A Study on Commodities Trading Investment and Speculation MBA Marketing Projects

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 I II INTRODUCTION INDUSTRY PROFILE PAGE NO: 5-15 16-17

III

NEED FOR THE STUDY OBJECTIVES, METHODOLOGY LIMITATIONS 1!-1" #$-#6 #7-%& %%-%! %"-71

IV V VI VII

COMMODITY FUTURES CONTRACT COMMODITY TRADING PARTICIPANTS IN COMMODITY MAR'ET REGULATORY FRAME(OR' FOR COMMODITY TRADING IN INDIA

VIII X XI

ANALYSIS CONCLUSIONS BIBLIOGRAPHY RECOMMENDATIONS

7#-77 7!-7" !$

INTRODUCTION Indian markets have recently thro!n open a ne! avenue for retail investors and traders to participate commodity derivatives 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 )or those !ho !ant to diversify their portfolios beyond shares, bonds and real estate, commodities

silver or oilseeds in the futures market for pumping in commodities

"his !as nearly impossible in

commodities e+cept for gold and silver as there !as practically no retail avenue

,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 -etail should understand fundamentals of demand and supply are concerned

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 -s 12,34,524 crore% -s 12,345 2 billion(, commodities related % and dependent( industries constitute about 67 per cent Currently, the various commodities across the country clock an annual turnover of -s 1,84,444 crore % -s 1,844 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 includes all kinds of goods money and securities= In short commodity )or!ard Contracts %-egulation( :ct %)C-, 1;63

defines <goods= as <every kind of movable property other than actionable claims,

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 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 'C$ facilitates online trading, clearing

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 management in the vital market

It brings a price transparency and risk

: 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>, Products Soya, mustard e+change, 'ultiple Castor, cotton 'ustard Gur Castor, groundnut Pepper Gur, mustard Gur

Commodity @+change Dational board of trade, Indore Dational multi commodity

:hmedabad :hmedabad commodity e+change -ajadhani 0il E 0il seeds Vijai &eopar Chamber Ftd , 'u//affarnagar -ajkot seeds, 0il E bullion e+change IPS":, Cochin Chamber of commerce, ,apur &hatinda 0m and 0il @+change 0ther % mostly inactive(

C,//,0+*1 E678)-925 R29+5*2320 +- I-0+) Commodity @+change Products "raded &hatinda 0m E 0il @+change Gur Ftd , Sunflo!er 0il Cotton % Seed and 0il( Safflo!er % Seed , 0il and 0il Cake( "he &ombay commodity 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 Groundnut 0il, Castro Seed 'erchants :ssociation Ftd "he Canpur Commodity -apeseed I 'ustard seed oil and cake @+change Ftd , "e 'eeerut :gro commodities Gur @+change Co , Ftd "he Spices and 0ilseeds "urmeric @+change Ftd

e+change Ftd , Sangli :hmedabad Commodities Cottonseed, castor seed @+change Ftd Vijay &eopar Chamber Ftd , Gur 'u/affarnagr India Pepper E Spice "rade Pepper :ssociation, Cochi -ajadhani 0ils and 0il seeds Gur, -apeseed I 'ustard Seed Sugar Grade J @+change Ftd ,Delhi ' -apeseed I 'ustard Seed I 0il I Cake Soya bean I 'eal I 0il I Crude Palm 0il Dational &oard of "rade, Indore "he Chamber of Commerce, Gur, -apeseed I 'ustard seed

,apur "he @ast

India

Cotton Cotton

:ssociation, 'umbai "he central India Commercial Gur @+change Ftd G!aliar "he east India Kute E ,essain ,essain, Sacking @+change Ftd , Colkata )irst Commodity @+change of Copra, Coconut 0il E Copra Cake India Ftd , Cochi "he Coffee )utures @+change Coffee India Ftd &angalore Gur -&D Pamolien Crude Palm 0il, Copra -apeseed I 'ustard Seed, Soy &ean Cotton % Seed, 0il, 0il Cake( Dational @+change :hmedabad 'ulti of Commodity Safflo!er % Seed, 0il, and 0il cake( India Ftd , I 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 Soy &ean, -efined Soy oil, 'ustard Seed @+peller 'ustard 0il -&D Palmolein Crude Palm 0il 'edium staple cotton Fong Staple Cotton Gold, Silver

Derivatives @+change Fimited

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 B S dollar, this meant that other countries !ould pet their currencies to the B S dollar, and J once convertibility !as restored J !ould buy and sell B S dollars to keep market e+change rates !ithin plus or minus 1M of parity "hus, the B S 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 B S 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 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 37 6 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$( is an independent commodity e+change based in India It !as established in 3442 and is based in 'umbai It has an average daily turnover of around BSA1 66 billion 'C$ 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> !!! !ikipedia com !!! investopedia com !!! google com

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 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 F,3C)30 C,-*3)7*>

FOR(ARDS CONTRACTS

)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 • • asset • If the party !ishes to reverse the contract, it has to compulsorily go to the "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

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 "rade on an organi/ed e+change Standardi/ed contract terms ,ence more li.uid -e.uires margin payment

)0-9:-DS 0"C in nature Customi/ed contract terms ,ence less li.uid 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, i e , 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

COMMODITY 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 34th 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 conditions are broadly divided into the follo!ing categories> • • • "ime conditions Price conditions 0ther conditions "hese

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 -s 284I# 14 kg If the market does not reach this price the

order does not get filled even if the market touches -s 281 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 -s 844I# 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 price reaches that point the stop order becomes a market order 9hen the '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 -s 564 per barrel ,e

!ishes to limit his loss to -s 64 a barrel : stop order !ould then be placed to sell an offsetting contract if the price falls to -s 544 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 "his margin is meant to

time of entering into a contract is called initial margin 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 &ased on the

daily reducing the credit e+posure to one day*s movement

settlement price, the value of all positions is marked#to#market each day after the official close, i e , 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 :ll open

underlying commodity on the last trading day of the futures contract 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 physical settlement makes the process a little more complicated P Types of Settlement Daily Settlement Daily Settlement Price Han les aily price fl!ct!ation for all tra es "mar# to mar#et$ Daily process at en of ay Final Settlement "he possibility of

Final Settlement Price Han les 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 "he polled bidIask prices are bootstrapped and the mid of the

through polling

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 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 "he e+act settlement day for each commodity is

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 tolerance limits for variances ,enceI DCD@$ contracts also provide

: 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 -s 6;37 In this case, over the period of holding the position he has suffered a loss of -s 1G3 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 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 9e !ill

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 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 -s G444 per 14 "ables 5 2 gives the

gms and three#months gold futures trades at -s G164 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 -s G,16,444 &uying an asset in the futures markets only re.uire making margin payments "o take this position, he pays a margin of -s 1,34,444 "hree months later gold trades at -s G844 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 -s G8,444 in the process making a profit of -s 36,444 on an

initial margin investment of -s 1,34,444 "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 -s 8,44,444 ,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 -s 2,64,444, making a profit of -s 64,444

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(ee" 9here> Cost of financing %annuali/ed( " B Q Q "ime till e+piration 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 -egulation is also

spot prices, thereby affecting interests of society at large

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 %i e to prevent systematic risk of default by one major operator or group of operators(, market integrity %i e to ensure that futures prices are truly aligned !ith the prospective demand and supply conditions( and to protect and promote interest of customersI nonmembers follo!ing regulatory measures> 1 Fimit on net open position as on close of the trading houses Some "he limit is imposed It prescribes the

times limit is also imposed on intra#day net open position 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 e+change "his measure is imposed only on the re.uest of the

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 imposed on the re.uest of the e+change 6 Skipping trading in certain derivatives of the contract closing the "his measure is also

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 i e 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 Gold 14am 11 24pm Gold mini 14am 11 24pm Silver 14am 11 24pm Silver mini 14am 11 24pm Steel long 14am 6 44pm Steel flat 14am 6 44pm Fight s!eet 14am Crudeoil 11 24pm Datural gas 14am 11 24pm -&D 14am palmolein 6 44pm -efined soyoil -ubber 14am 11 24pm Soy seed &lack 14am paper 6 44pm Capas 14am 6 44pm Castor oil 14am 6 44pm Castor 14am seed 6 44pm Copper 14am 11 24pm Dickel 14am 11 24pm "in 14am 11 24pm Fot si/e to 1kg to 144kg to 24kg to 6kg to 36mt to 36mt to 144bbls to 644mmbt u to 1mt 1mt to 1mt 1mt to 1mt to 8mt to 1mt to 1mt to 1mt to 644kg to 364kg Initial 'argins 6M 6M 6M 6M 6M 6M 8M 8M 8M 8M 6M 8M 7M 6M 8M 8M 6M 6M 7M

Guar seed Chana %Gram( Brad %black 'atpe( Nello! peas "ur %pigeon peas(

14am 6 44pm 14am 6 44pm 14am 6 44pm 14am 6 44pm 14am 6 44pm

to 6mt to 6mt to 34mt to 34mt to 14mt

5M 6M 6M 6M 6M

Dote> in !inter timings from 14 44am to 11 66pm

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 "rading cycle for each

reduce the trading hours by notifying the members

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 generated on the system are irrevocable and blocked in 1 "raders

"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 clearing member cannot operate the clearing account for any other purpose "he

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 Do 1I1 along !ith the follo!ing enclosures 1 "he statement of case%containing all the relevant facts about the

dispute and relief sought( 3 2 "he statement of accounts 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 1st day J &uyerIseller informs the e+change about their intentions 6th day J &uyer is re.uired to make payment in accordance to the .uantity allocated to him Gth day J seller is re.uired to deliver the goods at the delivery centers specified by the @+change by 13 44 noon &uyer can pick up the delivery from 13 44 noon to 8 44pm 5th day J "he Payment !ill be released to the seller COST PHYSICAL DELIVERY )i+ed Costs Group 8 receipt charges Group 8 'anagerial charges Group 8 'ovement charges Packing :9& Cutting charges Valuation Charges "otal fi+ed cost Variable cost Foading Iunloading charges Insurance on flight ESTIMATED MAR'ET Physical Physical 2"imes pa %-s bn( Per day %-s Crs( 1G4 384 multipl e Per day 874 534 6 "imes 'ultiple Per day -s 264 2444 6444 644 6444 12764 4 4 16Iper 1444

&ullion 'etals

844 G44

744 1344

:gri 6444 @nergy 6444 "otal 11444

3444 3444 8844

G444 G444 12344

14444 14444 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 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 relic U 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 Due to large stocks of Gold as against its demand, it is argued that the

major institutions and retail Ke!ellery keep coming back to the market core driver of the real price of gold is stock e.uilibrium rather than flo! e.uilibrium • • • tons @conomic forces that determine the price of gold are different from, and in South :frica is the !orldVs largest gold producer !ith 2;8 tons in 3441, India is the !orldVs largest gold consumer !ith an annual demand of 744 many cases opposed to the forces that influence most financial assets follo!ed by BS and :ustralia

(,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 'n ia in Worl Gol 'n !stry %-ounded )igures( India %In "ons( "otal Stocks 12444 Central &ank holding 844 :nnual Production 3 :nnual -ecycling 144#244

9orld %In "ons( 186444 37444 3G44 1144#1344

M Share ; 18 4 47 12

:nnual Demand :nnual Imports :nnual @+ports

744 G44 G4

2544 ### ###

33 ### ###

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

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 "he gold hoarding tendency is !ell ingrained in Indian society Domestic consumption is dictated by monsoon, harvest and marriage gold from 65 percent during 1;7G to 1;;1 to 7 6 percent in 3441

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 )acilities for refining, assaying, making them into standard bars in India, range of consumer goods 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 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

official gold loans

F32A;2-71 D+5*> ,< G,.0 L,-0,- F+6+-9 V,.)*+.+*1 <3,/ 1""5 *+.. 0)*2 Percentage Change Daily Dumber of times Percentage times 9eekly Dumber of times Percentage times W 6M 8 43 2 45 3#6M 68 38 G3 18 1 X 3M 3185 ;5 8 25G 76 2

&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

• 38+5 •

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 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, Performance of gold not linked to performance of any company, industry 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 Gold doesnVt ever loose its intrinsic value

sold or traded globally or government

under !orst societal conditions

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 :ssured Ouality E Purity 38 k,;;6 E ;;; fineness gold bars imported from Delivery at 8 locations :hmedabad, Delhi, Colkata E 'umbai

the outlet unlike today F&': approved overseas suppliers

A04)-*)925 *, ) J2C2..23 • • • • • • 'C$ • Delivery at 8 locations :hmedabad, Delhi, Colkata E 'umbai : platform to trade in physical gold !ith shorter E 144M guaranteed "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&': Seamless platform %buying E selling( for transaction @asily accessible through an e+isting stock broker !ho is a member of

delivery cycle vis a vis futures market

approved

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( Service "a+ on brokerage Demat E -emat Custody E Insurance V:" Sales "a+ agency charge

4 64 J 1 44M of transaction value 13 38M on brokerage -s 144I# 344I#per transaction -s 5,344 p a per %1k g( 1M of transaction value 4 64M # 1 44M %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( Service "a+ on brokerage Demat E -emat Custody E Insurance V:" Sales "a+ agency charge

4 64 J 1 44M of transaction value 13 38M on brokerage -s 144I# 344I#per transaction -s 5,344 p a per %1k g( 1M of transaction value 4 64M # 1 44M %re.uired for selling physical gold(

T)6 T32)*/2-* (2).*8 T)6 • • Investment upto -s 16 lacs during a financial year is e+empted Investment W -s 16 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 -s per 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 Dame of Commodity "icker symbol "rading system &asis Bnit of trading Delivery unit OuotationIbase value "ick si/e

)utures Contract Specifications Gold G0FD144'B' DCD@$Vs "rading System @+#'umbai inclusive of Customs Duty and 0ctroi, e+cluding Sales "a+IV:" 144 grams 144 grams -s per 14 Grams of Gold !ith ;;6 fineness -e 1 Bp to ;;; ; fineness bearing a serial number and identifying stamp of a refiner approved by the @+change

Ouality specification Fist of approved refiners is available at the follo!ing B-F> !!! ncde+ comYdo!nloadsYrefinersZgold pdf Ouantity variation Delivery center :dditional delivery centres "rading hours Done 'umbai :hmedabad :s per directions of the )or!ard 'arkets Commission from 'ondays 14>44 :' time to through to time, currently )ridays 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 34th Due date I @+piry Date 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 Bpon e+piry of the contracts all the outstanding positions should result in compulsory delivery Delivery specification : 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 "rading in a far month contract !ill open on the 14th 0pening of Contracts 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 Price limit Contracts !ould be opened as per the launch calendar given belo! 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 'ember!ise > G '" or 16 M of market !ide open position, !hichever is higher Client#!ise # 3 '" Position limits "he above limits !ill not apply to bonafide hedgers )or bonafide hedgers the @+change !ill decide the limits on a case#to#case basis Gold Ouality Delivery( bars of ;;6 I ;;; ; fineness

allo!ance%for : 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 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

Special 'argin

L);-78 C).2-0)3>

G,.0 1$$ G3)/5

Faunch Date 31st Dovember 3445 December 3445 Kanuary 3447 )ebruary 3447 'arch 3447 ril 3447 'ay 3447 Kune 3447 Kuly 3447 :ugust 3447 September 3447

Contract @+piring in December 3445, Kanuary 3447, )ebruary 3447 'arch 3447 ril 3447 'ay 3447 Kune 3447 Kuly 3447 :ugust 3447 September 3447 0ctober 3447 Dovember 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( 3( Fong hedge 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

• selling

&y using these commodity futures the farmers can benefit by !ay of short#

•

&y using commodity futures inventory risk !ill be minimi/ed

BIBLIOGRAPHY

(EBSITES: !!! !ikipedia com !!! investopedia com !!! google com



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