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` Commodity markets are markets where raw products minedproducts such as metals, energy products such as oil andagricultural produce are traded.
` With increasing volumes and standardization in commodity
units traded the market is now become an important part ofglobal economy and its functioning.
` Purpose :A commodity market was created for farmers tobring their commodities and sell them either for immediatedelivery (also called spot or cash market) or for forwarddelivery.
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` Started In Japan , with trading of rice and silk.
` Then in 19th centuries Holland and US began trading.
` CTA was the first one to start cotton trading in India
` Followed by :-
Oilseed in Bombay (1900) Raw Jute and jute goods in Calcutta (1912)
Wheat in Hapur (1913) Bullion in Bombay (1920)
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` A well-developed and effective commodity futures market,unlike physical market, facilitates offsetting the transactionswithout impacting on physical goods until the expiry of a
contract.` Futures market attracts hedgers who minimize their risks, and
encourages competition from other traders who possessmarket information and price judgment
` These forward contracts were private contracts between
buyers and sellers and became the forerunner to today'sexchange-traded futures contracts.
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` Spot price: The price at which an asset trades in the spotmarket.
` Futures price: The price at which the futures contract tradesin the futures market.
` Contract cycle: The period over which a contract trades. Thecommodity futures contracts on the NCDEX have one-month,two-months and three-month expiry cycles.
` Expiry date:
` Delivery unit: The amount of asset that has to be deliveredunder one contract
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` Basis: Basis can be defined as the futures price minusthe spot price
` Cost of carry: The relationship between futures prices andspot prices
` Marking-to-market (MTM): at the end of each trading day,the margin account is adjusted to reflect the investor's gain orloss
` Maintenance margin: This is somewhat lower than the initialmargin. This is set to ensure that the balance in the marginaccount never becomes negative
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` Hedging
` Speculation
` Portfolio diversification
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There are basically two kinds ofhedges that can be taken. A company that wantsto sell an asset at a particular time in the future
can hedge by taking short futures position. Thisis called a short hedge. Similarly, a companythat knows that it is due to buy an asset in thefuture can hedge by taking long futures position.
This is known as long hedge.
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` The commodities futures markets provide speculatorswith an easy mechanism to speculate on the price ofunderlying commodities. This enables futures traders to
take a position in the underlying commodity withouthaving to actually hold that commodity. With thepurchase of futures contract on a commodity, the holderessentially makes a legally binding promise or obligationto buy the underlying security at some point in the future(the expiration date of the contract).
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` Diversification in finance is a risk managementtechnique, related to hedging, that mixes a widevariety of investments within a portfolio.
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` Guar seed 4,432.71 ($ million)
` Gold 4,082.15 ($ million)
` Silver 3,869.36 ($ million)
` Crude oil 3,380.13 ($ million)
` Chana (chick peas) 2,100.15 ($ million)
` Urad (Black Legume) 624.71 ($ million)
` Gur (Jaggery: cane sugar)369.72 ($ million)
` Guar Gum 345.08 ($ million)
` Tur (Lentils) 329.35 ($ million)Source: www.ncdex.com
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61%
39%
Awareness of the commodity market
Aware
Unaware
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30%
70%
Platform Used forTrading
Not using platform fortrading
Platform Used forTrading
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13.04%
17.39%
4.34%
17.39%
8.69%
26.08%
13.04%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%
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Lack of awareness
Very risky/highly volatile
Pure gambling Dabba is Best
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` www.mcxindia.com` www.ncdex.com` www.google.com`
www.wikipedia.com` Commodity Market module material of NCFM` Article on Business Standard 8th December 2008` News in Economic Times 31st December
2009, 30th March 2010` COMMODITY WORLD news paper (Language-
Gujarati)
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