of commodities involves the follo!ing three entities J
an accredited !arehouse, registrar E transfer agent and an assayer 9e !ill
briefly look at the functions of each accredited !arehouse
ACCREDITED (AREHOUSE
DCD@$ specified accredited !arehouses through !hich delivery of a
specific commodity can be affected and !hich !ill facilitate for storage of
commodities )or the services provided by them, !arehouses charge a fee that
constitutes storage and other charges such as insurance, assaying and handling
charges or any other incidental charges follo!ing are the functions of an
accredited !arehouse
THE FUTURES BASIS
"he cost#of#carry model e+plicitly defines the relationship bet!een the
futures price and the related spot price "he difference bet!een the spot price
and the futures price is called the basis 9e see that as a futures contract nears
e+piration, the basis reduces to /ero "his means that there is a convergence of
the futures price to the price of the underlying asset "his happens because if
the futures price is above the spot price during the delivery period it gives rise to
a clear arbitrage
V)3+)*+,- ,< B)5+5 ,423 *+/2
"he figure sho!s ho! basis changes over time :s the time to e+piration of a
contract reduces, the basis reduces "o!ards the close of trading on the day of
settlement, the futures price and the spot price converge "he closing price for
the
ril gold futures contract is the closing value of gold in the spot market onthat day
0pportunity 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 "his
!ill lead to a profit e.ual to the difference bet!een the futures price and spot
price :s traders start e+ploiting this arbitrage opportunity the demand for the
contract !ill increase and futures prices !ill fall leading to the convergence of the
future price !ith the spot price If the futures price is belo! the spot price during
the delivery period all parties interested in buying the asset in the spot marked
making a profit e.ual to the difference bet!een the future price and the spot
price :s more traders take a long position the demand for the particular asset
!ould increase and the futures price !ould rise nullifying the arbitrage
opportunity
? :s the date of e+piration comes near, the basis reduces Q there is a
convergence of the futures price to!ards the spot price %)igure G, 1( 0n the
date of e+piration, the basis is /ero If it is not, then there is an arbitrage
opportunity :rbitrage opportunities can also arise !hen the basis %difference
bet!een spot and futures price( or the spreads difference bet!een prices of t!o
futures contracts( during the life of a contract are incorrect :t a later stage !e
shall look at ho! these arbitrage opportunities can be e+ploited
? "here is nothing but cost of carry related arbitrage that drives the behavior of
the futures price in the case of investment assets In the case of consumption
assets, !e need to factor in the benefit provided by holding the physical
commodity
? "ransactions costs are very important in the business of arbitrage
PA&T'C'PANTS 'N COMMOD'T( MA&KET
)or a market to succeedI it must have all three kinds of participant*s J
hedgers, speculators and arbitragers "he confluence of these participants
ensures li.uidity and efficient price discovery on the market Commodity markets
give opportunity for all three kinds of participants
H209+-9
'any participants in the commodity futures market are hedgers "he use
the futures market to reduce a particular risk that they face "his risk might relate
to the price of !heat or oil or any other commodity that the person deals in "he
classic hedging e+ample is that of !heat farmer !ho !ants to hedge the risk of
fluctuations in the price of !heat around the time that his crop is ready for
harvesting &y selling his crop for!ard, he obtains a hedge by locking in to a
predetermined price ,edging does not necessarily improve the financial
outcome? indeed, it could make the outcome !orse 9hat it does ho!ever is that
it makes the outcome more certain ,edgers could be government institutions,
private corporations like financial institutions, trading companies and even other
participants in the value chain, for instance farmers, e+tractors, ginners,
processors etc, !ho are influenced by the commodity prices
H2092 R)*+,
,edge ratio is the ratio of the si/e of position taken in the futures contracts to the
si/e of the e+posure in the underlying asset So far in the e+amples !e used, !e
assumed that the hedger !ould take e+actly the same amount of e+posure in
there futures contract as in the underlying asset )or e+ample, if the hedgers
e+posure in the underlying !as to the e+tent of 11 bales of cotton, the futures
contracts entered into !ere e+actly for this amount of cotton 9e !ere assuming
here that the optimal hedge ratio is one In situations !here the underlying asset
in !hich the hedger has an e+posure is e+actly 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 hedge
ratio of one may not be optimal &elo! e.uation gives the optimal hedge ratio,
one that minimi/es the variance of the hedger*s position
9here>
: CH <== R Q Change in spot price, S, during a period of time e.ual to the life of the
hedge
Q Change in futures price, ), during a period of time e.ual to the life of thehedge deviation of :S
a
)> Q Standard deviation of
Coefficient of correlation bet!een :s and
h Q hedge ratioSE27;.)*+,-
:n entity having an opinion on the price movements of a given commodity
can speculate using the commodity market 9hile the basics of speculation
apply to any market, speculating in commodities is not as simple as speculating
on stocks in the financial market )or a speculator !ho thinks the shares of a
given company !ill rise It is easy to buy the shares and hold them for !hatever
duration he !ants to ,o!ever, commodities are bulky products and come !ith
all the costs and procedures of handling these products "he commodities
futures markets provide speculators !ith an easy mechanism to speculate on the
price of underlying commodities
"o trade commodity futures on the DCD@$, a customer must open a
futures trading account !ith a commodity derivatives broker &uying futures
simply involves putting in the margin money "his enables futures traders to take
a position in the underlying commodity !ithout having to actually hold that
commodity 9ith 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 e+piration date of the contract( 9e look
here at ho! the commodity futures markets can be used for speculation
"oday a speculator can take e+actly the same position on gold by using gold
futures contracts Fet us see ho! this !orks Gold trades at -sG444 per 14
gms and three#months gold futures trades at -sG164 "ables 52 gives the
contract specifications for gold futures "he unit of trading is 144 gms and the
delivery unit for the gold futures contract on the DCD@$ is 1 kg ,e buys one kg
of gold futures !hich have a value of -sG,16,444 &uying an asset in the futures
markets only re.uire making margin payments "o take this position, he pays a
margin of -s1,34,444 "hree months later gold trades at -sG844 per14 gms
:s !e kno!, on the day of e+piration, the futures price converges to the spot
Price %else there !ould be a risk#free arbitrage opportunity( ,e closes his long
futures position at -sG8,444 in the process making a profit of -s36,444 on an
initial margin investment of -s1,34,444 "his !orks out to an annual return of
72percent &ecause of the leverage they provide, commodity futures form an
attractive tool for speculators
SE27;.)*+,-: B2)3+58 C,//,0+*1, S2.. F;*;325:
"his can also be used by a speculator !ho believes that there is likely to
be e+cess supply of a particular commodity in the near future and hence the
prices are likely to see a fall ,o! can he trade based on this opinionS In the
absence of a deferral product, there !asn*t much he could do to profit from his
opinion "oday all he needs to do is sell commodity futures
Fet us understand ho! this !orks Simple arbitrage ensures that the price
of a futures contract on a commodity moves correspondingly !ith the price of the
underlying commodity If the commodity price rises, so !ill the futures price If
the commodity price fallsIso !ill the futures price Do! take the case of the
trader !ho e+pects to see a fall in the price of cotton ,e sells ten t!o#months
cotton futures contract !hich is for delivery of 664 bales of cotton "he value of
the contract is -s8,44,444 ,e pays a small margin on the same "hree months
later If his hunch !ere correct the price of cotton falls So does the price of
cotton futures ,e close out his short futures position at -s2,64,444, making a
profit of -s64,444
A3B+*3)92
: central idea in modern economics is the la! of one price "his states
that in a competitive market, if t!o assets are e.uivalent from the point of vie! of
risk and return, they should sell at the same price If the price of the same asset
is different in t!o markets, there !ill be operators !ho !ill buy in the market
!here the asset sells cheap and sell in the market !here it is costly "his activity
termed as arbitrage, involves the simultaneous purchase and sale of the same or
essentially similar security in t!o different markets for advantageously different
prices "he buying cheap and s!elling e+pensive continues till prices in the t!o
markets reach e.uilibrium ,ence, arbitrage helps to e.uali/e prices and restore
market efficiency
) Q %STB(e
e"
9here>
Cost of financing %annuali/ed(
" Q "ime till e+piration
B Q present value of all storage costs
REGULATORY FRAME(OR' FOR COMMODITY TRADING IN INDIA
:t present there are three tiers of regulations of for!ardIfutures trading
system in India, namely, government of India, )or!ard 'arkets
Commission%)'C( and commodity e+changes "he 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 "his could have undesirable influence on the
spot prices, thereby affecting interests of society at large -egulation 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
"he resultant financial crisis in a futures market could create systematic
risk -egulation is also needed to ensure fairness and transparency in trading,
clearing, settlement and management of the e+change so as to protect and
promote the interest of various stakeholders, particularly non#member users of
the market
RULES GOVERNING COMMODITY DERIVATIVES EXCHANGES
"he trading of commodity derivatives on the DCD@$ is regulated by
)or!ard 'arkets Commission %)'C( Bnder the )or!ard Contracts %-egulation(
:ct, 1;63, for!ard trading in commodities notified under section 16 of the :ct can
be conducted only on the e+changes, !hich are granted recognition by the
central government %Department of Consumer :ffairs, 'inistry of Consumer
:ffairs, )ood and Public Distribution( :ll the e+changes, !hich deal !ith for!ard
contracts, are re.uired to obtain certificate of registration from the )'C &esides,
they are subjected to various la!s of the land like the Companies :ct, Stamp :ct,
Contracts :ct, )or!ard Commission %-egulation( :ct and various other
legislations, !hich impinge on their !orking
)or!ard 'arkets Commission provides regulatory oversight in order to
ensure financial integrity %ie to prevent systematic risk of default by one major
operator or group of operators(, market integrity %ie to ensure that futures prices
are truly aligned !ith the prospective demand and supply conditions( and to
protect and promote interest of customersI nonmembers It prescribes the
follo!ing regulatory measures>
1 Fimit on net open position as on close of the trading houses Some
times limit is also imposed on intra#day net open position "he limit is imposed
operator#!iseI and in some cases, also member !ise
3 Circuit filters or limit on price fluctuations to allo! cooling of market
in the event of abrupt ups!ing or do!ns!ing in prices
2 Special margin deposit to be collected on outstanding purchases or
sales !hen price moves up or do!n sharply above or belo! the previous day
closing price &y making further purchasesIsales relatively costly, the price rise
or fall is sobered do!n "his measure is imposed only on the re.uest of the
e+change
8 Circuit breakers or minimumIma+imum prices "hese are
prescribed to prevent futures prices from failing belo! as rising above not
!arranted by prospective supply and demand factors "his measure is also
imposed on the re.uest of the e+change
6 Skipping trading in certain derivatives of the contract closing the
market for a specified period and even closing out the contract "hese e+treme
are taken only in emergency situations
&esides these regulatory measures, the )C(-( :ct provides that a client*s
position cannot be appropriated by the member of the e+change, e+cept !hen a
!ritten consent is taken !ithin three days time "he )'C is persuading
increasing number of e+changes to s!itch over to electronic trading, clearing and
settlement !hich is more customerIfriendly "he )'C has also prescribed
simultaneous reporting system for the e+changes follo!ing open out cry system
"hese steps facilitate audit trail and make it difficult for the members to indulge
in malpractice like trading ahead of clients, etc "he )'C has also mandated all
the e+changes follo!ing open outcry system to display at a prominent place in
e+change premises, the name, address, telephone number of the officer of the
commission !ho can be contacted for any grievance "he !ebsite of the
commission also has a provision for the customers to make complaint and send
comments and suggestions to the )'C 0fficers of the )'C have been
instructed to meet the members and clients on a random basis, !henever they
visit e+changes, to ascertain the situation on the ground, instead of merely
attending meetings of the board of directors and holding discussions !ith the
office bearers
TRADING DAYS
"he e+change operates on all days e+cept Saturday and Sunday and on
holidays that it declares from time to time 0ther than the regular trading hours,
trading members are provided a facility to place orders offline ie outside trading
hours "hese are stored by the system but get traded only once the market
opens for trading on the follo!ing !orking day
"he 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
e+change to the members via its circulars or notices issued from time to time
'embers can place orders on the trading system during these sessions, !ithin
the regulations prescribed by the e+change as per these bye la!s, rules and
regulations, from time to time
TERMS AND CONDITIONS OF COMMODITIES>
"he basic terms and conditions of commodities are as follo!s
Commodity "rading
Session
Fot si/e Initial
'argins
Gold 14am to
1124pm
1kg 6M
Gold mini 14am to
1124pm
144kg 6M
Silver 14am to
1124pm
24kg 6M
Silver mini 14am to
1124pm
6kg 6M
Steel long 14am to
644pm
36mt 6M
Steel flat 14am to
644pm
36mt 6M
Fight s!eet
Crudeoil
14am to
1124pm
144bbls 8M
Datural gas 14am to
1124pm
644mmbt
u
8M
-&D
palmolein
14am to
644pm
1mt 8M
-efined
soyoil
1mt 8M
-ubber 14am to
1124pm
1mt 6M
Soy seed 1mt 8M
&lack
paper
14am to
644pm
1mt 7M
Capas 14am to
644pm
8mt 6M
Castor oil 14am to
644pm
1mt 8M
Castor
seed
14am to
644pm
1mt 8M
Copper 14am to
1124pm
1mt 6M
Dickel 14am to
1124pm
644kg 6M
"in 14am to
1124pm
364kg 7M
Guar seed 14am to
644pm
6mt 5M
Chana
%Gram(
14am to
644pm
6mt 6M
Brad
%black
'atpe(
14am to
644pm
34mt 6M
Nello!
peas
14am to
644pm
34mt 6M
"ur %pigeon
peas(
14am to
644pm
14mt 6M
Dote> in !inter timings from 1444am to 1166pm
T3)0+-9 8,;35 )-0 *3)0+-9 717.2
"he e+change announces the normal trading hoursIopen period in
advance from time to time In case necessary, the e+change can e+tend or
reduce the trading hours by notifying the members "rading cycle for each
commodityIderivative contract has a standard period, during !hich it !ill be
available for trading
C,-*3)7* 26E+3)*+,-
Derivatives contracts e+pire on a pre#determined date and time up to
!hich the contract is available for trading "his is notified by the e+change in
advance "he contract e+piration period !ill not e+ceed t!elve months or as the
e+change may specify from time to time
T3)0+-9 E)3)/2*235
"he e+change from time to time specifies various trading parameters
relating to the trading system @very trading member is re.uired to specify the
buy or sell orders as either an open order or a close order for derivatives
contracts "he e+change also prescribes different order books that shall be
maintained on the trading system and also specifies various conditions on the
order that !ill make it eligible to place it in those books
"he e+change specifies the minimum disclosed .uantity for orders that !ill
be allo!ed for each commodityIderivatives contract It also prescribed the
number of days after !hich Good "ill Cancelled orders !ill be cancelled by the
system It specifies parameters like lot si/e in !hich orders can be placed, price
steps in !hich shall be entered on the trading system, position limits in respect of
each commodity etc
F)+.;32 ,< *3)0+-9 /2/B23 *23/+-).
In the event of failure of trading members !orkstation andI or the loss of
access to the trading system, the e+change can at its discretion undertake to
carry out on behalf of the trading member the necessary functions !hich the
trading member is eligible for 0nly re.uests made in !riting in a clear and
precise manner by the trading member !ould be considered "he trading
member is accountable for the functions e+ecuted by the e+change on its behalf
and has to indemnity the e+change against any losses or costs incurred by the
e+change
T3)02 ,E23)*+,-5
"rading members have to ensure that appropriate confirmed order instructions
are obtained from the constituents before placement of an order on the system
"hey have to keep relevant records or documents concerning the order and
trading system order number and copies of the order confirmation
slipImodification slip must be made available to the constituents
"he trading member has to disclose to the e+change at the time of order entry
!hether the order is on his o!n account or on behalf of constituents and also
specify orders for buy or sell as open or close orders "rading members are
solely responsible for the accuracy of details of orders entered into the trading
system including orders entered on behalf of their constituents "raders
generated on the system are irrevocable and blocked in 1 "he e+change
specifies from time to time the market types and the manner if any, in !hich trade
cancellation can be effected
9here a trade cancellation is permitted and trading member !ishes to cancel a
trade, it can be done only !ith the approval of the e+change
M)39+- 32A;+32/2-*5
Subject to the provisions as contained in the e+change bye#la!s and such other
regulations as may be in force, every clearing memberIin respect of the trades in
!hich he is party to, has to deposit a margin !ith e+change authorities
"he e+change prescribes from time to time the commoditiesIderivatives
contracts, the settlement periods and trade types for !hich margin !ould be
attracted
"he e+change levies initial margin on derivatives contracts using the concept of
Value at -isk %Va-( or any other concept as the e+change may decide from time
to time "he margin is charged so as to cover one#day loss that can be
countered on the position on ;;M of the days :dditional margins may be levied
for deliverable positions, on the basis of Va- from the e+piry of the contract till
the actual settlement date plus a mark#up for default
"he margin has to be deposited !ith the e+change !ithin the time notified by the
e+change "he e+change also prescribes categories of securities that !ould be
eligible for a margin deposit, as !ell as the method of valuation and amount of
securities that !ould be re.uired to be deposited against the margin amount
"he procedure for refundIadjustment of margins is also specified by the
e+change from time to time "he e+change can impose upon any particular
trading member or category of trading member any special or other margin
re.uirement 0n failure to deposit marginIs as re.uired under this clause, the
e+changeIclearing house can !ithdra! the trading facility of the trading member
:fter the pay#out, the clearing house releases all margins
U-<)+3 *3)0+-9 E3)7*+725
Do trading member should buy, sell, deal in derivatives contracts in a fraudulent
manner, or indulge in any unfair trade practices including market manipulation
"his includes the follo!ing? if @ffect, take part either directly or indirectly in
transactions, !hich are likely to have effect of artificially, raising or depressing the
prices of spotIderivatives contracts
Indulge in any act, !hich is calculated to create a false or misleading
appearance of trading, resulting in reflection of prices, !hich are not genuine
? &uy, sell commoditiesIcontract on his o!n behalf or on behalf of a person
associated !ith him pending the e+ecution 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
? 9hen acting as an agent, e+ecute a transaction !ith a constituent at a price
other than the price at !hich it !as e+ecuted on the e+change
? @ither take opposite position to an order of a constituent or e+ecute opposite
orders !hich he is holding in respect of t!o constituents e+cept in the manner
laid do!n by the e+change
CLEARING
:s mentioned earlier, Dational Securities Clearing Corporation Fimited
%DSCCF( undertakes clearing of trades e+ecuted on the DCD@$, :ll deals
e+ecuted on the @+change 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 !ith these
regulationsIbye la!s and rules of the e+change
LAST DAY OF TRADING
Fast trading day for a derivative contract in any commodity is the date as
specified in the respective commodity contract If the last trading day as
specified in the respective commodity contract is a holiday, the last trading day is
taken to be the previous !orking day of e+change 0n the e+piry date of
contracts, the trading membersI clearing members have to give delivery
information as prescribed by the e+change from time to time If a trading
memberIclearing member fails to submit such information during the trading
hours on the e+piry date for the contractIthe deals have to be settled as per the
settlement calendar applicable for such deals, in cash#together !ith penalty as
stipulated by the e+change deals entered into through the e+change "he
clearing member cannot operate the clearing account for any other purpose
RULES GOVERNING INVESTOR GRIEVANCES, ARBITRATION
In matters !here the e+change is a party to the dispute, the civil courts at
'umbai have e+clusive jurisdiction and in all other matters, proper courts !ithin
the area covered under the respective regional arbitration center have jurisdiction
in respect of the arbitration proceedings fallingIconducted in that regional
arbitration center
PROCEDURE FOR ARBITRATION:
"he application has to submit to the e+change application for arbitration in
the specified form %)orm Do1I1
along !ith the follo!ing enclosures1 "he statement of case%containing all the relevant facts about the
dispute and relief sought(
3 "he statement of accounts
2 Copies of members J constituent agreement
8 Copies of the relevant contract notes, invoice and delivery challan
DELIVERY PROCEDURE
"he client should follo! the follo!ing procedure to take delivery of the commodity
1
st
day J &uyerIseller informs the e+change about their intentions
6
th
day J &uyer is re.uired to make payment in accordance to the .uantity
allocated to him
G
th
day J seller is re.uired to deliver the goods at the delivery centers specified
by the
@+change by 1344 noon &uyer can pick up the delivery from 1344 noon to
844pm
5
th
day J "he Payment !ill be released to the seller
COST PHYSICAL DELIVERY
)i+ed Costs -s
Group 8 receipt charges 264
Group 8 'anagerial charges 2444
Group 8 'ovement charges 6444
Packing :9& Cutting charges 644
Valuation Charges 6444
"otal fi+ed cost 12764
Variable cost
Foading Iunloading charges 4
Insurance on flight 416Iper 1444
ESTIMATED MAR'ET
Physical Physical 2"imes 6 "imes
'ultiple
pa
%-sbn(
Per day multipl
e
Per day
%-s
Crs(
Per
day
&ullion 844 1G4 874 744
'etals G44 384 534 1344
:gri 6444 3444 G444 14444
@nergy 6444 3444 G444 14444
"otal 11444 8844 12344 33444
GOLD PROFILE
"he collapse of e.uity markets and the arrival of lo! interest rates have
increased the investor presence in alternative investments such as gold In India,
gold has traditionally played a multi#faceted role
art from being used foradornment purpose, it has also served as an asset of the last resort and a hedge
against inflation and currency depreciation &ut most importantly, it has most
often been traded as an investment
Gold supply primarily comes from mine production, official sector sales of global
central banks, old gold scrap and net disinvestments of invested gold 0ut of the
total supply of 2754 tons last year, GGM !as from mine production, 34 M from old
gold scrap and 18M from official sector sales Demand globally emanates from
fabrication %je!ellery and other fabrication(, &ar hoarding, Det producer hedging
and Implied investment
Gold continues to occupy a prominent part in rural Indian economy and a
significant part of the rural credit market revolves around bullion as security India
is the largest consumer of gold in the !orld accounting for more than 32M of the
total !orld demand annually :ccording to unofficial estimates, India has more
than 12,444 tonnes of hoarded gold, !hich translates to around -s G,64,444
crore Inspite of its predominant position, especially in the gold market !here
India is the largest importer, India has traditionally been a price seeker in the
global bullion market
&ullion trading in India received a major fillip )ollo!ing the changes in the Gold
Policy announced by the Government of India, in 1;;5 under e+port#import
Policy 1;;5#3443 :s per the policy, scheduled commercial banks are authori/ed
by the -eserve &ank of India %-&I( to import gold and silver for sale in domestic
market !ithout an Import license or surrendering the Special Import Ficense
%SIF( &ullion is imported into India by banks and four designated trading
agencies acting as canali/ing agents and consignees for overseas suppliers,
!ho in turn sell to domestic !holesale traders, fabricators, etc "he price risk is
borne either by the fabricator or the retail consumer "he !holesale traders,
fabricators and investors do not have any effective tool to hedge their price risk in
gold I silver
India being the largest consumer of gold in the !orld, !ith minimal domestic
supply, the demand is met mainly from imports
Gold is the oldest precious metal kno!n to man "herefore, it is a timely subject
for several reasons It is the opinion of the more objective market e+perts that the
traditional investment vehicles of stocks and bonds are in the areas of their all#
time highs and may be due for a severe correction
"o fully appreciate !hy 7,444 years of e+perience say <gold is foreverU, !e
should revie! !hy the !orld reveres !hat @nglandVs most famous economist,
Kohn 'aynard Ceynes, cynically called the <barbarous relicU
9hy gold is Ugood as goldU is an intriguing .uestion ,o!ever, !e think that the
more pragmatic ancient @gyptians !ere perhaps more accurate in observing that
goldVs value !as a function of its pleasing physical characteristics and its scarcity
• Gold is primarily a monetary asset and partly a commodity
• 'ore than t!o thirds of goldVs total accumulated holdings account as
Vvalue for investmentV !ith central bank reserves, private players and high#carat
Ke!ellery
• Fess than one third of goldVs total accumulated holdings is as a
VcommodityV for Ke!ellery in 9estern markets and usage in industry
• "he Gold market is highly li.uid and gold held by central banks, other
major institutions and retail Ke!ellery keep coming back to the market
• Due to large stocks of Gold as against its demand, it is argued that the
core driver of the real price of gold is stock e.uilibrium rather than flo!
e.uilibrium
• @conomic forces that determine the price of gold are different from, and in
many cases opposed to the forces that influence most financial assets
• South :frica is the !orldVs largest gold producer !ith 2;8 tons in 3441,
follo!ed by BS and :ustralia
• India is the !orldVs largest gold consumer !ith an annual demand of 744
tons
(,3.0 G,.0 M)3D2*5
• Fondon as the great clearing house
• De! Nork as the home of futures trading
• Lurich as a physical turntable
• Istanbul, Dubai, Singapore and ,ong Cong as door!ays to
important
• consuming regions
• "okyo !here "0C0' sets the mood of Kapan
• 'umbai under IndiaVs liberali/ed gold regime
TABLE -
I-0+) +- (,3.0 G,.0 I-0;5*31
%-ounded )igures( India %In "ons( 9orld %In "ons( M Share
"otal Stocks 12444 186444 ;
Central &ank holding 844 37444 18
:nnual Production 3 3G44 447
:nnual -ecycling 144#244 1144#1344 12
:nnual Demand 744 2544 33
:nnual Imports G44 ### ###
:nnual @+ports G4 ### ###
Indian Gold 'arket
• Gold is valued in India as a savings and investment vehicle and is the
second preferred investment after bank deposits
• India is the !orldVs largest consumer of gold in je!ellery as investment
• In Kuly 1;;5 the -&I authori/ed the commercial banks to import gold for
sale or loan to je!ellers and e+porters :t present, 12 banks are active in the
import of gold
• "his reduced the disparity bet!een international and domestic prices of
gold from 65 percent during 1;7G to 1;;1 to 76 percent in 3441
• "he gold hoarding tendency is !ell ingrained in Indian society
• Domestic consumption is dictated by monsoon, harvest and marriage
season Indian je!ellery offtake is sensitive to price increases and even more so
to volatility
• In the cities gold is facing competition from the stock market and a !ide
range of consumer goods
• )acilities for refining, assaying, making them into standard bars in India,
as compared to the rest of the !orld, are insignificant, both .ualitatively and
.uantitatively
'arket 'oving )actors
• :bove ground supply from sales by central banks, reclaimed scrap and
official gold loans
• Producer I miner hedging interest
• 9orld macro#economic factors # BS Dollar, Interest rate
• Comparative returns on stock markets
• Domestic demand based on monsoon and agricultural output
F32A;2-71 D+5*> ,< G,.0 L,-0,- F+6+-9 V,.)*+.+*1 <3,/ 1""5 *+.. 0)*2
Percentage Change W 6M 3 # 6 M X 3M
Daily
Dumber of times 8 68 3185
Percentage times 43 38 ;58
9eekly
Dumber of times 2 G3 25G
Percentage times 45 181 762
&iggest price movement since 1;;6
&et!een September 38 and 0ctober 6, 1;;;, daily prices !itnessed a rally of
more than 31 M, based on surprised announcement by 16 @uropean central
banks of a five#year suspension on all ne! sales of gold from their reserves
(81 I-425* +- G,.0
:dding gold to a portfolio introduces an entirely different asset class# a tangible E
real asset !hich increases the portfolioVs degree of diversification
E<<27*+42 E,3*<,.+, 0+4235+<+23
• :s depicted above, !hile the overall return of a portfolio !ithout gold is
18M, that of a portfolio !ith gold is over 1GM ,ence an allocation of physical
gold in a financial portfolio not just helps reduce the impact of the volatility
created by the other asset classes like e.uity, bonds etc, but also increases the
average return over a period of time
• : financial portfolio containing gold is generally more robust because it
improves the stability and predictability of better average returns
Superior to other alternative asset classes
• Gold is the most li.uid asset class due to its universal acceptance as an
alternative to currency, and also because globally, the gold market is functional
38+5
• Same cannot be said about any other asset class as they take much
longer time to li.uidate %from 1 day to up to 2#8 months(
@ffective hedge against currency risk
• Due to its inverse relationship to dollar, gold has al!ays proved to be an
effective hedge over a period of time
@ffective hedge against Inflation
• : study conducted by 9GC in BC sho!s that one ounce of Gold !ould
consistently purchase the same amount of goods E services as it !ould have
done 844 years ago, making it the perfect hedge against inflation over a long
period of time
O*823 R2)5,-5
• 'ore li.uid as compared to the other asset classes Gold can be bought,
sold or traded globally
• Performance of gold not linked to performance of any company, industry
or government
• Gold needs no professional manager unlike mutual funds
• Gold is an asset, !hich is not simultaneously a liability, unlike stocks
• It doesnVt re.uire political E social stability to survive, in fact it thrives
under !orst societal conditions
• Gold doesnVt ever loose its intrinsic value
Inspite of the gro!ing demand for gold in India, average retail household has
seldom considered <investing in gold= because of the absence of an efficient and
effective platform 'C$ bridges this re.uirement by introducing an ideal
investment platform for investment in gold by retail household <i#gold =
(8)* +5 +-9,.0G
Ui#gold= is a platform !hich facilitates intelligent investment in gold !ith an option
of Physical or Demat holding of gold
F2)*;325 ,< +-9,.0
• "ransparent pricing
• :ssured .uality E purity
• 0ption of Demating
• Do risk of storage
• Simple process
A04)-*)925 *, )- I-425*,3
• :n ideal platform for systematic investment in gold
• "ransparent screen based price at par !ith the prevailing spot price
• 0ptions of loan against Demat gold from &anksI)inancial Institutions
• Convenience of buying gold at the investors discretion # !ithout visiting
the outlet unlike today
• :ssured Ouality E Purity 38 k,;;6 E ;;; fineness gold bars imported from
F&': approved overseas suppliers
• Delivery at 8 locations :hmedabad, Delhi, Colkata E 'umbai
A04)-*)925 *, ) J2C2..23
• : platform to trade in physical gold !ith shorter E 144M guaranteed
delivery cycle vis a vis futures market
• "ransparent screen based price at par !ith the prevailing spot price
• @fficient distribution system %from the custodian to the end user(
• :ssured Ouality E Purity # 38 k, ;;6 E ;;; fineness gold bars F&':
approved
• Seamless platform %buying E selling( for transaction
• @asily accessible through an e+isting stock broker !ho is a member of
'C$
• Delivery at 8 locations :hmedabad, Delhi, Colkata E 'umbai
R2A;+5+*25 <,3 B;1+-9 +-9,.0
• Commodity Demat account !ith DSDFICDSF
• :ccount !ith a member broker of 'C$
• &ank account !ith any one clearing banks of 'C$
H,C 0,25 +* C,3DG
Day 1#G # &uy Isell depending on margin money !ith the brokerIe+change based
on 'ark to 'arket %'"'(
Day 5 # Intimate the status of their respective open position to &uyers E Sellers
Day 7 # Seller members 'BS" deposit the physical gold in the Group 8 vault I
deliver through demat form
Day; # Pay#in of funds by &uyer members against their delivery commitments
%obligation(
Day ; # Pay#out of commodity
Physical delivery of gold %Docs> :uthorisation form filled and signed along !ith
the photograph of the investorIauthori/ed person of the broker, proof of identity
%photo id card(
Demat and hold in demat account %Docs> Commodity Deposit )orm CD) and
0riginal :llocation Fetter(
C,5*5 5*3;7*;32
&rokerage %&uyIsell( 464 J 144M of transaction value
Service "a+ on brokerage 1338M on brokerage
Demat E -emat -s144I# 344I#per transaction
Custody E Insurance -s5,344 pa per %1kg(
V:" 1M of transaction value
Sales "a+ agency charge 464M # 144M %re.uired for selling
physical gold(
Demat and hold in demat account %Docs> Commodity Deposit )orm CD) and
0riginal :llocation Fetter(
C,5*5 5*3;7*;32
&rokerage %&uyIsell( 464 J 144M of transaction value
Service "a+ on brokerage 1338M on brokerage
Demat E -emat -s144I# 344I#per transaction
Custody E Insurance -s5,344 pa per %1kg(
V:" 1M of transaction value
Sales "a+ agency charge 464M # 144M %re.uired for selling
physical gold(
T)6 T32)*/2-*
(2).*8 T)6
• Investment upto -s16 lacs during a financial year is e+empted
• Investment W -s16 lacs !ill attract 1M of the value of assets %including
gold( as on 21st 'arch of every year
C)E+*). 9)+-5 *)6
• Short term if bought and sold !ithin 2G months at the applicable ta+ rate
• Fong term if sold after 2G months at the applicable ta+ rate
ANALYSIS
OBH27*+42: "he objective of the analysis is to evaluate the profitIloss position of
hedger "his analysis is done based on the sample data "he sample is taken as
Gold commodity of December to Kanuary prices "he delivery unit is 1 kg
"rading unit is 144 gm OuotationIbase value -sper 14 gms 0f Gold !ith
;;;;; finess "ick si/e is 6 paise :s the commodity Gold is volatile in nature, it
is chosen as a sample for analysis "he spot price and futures price is taken from
various ne!s papers Fike economic times, business standard and business line
0f course, from the DCD@$ %Dational Commodity E Derivatives @+change
Fimited(
L+/+*)*+,-5:
1( "he sample is chosen as commodity future contract gold 144gm gold
3( "he study is confined to December 3445 to Kanuary 3447 month only
2( "he data gathered is completely restricted to the spot and future prices of
commodity gold 144 gms 0f December to Kanuary 35, 3447 and hence cannot
be taken universally
8( 0ur study is limited to the trading strategies )or hedging, this includes long
hedge and short hedge
G,.0 F;*;32 C,-*3)7* SE27+<+7)*+,-5
"ype of Contract )utures Contract Specifications
Dame of Commodity Gold
"icker symbol G0FD144'B'
"rading system DCD@$Vs "rading System
&asis
@+#'umbai inclusive of Customs Duty and 0ctroi,
e+cluding Sales "a+IV:"
Bnit of trading 144 grams
Delivery unit 144 grams
OuotationIbase value -s per 14 Grams of Gold !ith ;;6 fineness
"ick si/e -e 1
Ouality specification
Bp to ;;;; fineness bearing a serial number and
identifying stamp of a refiner approved by the
@+change
Fist of approved refiners is available at the follo!ing
B-F> !!!ncde+comYdo!nloadsYrefinersZgoldpdf
Ouantity variation Done
Delivery center 'umbai
:dditional delivery centres :hmedabad
"rading hours :s per directions of the )or!ard 'arkets Commission
from time to time, currently #
'ondays through )ridays >
14>44 :' to 11>24 P'H
Saturdays >
14>44 :' to 43>44 P'
0n the e+piry date, contracts e+piring on that day !ill
not be available for trading after 6 P' "he @+change
may vary the above timing !ith due notice
Due date I @+piry Date
34
th
day of delivery month
If 34th happens to be a holiday, a Saturday or a
Sunday then the due date shall be immediately
preceding trading day other than a Saturday of the
@+change
Delivery specification
Bpon e+piry of the contracts all the outstanding
positions should result in compulsory delivery :
penalty of minimum 6 M %of final settlement price(
!ould be imposed on longs and shorts if they fail to
meet their delivery obligation
Closing of Contracts
Bpon the e+piry of the contract all the outstanding open
position should result in compulsory delivery
0pening of Contracts
"rading in a far month contract !ill open on the 14th
day of the month in !hich near month contract is due to
e+pire If the 14th happens to be a non#trading day,
contracts !ould open on the ne+t trading day
Do of active contracts
Contracts !ould be opened as per the launch calendar
given belo!
Price limit Daily price fluctuation limit is %TI#( 8M If the trade hits
the prescribed daily price limit there !ill be a cooling off
period for 16 minutes "rade !ill be allo!ed during this
cooling off period !ithin the price band of %TI#( 8M
"hereafter the price band !ould be raised by another
64M of the e+isting limit ie %T I #( 3M
Do trade I order shall be permitted during the day
beyond the revised limit of %T I #( GM e+cept such
further variations as may be permitted by the
regulators
0n the first day of any ne! contract, the limit on daily
price fluctuation !ill be reckoned !ith reference to the
opening price 0n the second and subse.uent days,
the daily price fluctuation limit !ill be reckoned !ith
reference to the mark#to#market rate of the previous
closing day
Position limits
'ember!ise > G '" or 16 M of market !ide open
position, !hichever is higher Client#!ise # 3 '"
"he above limits !ill not apply to bonafide hedgers )or
bonafide hedgers the @+change !ill decide the limits
on a case#to#case basis
Ouality allo!ance%for
Delivery(
Gold bars of ;;6 I ;;;; fineness
: premium !ill be given for fineness above ;;6 "he
settlement price for more than ;;6 fineness !ill be
calculated at %:ctual finenessI;;6( H )inal Settlement
Price
Special 'argin
In case of additional volatility, a special margin of at
such other percentage, as deemed fit, !ill be imposed
immediately on both buy and sell side in respect of all
outstanding positions, !hich !ill remain in force for
ne+t 3 days, after !hich the special margin !ill be
rela+ed
L);-78 C).2-0)3> G,.0 1$$ G3)/5
Faunch Date Contract @+piring in
31st Dovember 3445
December 3445, Kanuary 3447, )ebruary
3447
December 3445 'arch 3447
Kanuary 3447
ril 3447)ebruary 3447 'ay 3447
'arch 3447 Kune 3447
ril 3447 Kuly 3447'ay 3447 :ugust 3447
Kune 3447 September 3447
Kuly 3447 0ctober 3447
:ugust 3447 Dovember 3447
September 3447 December 3447
N,*2: Faunch dates for contracts launched in December 3445 and thereafter
!ould be 14th of the month in !hich the near month contract is due to e+pire and
if the 14th happens to be a trading holiday at the @+change, the near contract
!ould be launched on the ne+t trading day
H209+-9
'any participants in the commodity futures market are hedgers "hey use the
futures market to reduce a particular risk that they face "his risk might relate to
the price of !heat or oil or any other commodity that the person deals in "he
classic hedging e+ample is that of !heat farmer !ho !ants to hedge the risk of
fluctuations in the price of !heat around the time that his crop is ready for
harvesting &y selling his crop for!ard, he obtains a hedge by locking in to a
predetermined price ,edging does not necessarily improve the financial
outcome? indeed, it could make the outcome !orse 9hat it does ho!ever is, that
it makes the outcome more certain ,edgers could be government institutions,
private corporations like financial institutions, trading companies and even other
participants in the value chain, for instance farmers, e+tractors, ginners,
processors etc, !ho are influenced by the commodity prices
T1E25 ,< 8209+-9
1( Fong hedge
3( Short hedge
L,-9 82092
,edges that involve taking a long position in a futures contract are kno!n as long
hedges : long hedge is appropriate !hen a company kno!s it !ill have to
purchase a certain asset in the future and !ants to lock in a price no!
S8,3* 82092
: short hedge is a hedge that re.uires a short position in futures contracts :s !e
said, a short hedge is appropriate !hen the hedger already o!ns the asset, or is
likely to o!n the asset and e+pects to sell it at some time in the future )or
e+ample, a short hedge could be used by a cotton farmer !ho e+pects the cotton
crop to be ready for sale in the ne+t t!o months : short hedge can also be used
!hen the asset is not o!ned at the moment but is likely to be o!ned in the
future )or e+ample, an e+porter !ho kno!s that he or she !ill receive a dollar
payment three months later ,e makes a gain if the dollar increases in value
relative to the rupee and makes a loss if the dollar decreases in value relative to
the rupee : short futures position !ill give him the hedge he does
CONCLUSION
• "he trading in commodity derivatives started on Dec J 3442
• 9ithin a short span of 2 years the trading volume in commodity derivatives
increased in a rapid manner, no! it going to e.uali/e !ith the financial
derivatives trading volumes
• )irst derivatives emerged as hedging products in commodities
• "hese commodities are the risk management instruments !hich transfers
the pricing risks to other parties
• Internationally, commodity derivatives are e+change # traded
• In the bullish market, the investors can earn profits by buying the
commodity futures
• In the bearish market, the investors can earn profits by selling the
commodity futures
• "he hedgers can transfer their risks to other parties by !ays of long hedge
and short hedge
• "he speculators can build large positions !ith little margins by !ay of
leverage and their profitIloss potential is unlimited
• "he arbitragers can also earn risk less profits by !ays of cash Jand#carry
arbitrage and reverse cash#in#carry arbitrage
• "hese commodity products are very much ne! to India
• "he S@&I is taking necessary actions to create a!areness into the
investors
RECOMMENDATIONS
• "he commodities are very comple+ financial instruments ,ence the
investor should take at most care !hile trading
• In India, the commodities only have commodity futures, and the options in
commodities should be introduced
• "he S@&I and the Stock @+changes should take more actions %investor*s
a!areness programmes( to create a!areness and kno!ledge in bet!een the
investors
• :ll the persons and intermediaries associated !ith the commodity
derivative markets must fulfill the minimum education %DC)'(
• &y using the trading strategies %long hedge and short hedge( the
producers can transfers the pricing risk
• "he agree commodity producers can get better prices for their production
in the market by !ay of efficient price discovery !ith the help of future prices
• &y using these commodity futures the farmers can benefit by !ay of short#
selling
• &y using commodity futures inventory risk !ill be minimi/ed
BIBLIOGRAPHY
(EBSITES:
!!!!ikipediacom
!!!investopediacom
!!!googlecom
doc_124088912.doc