COMMODITIES MARKET

transcript

COMMODITIES MARKET

SUBMITTED BY:-RINKI GROVER

ROHIT CHOPRAMENU SHARMA

MEGHNA GUPTASHUBHANGI SHUKLA

TUSHAR ARORAVARUN KUMAR

Commodity

◙ A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a markets.

◙ They are things of value, of uniform quality, that are produced in large quantities by many different producers; the items from each different producer are considered equivalent.

Classification of Commodities

Precious Metals

Other Metals

Agro Based Commodities

Soft Commodities

Petrochemicals

Crude Oil

Commodities Market

Commodities market essentially represents another kind of organized market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate etc.

What can commodities offer?

• If you are an Investor,

• High Leverage – The margins in the commodity futures market are less than the F&O section of the equity market.

• Less Manipulations - Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations.

• Diversification – The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification

• If you are an Importer or an Exporter

Hedge against price fluctuations – Wide fluctuations in the prices of import or export products can directly affect your bottom-line as the price at which you import/export is fixed before-hand. Commodity futures help you to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any change in prices that happen subsequently.

• If you are a producer of a commodity, 1. Lock-in the price for your produce – If you

are a farmer, there is every chance that the price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures you can effectively lock-in the price at which you wish to sell your produce

2. Assured demand – Any glut in the market can make you wait unendingly for a buyer. Selling commodity futures contract can give you assured demand at the time of harvest.

If you are a large scale consumer of a product,

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

Cont…

• Ensure continuous supply – Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.

Commodities – An Alternate Asset Class

◘Returns are independent of other asset classes

◘Low correlation with other asset classes◘Its returns cannot be replicated with

combination of other asset classes◘Positively correlated with inflation whereas

bonds & equities are negatively◘correlated◘ Have independent risk/return profile

Commodity Exchange• Commodity exchange is an exchange where raw

or primary products are traded in standardised contracts for future delivery.

• A commodity exchange is conceptually comparable to a Stock Exchange. The difference between the two is that on a Stock Exchange, securities are traded and on a Commodity Exchange, commodity futures are traded.

What are the major commodity Exchanges?

The Government of India permitted establishment of National-level Multi-Commodity exchanges in the year 2002 and accordingly three exchanges

have come into picture. They are

Multi-Commodity Exchange of India Ltd, Mumbai (MCX).

National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).

National Multi Commodity Exchange, Ahmedabad (NMCE).

Commodity Exchanges at international level

EXCHANGE MAJOR COMMODITIES TRADED • New York Mercantile Exchange (NYMEX)- Crude Oil,

Heating Oil • Chicago Board of Trade- Soy Oil, Soy Beans, Corn• London Metals Exchange- Aluminium, Copper, Tin, Lead• Chicago Board Option Exchange -Options on Energy,• Interest rate Tokyo Commodity Exchange -Silver, Gold,

Crude oil, • Rubber Malaysian Derivatives Exchange -Rubber, Soy

Oil, Palm Oil

20 Other Regional

Exchanges

20 Other Regional

Exchanges

Commodity ExchangesCommodity Exchanges

MCXMCX

Structure of Indian Commodity Futures Exchanges

National exchange

Regional exchange

NBOTNBOTNCDEXNCDEX

FAQs• Can anybody hedge on commodity

exchanges?

• What are the precautions one should take in trading on commodity exchanges?

• Are commodity exchanges subject to any regulatory control by the government?

NCDEXNational Commodity & Derivatives Exchange of India Limited

• NCDEX is a multi commodity exchange incorporated in 2003

• It is regulated by FMC & various other laws

• It is located in Mumbai & operates at national level

Share Holders

ProductsNCDEX currently facilitates trading of 57 commodities

Agricultural

Metals

Energy

INTRODUCTION TO MCX….• MCX is an independent Commodity

exchange based in India by Financial Technologies.

• It was established in 2003 and is based in Mumbai.

• The turnover of the exchange for the period Apr-Dec 2008 was INR 32 Trillion.

FEATURES OF MCX…

• MCX is India's No. 1 commodity exchange with 84% Market share in 2008($0.84 trillion)

• The exchange's competitor is National Commodity & Derivatives Exchange Ltd

• Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in futures trading

• The crude volume touched 23.49 Million barrels on January 3, 2009

Cont…

• The highest traded item is gold with an average monthly turnover of Rs 1.42 Trillion ($29 Billion).

• MCX has 10 strategic alliances with leading commodity exchange across the globe

• The average daily turnover of MCX is about US$ 2.4 billion.

• MCX now reaches out to about 500 cities in India with the help of about 10,000 trading terminals

• MCX COMDEX is India's first and only composite commodity futures price index

“MCX Stock Exchange partners with FTSE Group to create new index opportunities for Indian financial market”

• MCX Stock Exchange brings with it superior technology and processes that makes it one of the most efficient exchanges in India.

• It is recognized by the Securities and Exchange Board of India (SEBI) as a stock exchange.

• MCX Stock Exchange enjoys good market share in trading currency futures and is fully geared to increase market depth and enhance reach and access in Indian securities market.

Multi Commodity Exchange of India Lmt. (MCX)

Cont…

• It is promoted by MCX, the no 1 commodity exchange in India and Financial Technologies that operates multi asset exchanges in different geographies and time zones.

• With more than 600 members and trading terminals spread over several cities, MCX Stock Exchange is committed to deploy state of the art technology and global best practices in regulatory compliance and investor protection.

Cont…

• The exchange enables importers, exporters, investors, corporations and banks to hedge their currency risks with greater transparency and safety.

• With a large number of banks, corporates, brokerage houses and actual users as its trading members, MCX Stock Exchange provides the desired liquidity and depth for all categories of users.

Cont….

• Guarantees settlement of all transactions, by eliminating counterparty risk.

• It believes in “systematic development of markets through Information, Innovation, Education and Research”

• MCX-SX’s currency derivatives segment offers an India-wide electronic platform for trading in currency futures .

Commodities traded at MCX•Aluminium• Copper,•Lead• Nickel•Steel•Zinc, etc.

BULLION

•Gold• Gold HNI•Gold M,•Silver,•Silver HNI•Silver M

•Cotton L Staple• Cotton M Staple• Cotton S Staple•Cotton Yarn•Kapas

• Crude Oil•Furnace Oil•Natural Gas,•ATF•Electricity•Carbon Credit

ENERGY

•Cardamom•Jeera•Pepper•Red Chilli

SPICES

•Arecanut•Cashew Kernel• Coffee (Robusta)• Rubber

PLANTATIONS

•Chana•Masur•Yellow Peas

PULSES

•HDPE•Polypropylene(PP)• PVC

PETRO CHEMICALS

Trading in Commodity market

Commodities can be traded in:-

•Spot markets•Futures market•Forward contracts market

How does the trading work?

• Commodity trading works exactly like stock futures

• When you buy a ‘Futures’, you don’t have to pay the entire amount, just a fixed percentage of the cost. This is known as the margin.

Future trading

Futures are standardized contracts among buyers and sellers of commodities that specify the amount of a commodity, grade / quality and delivery location.

• Price discovery for commodity players– A farmer can plan his crop by looking at prices prevailing in the futures market

• Hedging against price risk – A farmers can sell in futures to ensure remunerative prices– A processor/ manufacturing firm can buy in futures to hedge against volatile raw

material costs– An exporter can commit to a price to his foreign clients– A stockist can hedge his carrying risk to ensure smooth prices of the seasonal

commodities round the year

• Easy availability of finance Based on hedged positions commodity market players (farmers, processors, manufacturers, exporters) may get easy financing from the banks

BENEFITS OF TRADING

Spot market trading

Spot markets are those in which the commodity is traded immediately in exchange for cash or some other good.

Spot trading is any transaction where delivery either takes place immediately, or if there is a minimum lag, due to technical constraints, between the trade and delivery.

Commodity Market Structure

Producers(Farmers/

Co-operatives/Institutional)

CommoditiesEcosystem

Consumers(Retail/

Institutional)

QualityCertification

Agencies

Clearing Bank

Warehouses

Transporters/Support

Agencies

Traders(Speculators)Arbitrageurs/

Client)

Hedger(Exporters/

Millers/Industry)

Global Commodities Market

Spot Market

Forward contracts

A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price.

For Example You decide to buy 100gms of gold

futures (which is the minimum contract size) for a certain price. You have to pay a certain amount of margin set by the commodity trading exchange you are trading on, which would be a lower amount than the original price for 100 gms.

The next day the price goes up by Rs. 1000. Rs. 1000 would be credited into your account. The following day it dips by Rs. 500. Rs. 500 is debited from your account. Once you feel that the amount that you have already profited with is not going to change, you can choose to sell the futures.

COMMODITY ECOSYSTEM

References

• Wikipedia.com• Google.com• Karvy commodities• MCXindia.com• NCDEX.com• Investopedia.com• Business magazines• indiabudget.nic.in• Boomrang.com• Business.mapsofindia.com

THANK YOU……

COMMODITIES MARKET

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