Commodity Derivatives

Presented By:Atul JainAbhishek

Goud

Commodity Derivatives

COMMODITY DERIVATIVES

COMMODITY DEFINED Every kind of movable good excluding money,

securities and actionable claims Any good that possesses a physical attribute. Comes from a French word “commodite” which is used

to refer to an object of utility, that offers some convenience or useful service.

A commodity is an economic good, tradable good, product or article of commerce; something for which there is an established market where the commodity can be bought and sold in commercial transaction between willing buyers and sellers.

Commodities include Metals (Bullion & Other Metals) Agro Products

Perishable / Non Perishable Consumable / Non Consumable

DERIVATIVES DEFINED

Contracts (Futures or Options) the value of which is derived from the underlying assets are called Derivatives.

Derivatives are contracts that originated from the need to minimize risk.

COMMODITY DERIVATIVES DEFINED

Derivative contracts where the underlying assets are Commodities are called Commodity derivatives

If the underlying asset of the derivative contract is PRECIOUS METALS (Gold, silver, platinum etc) OTHER METALS (tin, copper, lead, steel, nickel etc) AGRO PRODUCTS (coffee, wheat, pepper, cotton) ENERGY PRODUCTS (crude oil, heating oil,natural

gas) then the derivative is known as a commodity

derivative..

Types of Commodities

Agricultural products Oil and Oil Seeds Spices Pulses Plantations Fibers Potato sugar

Industrial Metals Copper Zinc Aluminium Lead Tin Steel Sponge iron

Precious Metals Gold Silver platinum

Energy Crude oil Natural gas Furnace oil Aviation Turbine Fuel(ATF) power

Commodity Exchange

What is COMMODITY EXCHANGE?

An Exchange is an institution, organisation or association which hosts a market where stocks, bonds, options and futures, as well as commodities are traded, and where buyers and sellers can come together to trade during specific hours on business days.

A commodity exchange offers a central meeting place where buyers and sellers meet to do business, and where various commodities are traded.

Functions:

Sets rules and regulations to standardise the practice of buying and selling in the market.

Provides the mechanism for resolution of business disputes.

Helps to generate and disseminate valuable signals relating to price and market information to exchange members, their customer and interested market participants on a real time basis.

WHY ARE COMMODITY DERIVATIVES REQUIRED

India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products.

Agriculture contributes about 22% to the GDP of the Indian economy.

It employees around 57% of the labor force on a total of 163 million hectares of land.

Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives.

It is important to understand why commodity derivatives are required and the role they can play in risk management

It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time.

The possibility of adverse price changes in future creates risk for businesses.

Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes

Indian Commodity Exchanges Ace Derivatives & Commodity Exchange Bhatinda Om & Oil Exchange Ltd., Batinda E-Commodities Ltd Esugarindia.com First Commodity Exchange of India Ltd, Kochi Haryana Commodities Ltd., Hissar Multi-Commodity Exchange of India National Board of Trade Limited National Commodity & Derivatives Exchange Limited National Multi-Commodity Exchange of India Ltd Rajdhani Oils and Oilseeds Exchange Ltd. , Delhi Surendranagar Cotton oil & Oilseeds Association Ltd

The Bikaner Commodities Exchange Limited The Bombay Commodity Exchange Ltd The Bullion Association Limited The Central India Commercial Exchange Ltd, Gwaliar The Chamber of Commerce The East India Cotton Association The East India Jute & Hessian Exchange Ltd, The Indian Pepper and Spice Trade Association The Meerut Agro Commodities Exchange Co. Ltd., Meerut The Rajkot Seeds oil & Bullion Merchants` Association Ltd The Spices and Oilseeds Exchange Ltd. Vijay Beopar Chamber Ltd.,Muzaffarnagar

MODERN COMMODITY EXCHANGESMulti-Commodity Exchange of India Limited

(MCX) Inaugurated in November 2003 by Shri Mukesh Ambani

Chairman and MD Reliance Industries LTD. Headquarters in Mumbai MCX an independent and de-mutualized.

Multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country.

Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Maharashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank.

MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Through the integration of dedicated resources, robust technology and scalable infrastructure.

MCX offers futures trading in the following commodity categories: Agri Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities.

MCX has built strategic alliances with some of the largest players in commodities eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United Planters Association of India and India Pepper and Spice Trade Association.

(B)NATIONAL COMMODITY AND DERIVATIVES EXCHANGE LIMITED (NCDEX)

National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed online multi commodity exchange

Promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertiliser Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the initial promoters as shareholders of the Exchange.

NCDEX is located in Mumbai and offers facilities to its members in more than 390 centers throughout India.

NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed, Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Gur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal.

SETTLEMENTS DAILY SETTLEMENTS A.DAILY SETTLEMENTS: After the closing hours at the end of each day. Determine the closing price for the day

› Weekdays : 11:15 p.m. to 11:30 p.m.› Saturday : 2:15 p.m. to 2:30 p.m.

Mark to Market Settlement1. For daily price fluctuations2. All Trades are Marked to Market at daily

settlement price3. Pay In/ Pay Out required as the case maybe

4. Daily Process at the end of each day

FINAL SETTLEMENTS *Cash Settlement *Delivery Settlement  Cash Settlement Settlement for all open positions on the expiry

date Determine all open positions for all the clients Determine the final settlement price for the

contract Determination of Final Settlement Price Underlying spot price on Expiry date Bootstrapping of polled prices Disseminated to market at end of day

Delivery settlement  Delivery Margin Requirements till physical

delivery is made/received Transportation & other expenses to be paid by

clients Assaying fees and Warehousing fees Goods below the Allowable Variation considered

as bad delivery and penalties are levied