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CHAPTER I
INTRODUCTION
1.1 Background of the study
This study is conducted for the fulfillment of the requirements for summer project in the
fifth semester of Bachelor of Business Administration in Banking and insurance (BBA-
BI) program. The summer project is entitled to 3 credits in the Bachelor of Business
Administration in Banking and insurance (BBA-BI), affiliated to Pokhara University.
This project work is concentrated on the commodity market in the context of Nepal. For
the study, both the commodity exchanges of Nepal, Commodity and Metal Exchange
Nepal Ltd (COMEN) and Mercantile Exchange Nepal (MEX) are thoroughly studied.
A commodities exchange is an exchange where various commodities and derivatives
products are traded. Most commodity markets across the world trade in agricultural
products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee,
milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts
can include spot prices, forwards, futures and options on futures. Other sophisticated
products may include interest rates, environmental instruments, swaps, or ocean freight
contracts.
Commodity markets are markets where raw or primary products are exchanged. These
raw commodities are traded on regulated commodities exchanges, in which they are
bought and sold in standardized contracts.
1.2 Statement of the problem
Commodity market is the place where people can still earn the profit even if there is
downfall in the price of the commodity. The major problem is that people do not have
enough knowledge about commodity exchange. They do not know how they function and
risk associated with the exchanges.
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There are two commodity exchanges established in the country namely Commodity and
Metal Exchange Nepal Limited (COMEN) and Mercantile Exchange Limited (MEX).
This project has done some comparison on the commodity traded in these organisations.
There are many areas where the commodity exchanges need to work on. Some problem
in commodity exchange is that there is proper governance, lack of warehouse, etc.
1.3 Objective of the study
The primary objective of this study is to fulfill the requirement of the course. After
completing this program we have developed a lot of working skills in ourselves and
gained practical knowledge. We are now able to deal with organizational tasks with
confidence in efficient and effective manner.
The secondary objectives of the study are listed below:
To give insight about commodity exchange.
To make comparison between exchange systems in Nepal.
To know market condition of the commodities.
To examine and analyse the scope of the commodity exchange in Nepal
To find the barriers of the growth of the commodity exchange.
1.4 Methodology
1) Study approach
The study is purely based on the exploratory design finding the answers of research
questions. The problem is properly diagnosed through exploring as much
information as possible through different areas. An exploratory research was
conducted to get the information. Judgmental method used to identify the sample
elements for collection of data.
2) Sources of the Information
Primary sources of the information were used in the study. Data collected through
the research were the main source of information. Besides that literature survey and
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secondary data from the newspapers and websites were used for further analysis of
the commodity exchange.
2) Data collection procedure:
For the collection of data I visited the site, news channel, magazines and
newspapers. Also I interviewed with the professionals, experts of future market,
and staffs of the commodity exchanges to review the mechanism of commodity
exchanges in Nepal. Therefore, the data used while preparing this report is both
primary and secondary.
1.5 Limitation of the study
There were certain limitations faced in the research period which has in some or the other
way made impact in the conclusion of this report. These limitations are listed below:
In-depth and comprehensive study of the workings in the field of commodity
exchange could not be done due to different practices in commodity Exchange
Company.
Data is limited to the research and interview. Details information about the
working of the future market also could not get due to the security and privacy
reasons.
Customers are not fully aware of the working of commodity exchange since their
business is supervised by the broker. Due to this, Data collection was difficult.
The access to the complete information was not possible due to the time and
resource constraint. So the study was conducted in a limited sample size.
The past data regarding the price change in commodity is not available due to the
frequent change in its price.
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CHAPTER II
THE LITERATURE REVIEW
2.1 Introduction of Commodity Exchange
A commodities exchange is an exchange where various commodities and derivatives
products are traded. Most commodity markets across the world trade in agricultural
products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee,
milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts
can include spot prices, forwards, futures and options on futures. Other sophisticated
products may include interest rates, environmental instruments, swaps, or ocean freight
contracts.
Commodity markets are markets where raw or primary products are exchanged. These
raw commodities are traded on regulated commodities exchanges, in which they are
bought and sold in standardized contracts.
2.2 History of Commodity Exchange in Nepal
The history of commodity market is not so old in the case of Nepal. The first exchange
was only established in the country in 2006A.D. The first exchanges that deal with the
commodity exchange in Nepal was Commodity and Metal Exchange Nepal Limited
(COMEN).Later on Mercantile Exchange Nepal (MEX) was established for the same
purpose. Now these two exchanges are providing the future commodity business in
Nepal. Further Exchanges are in pipeline.
2.3 A BRIEF PROFILE OF THE ORGANIZATIONS
2.3.1 Introduction of Commodity and Metal Exchange Nepal Limited (COMEN)
Commodity And Metal Exchange Nepal Limited (COMEN), founded in 2006(2063B.S)
is the largest and most diverse commodity exchange in Nepal for trading futures and
forward. It is one of the first exchanges that deal with the commodity exchange in Nepal.
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It is situated at Lal Durbar, Kathmandu, Nepal. It monitors, regulate, and supervise all the
company, licensed by it as trading or clearing broker for transparency in the commodity
exchange.
It serve the risk management needs of customers around Nepal by offering the widest
range of commodities as products available on any exchange ,traded via COMEN trading
floor. In addition, it’s clearing committee matches and settles all trades and guarantees
the creditworthiness of every transaction that takes place in the market. It’s has wide
range of commodities for trading as financial instruments. It’s future and forward
contracts allow investors to transfer risk, optimize portfolio performance and adjust
underlying exposures with low transaction cost.
2.3.2 Introduction of Mercantile Exchange Nepal limited (MEX)
Mercantile Exchange Nepal Limited (MEX) Various integral aspects of commodity
economy, viz., warehousing, cooperatives, private and public sector marketing of
agricultural commodities, research and training were adequately addressed in structuring
the Exchange. Today, MEX is the only Exchange in Nepal to have such investment and
technical support from the commodity relevant institutions. It has robust delivery
mechanism making it the most suitable for the participants in the physical commodity
markets. It has also established fair and transparent rule-based procedures and
demonstrated total commitment towards eliminating any conflicts of interest.
MEX commenced futures trading in numbers of commodities on a national scale and the
basket of commodities has grown substantially since then to include cash crops, food
grains, vegetables, spices, oil seeds, metals & bullions among others. MEX is the first
Exchange to take up the issue of differential treatment of speculative loss. It is also the
first Exchange to enroll participation of high net-worth corporate securities Members in
commodity derivatives market. It is the Exchange, which shows a way to introduce ware
house receipt system within existing legal and regulatory framework. It is the first
Exchange to complete the contractual groundwork for dematerialization of the warehouse
receipts.
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2.4 Commodities exchanges across the world
Main commodity exchanges worldwide:
S. no. Name Contract Traded
1. Chicago Mercantile Exchange Butter, Milk, Diammonium Phosphate,
Feeder cattle, Frozen Pork bellies, Lean
Hogs, live Cattle, Non-fat Dry Milk,
Urea, Urea Ammonium Nitrate, etc.
2. New York Mercantile Exchange Light Sweet Crude Oil, Natural Gas,
Heating Oil, Gasoline, RBOB Gasoline,
Electricity, Propane, Gold, Silver,
Copper, Aluminum, Platinum,
Palladium, etc.
3. London International Financial
Futures and Options Exchange
Cocoa, Robusta Coffee, Corn, Potato,
Rapeseed, White Sugar, Feed Wheat,
Milling Wheat, etc.
4. Chicago Board of Trade Corn, Soybeans, Soybean Oil, Soybean
meal, Wheat, Oats, Ethanol, Rough
Rice, Gold, Silver, etc.
5. London Metal Exchange Aluminum, Copper, Nickel, Lead, Tin,
Zinc, Aluminum Alloy, North American
Special Aluminum Alloy (NASAAC),
Polypropylene, Linear Low Density
Polyethylene, etc.
6. Tokyo Commodity Exchange Gasoline, Kerosene, Crude Oil, Gold,
Silver, Platinum, Palladium, Aluminum,
Rubber, etc.
7. Sydney Futures Exchange Greasy Wool, Fine Wool, Broad Wool,
Cattle, etc.
8. Dubai Gold and Commodities
Exchange
Gold, Silver, Fuel Oil, Steel, Freight
Rates, Cotton, etc.
9. Bursa Malaysia Berhad Refined Bleached Deodorized
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Palmolein, Crude Palm Oil, Palm
Kernel Oil, etc
10. Dalian Commodity Exchange Corn, Soybean, Soybean Meal, Soy Oil,
etc.
11. Central Japan Commodity
Exchange
Gasoline, Kerosene, Gas Oil, Eggs,
Ferrous Scrap, etc.
12. Shanghai Futures Exchange Copper, Aluminum, Natural Rubber,
Plywood & Long Grained Rice
13. Osaka Mercantile Exchange (Ribbed Smoked Sheets) RSS3,
(Technically Specified Rubber) TSR20,
Nickel, Aluminum, Rubber Index
14. Kansai Commodity Exchange Soybean, Raw Sugar, Raw Silk, Shrimp
(frozen), Coffee, Corn, Azuki beans
(Red), etc.
15. Brazilian Mercantile and Futures
Exchange
Anhydrous Fuel Alcohol, Arabica
Coffee, Robusta-Conillon Coffee, Corn,
Cotton, Feeder cattle, Live Cattle,
Soybean, Crystal Sugar, Gold, etc.
16. Tokyo Grain Exchange Corn, Soybean Meal, Soybeans, Red
Beans, Coffee, Sugar, Raw Silk,
Vegetables, etc.
17. Intercontinental Exchange Brent Crude Oil, Coal, Electricity,
Emissions, Gas Oil, Heating Oil,
Gasoline , Natural Gas, WTI and all the
futures contracts of its subsidiary - The
International Petroleum Exchange (IPE)
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2.5 Types of Broker/Members
2.5.1 Types of Broker of COMEN
1. Introductory (Trading) Broker
Trading Broker (TB) is a Business Associate of COMEN who has the right to execute
transactions in the trading system of the exchange and the right to have contracts in its
own name. The TB can also act as a Broker. As a Broker, he can deal on behalf of the
clients. All the trades have to be executed only through the Trading facilities provided by
the Exchange. TB will settle the transactions through Clearing Brokers (Trading &
Clearing Brokers or Institutional Clearing Brokers).
2. Trading -cum- Clearing Broker
Trading cum Clearing Broker (TCB) is a Broker of COMEN who has the right to execute
transactions in the trading system of the exchange like a TB. TCB also a right to clear the
transactions in contracts executed in COMEN either on its own behalf or on behalf of
other TBs. TCBs will be responsible to COMEN for all the obligations (margins,
settlement obligations etc) of TBs on whose behalf they have agreed to clear the trades.
3. Clearing Broker
CB is a Broker of COMEN who has the right to clear transactions done in COMEN that
are executed in the trading system of the exchange by TBs and their clients who are
Registered Non Brokers with COMEN. A CB does not have the right to have contracts
executed in the trading system of COMEN. CBs are professional clearers in the market
providing clearing services to the institutional clients.
4. Sub Broker
Sub-Broker is a registered Broker of the COMEN who has the right to execute
transaction in the trading system of the exchange only through a TB/TCB. Sub Broker
enters transactions in COMEN through Brokers. Sub Brokers introduce the clients to the
Brokers. Sub-Brokers do not have the right to have contracts in their own name. Sub-
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Brokers will settle the transactions of clients introduced by them, through Brokers, who
in turn settle through Clearing Brokers (TCBs or CBs). Sub-Brokers will enter into an
agreement with the TB who would provide trading limits to them. Sub-Brokers are also
required to obtain registration from COMEN.
2.5.2 List of Brokers of COMEN
Some of the brokers of COMEN are as follows:
Code
No.
Broker Address Contact
02 Superstar Investment
Nepal Pvt. Ltd.
Lalitpur-14,
Mahalaxmithan
Cell: 977-9841220231
Contact Person: Shakespeare Pandey
Email: [email protected]
03 Investment Support Pvt.
Ltd.
Kathmandu,
Lazimpat
Ph:014414285; Fax:977-01-4414522
Cell: +977-9851074777 Email:
[email protected]
04 Kamal Vinayak
Securities & Investment
Pvt. Ltd.
Galaxy Marg,
Gyaneshwor;
Kathmandu
Cell: 977-9841553258/98413666454
Contact Person: Damodar Lohani;monoj
bhuju
Email: [email protected]
11 Bright Future
Investment Co. Pvt.
Ltd.
Dhapasi
Kathmandu
Cell:977-9841429103
Contact Person: Anka Bhadur Karki
Email: [email protected]
12 Morning Star
Investment Services
Pvt. Ltd.
New Baneshwor,
34, Kathmandu
Cell: 9851110060
Contact Person: Josheph Adhikari
Email: [email protected]
15 Eco-Max Commodities
Pvt. Ltd.
Gothatar-
06,Kathmandu
Cell:977-9841388801
Ph: 977-1-6632291
Contact Person: Devendra Prasad Pradhan
17 Columbus Investment
Pvt. Ltd.
Shree Bahal,
Lalitpur
Cell:977-9851008056
Ph: 977-1-5534883
Contact Person: Robin Shakya
Email: [email protected]
19 Golden Earth Securities
& Investment Pvt. Ltd.
Hattisar, Kathmandu Cell:977-9851110176
Contact Person: Bishnu Hari Aryal
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Email: [email protected]
20 Agro-Metal Investment
Pvt. Ltd.
New Baneshwor,
Kathmandu.
Ph: 977-1-4464876
Cell: 977-9841239660
Contact Person: Bandhu Karki
21 Nimbus International
Company Pvt. Ltd.
Kamaladi,
Kathmandu
Cell: 9802031309
Contact Person: Umang Bagaria
Eamil: [email protected]
26 Nepal Futures Market
Investment Pvt. Ltd.
Baliphal, 16,
Lalitpur
Ph: 01-5550221
Contact Person: Narsh Maharjan
Eamil: [email protected]
28 Vaibhav Laxmi
Investment Pvt. Ltd.
New
Baneshwor,Kathma
ndu
Cell:9841281369
Contact Person: Prakash Ghimere
29 Mass Capitals Pvt. Ltd. Ravi Bhavawan,
Kathmandu
Tell No: 01-4276129
Contact Person: Shreya Rajbhandari /
Bhupesh Rajbhandari
Email: [email protected]
50 Pancha Buddha Futures
Investment Pvt. Ltd.
Tangal, Lalitpur Cell: 9841801606
Contact Person: Sagun Bajracharya
Eamil: [email protected]
92 Paradise Securities Pvt.
Ltd.
Sinamangal-
9,Kathmandu
Cell: 9841337511/ 9841606424
Contact Person: Rabindra Acharya
Email: [email protected]
99 Emerging South Asia
Pvt. Ltd.
Anamnagar, Kumari
Galli (Near APCA
HOUSE)
Contact Person: Santosh Pradhan
Cell No.: 9851109487
Phone No. 014770917/4770637
Email: [email protected]
Website: http://nepalcomexmarket.com
2.5.3 Types of member of MEX
Non-Clearing Member
Non-Clearing Member (NCM) is a member of MEX who has the right to execute
transactions in the trading system of the exchange and the right to have contracts in its
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own name. As a Member, s/he can deal on behalf of the clients. All the trades have to
be executed only through the Trading facilities provided by the Exchange. NCM will
settle the transactions through Clearing Members. NCM is required to maintain a
separate account for client transactions and is required to maintain the margin deposit
and money belonging to clients in segregated accounts. The obligations of the NCMs
are monitored by the associated CM. Breach of rules, Regulation and bye-laws by a
NCM, shall not be allowed to do further trading unless the limits are reset on receipt of
additional deposits.
The following category of NCM shall be available in membership:
Professional Non-Clearing Member
Individual Non-Clearing Member
Institutional Non-Clearing Member.
Clearing Member
Clearing Member (CM) is a Member of MEX who has the right to execute
transactions in the trading system of the exchange like a NCM. CM also a right to
clear the transactions in contracts executed in MEX either on its own behalf or on
behalf of other NCMs. CMs will be responsible to MEX for all the obligations
(margins, settlement obligations etc) of NCMs on whose behalf they have agreed to
clear the trades. CMs will enter into Clearing Agreements with their constituent
Non-Clearing Members. They will also take the required Caution Deposit from the
NCMs. They will be allowed to set the limits for trading by NCMs. CMs are
required to maintain segregated accounts of the all the monies belonging to NCMs
on behalf of whom they are clearing the trades. If the clearing limits of CMs are
breached, all the Non-Clearing Members attached to them will be stopped from
further trading until the limits are reset on receipt of additional deposits.
2.5.4 List of the members of MEX
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Member
No.
Members Address Website
Clearing Members
CM10 Axis Broking Solution Pvt
Limited
Pureneshwor Marg,
Tripureswor,
Kathmandu, Nepal
www.axisbroking.
com
CM20 Himalayan
Commodity Brokers
Pvt. Ltd
Bira Complex-4th
Floor, New Road,
Kathmandu, Nepal
www.hcbnepal.com
Non Clearing Members
N001 Standard Commodities
Pvt. Ltd
Kamalpokhari-31,
Kathmandu, Nepal
www.standardcom
modities.com
N002 Jambhala Investment
Pvt. ltd
Jawalakhel-20,
Lalitpur, Nepal
www.jambhalainv
est.com
N003 Option Derivative
Commodities Markets
Pvt. Ltd
Kathmandu Metro-
31, Putalisadak,
Nepal
N004 Kasthamandap
Commodity Broker
And Investment
Company Pvt Ltd
Nagpokhari,
Kathmandu, Nepal
N005 Quest Commodities
And Investment Pvt.
Ltd
Haka Tole-11,
Lalitpur, Nepal
www.questcommo
dities.com
N006 Mero Co-operative Ltd Kupondole-10,
Lalitpur, Nepal
N008 Expedient Securities
Pvt. Ltd
Indrachowk ,
Kathmandu , Nepal
www.expedientsec
.com
N009 Sujit And Brothers Kupondole,
Lalitpur, Nepal
N012 Fewa Trade Exchange
Solutions Pvt. Ltd
Srijhana Chowk,
Pokhara-8,Nepal
www.fewatradeex.
com.np
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N015 Smart Investment
Company
Janak Marga-34 ,
New
Baneshwor ,Kathma
ndu, Nepal
N020 Morning Star
Investment Services
Pvt. Ltd
New Baneshwor-34,
Kathmandu, Nepal
www.morningstar.
com.np
N022 Money Plus &
Securities Pvt. Ltd
Maitidevi,
Kathmandu-33,
N023 Dream Merchant &
Securities Pvt Ltd
Udhyogpuri,
Rupandhi,
Bhairahwa, Nepal
N026 Universal
Commodities Pvt Ltd
Dhapasi,
Kathmandu-9,
Nepal
N027 Speculators & Hedgers
Investment Pvt Ltd
Buddhanagar,
Kathmandu-10,
Nepal
N028 Futures Fortune Pvt
Ltd
Kamaladi,
Ganeshthan,
Kathmandu, Nepal
www.futuresfortun
e.com.np
N029 Simrik Investments Pvt
Ltd
Baggikhana,
Ramshapath
N030 Initiative Trade Pvt.
Ltd
Putalisadak - 3
2.6 Objectives of Commodity Exchanges
• To establish fair price discovery mechanism.
• To stand for market integrity and price transparency.
• To help EXIM, Processor and Grower by providing risk mitigation system.
• To establish global standard in exchange trading.
• To establish efficient Clearing and guaranteed settlement system.
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• Development and implementation of hedging needs
2.7 Future Plans of Commodity Exchanges
• Market Expansion
• International Tie up
• Product Expansion
• Effective price collection
• Warehouse Development
CHAPTER III
DATA PRESENTATION AND ANALYSIS
3.1 Products in Exchange
The commodity products include futures contracts based on agro-products and other agro
related products along with metal products like gold, silver, copper and Zinc. Due to the
problem of warehousing, storage and perishable nature of agro-products, COMEN has
currently stop trading in agro products whereas MEX is trading the product but they are
not providing the physical delivery of the goods.
The following is the list of the products categorized by its nature.
Table 1: list of the products categorized by its nature by COMEN and MEX
Product Nature MEX COMEN
Wheat (WHT) Agro based
Soybean (SOY) Agro based
Crude Soy Oil (SBO) Agro based
Cotton (COT) Agro based
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Coffee (COF) Agro based
Crude Oil (CRU) Non-Agro based
Natural Gas(NAG) Non-Agro based
Heating Oil(HEA) Non-Agro based
Gold(GOL) Non-Agro based
Silver(SIL) Non-Agro based
Copper (COP) Non-Agro based
Zinc Non-Agro based
- exchange dealing with respected commodity
- exchange not dealing with respected commodity
3.2 Contract size as per exchanges
Mex has determined its commodity contract as follows:
Table 2: Commodity contract size of MEX
Commodity Contract Size Margin(NPR) Price Quoted at Mex
Wheat(WHT) 20,000kg 35000 NPR/Kg
Soyabean(SOY) 20,000kg 35000 NPR/Kg
Crude Soy Oil(SBO) 22000 Liters 70000 NPR/ltr
Cotton(COT) 10000 kg 35000 NPR/Kg
Coffee(COF) 5000kg 45000 NPR/Kg
Crude Oil(CRU) 250 US Barrels 60,000 NPR/Kg
Natural Gas (NAG) 2500 Mmbtu 60,000 NPR/Kg
Heating Oil (HEA) 10,000 Liters 80,000 NPR/Kg
Gold (GOL) 1 Kg 60,000 NPR/Kg
Silver (SIL) 30 Kg 60,000 NPR/Kg
Copper (COP) 1000 Kg 35,000 NPR/Kg
COMEN have determined its commodity contract as follows:
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Table 3: Commodity contract size of COMEN
Commodity Contract Size Margin(NPR) Price Quoted
Gold (GOL) 100, 500gms, 1 Kg,
3 kg
60,000 NPR/Kg
Silver (SIL) 30 Kg 60,000 NPR/Kg
Copper (COP) 1000 Kg 35,000 NPR/Kg
3.3 Weekly price update of commodity in Future Market
The price of the commodity is taken on the weekly basis starting from the April 6 for the
7 weeks. In these weeks of reviewing the price of the commodity following outcomes has
been concluded. The prices are thus, taken as opening price at the beginning of the week,
weeks’ highest price and the lowest price and the closing price of the commodity.
1. Gold
The price level of different period is quoted below.
At MEX Exchange
Table 1.1: Changes in the Gold Price at MEX
Open High Low Close
Apr 6-12 21557.45 21603.24 20894.7 21198.36
Apr 13-19 21200.77 21745.43 20875.42 20950.13
Apr 20-26 20979.05 22073.27 20873.01 22027.4
Apr 27- May 3 22029.81 22176.82 21251.38 21352.6
May 4-10 21352.6 22338.29 21369.47 22080.42
May 11-17 22087.65 22540.73 21918.95 22470.84
May 18-24 22519.04 23258.91 22111.75 23111.91
May 25-31 23121.54 23675.84 22805.83 23642.1
It is shown in the figure below:
Figure 1.1: Changes in the Gold Price at MEX
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Apr 6-12
Apr 13-19
Apr 20-26
Apr 27-May 3
May 4-10
May 11-17
May 18-24
May 25-31
200002050021000215002200022500230002350024000
Close
In the figure, black candle shows that the price of the gold is decreasing in the first two
weeks where the closing price is less than the opening price. Later in the month of May,
2009 the price is in increasing trend in the form of white candle.
At COMEN Exchange
Table 1.1: Changes in the Gold Price at COMEN
Open High Low Close
Apr 6-12 24378 24593 24162 24447
Apr 13-19 22848 23164.00 22814 22380
Apr 20-26 22446 23572 22420 22386
Apr 27- may 3 23598 23710 23135 23229
May 4-10 22911 23469 22901 23069
May 11-17 23329 23932 23366 23785
May 18-24 23349 23349 22624 23272
May 25-31 23316 23894 23261 23867
It is shown in the figure below:
1. Figure 1.1: Changes in the Gold Price at COMEN
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Apr 6-12
Apr 13-19
Apr 20-26
Apr 27- may 3
May 4-10
May 11-17
May 18-24
May 25-31
21000
21500
22000
22500
23000
23500
24000
24500
25000
Close
In the figure, the price is at highest at April, 2009 at Rs24593 per 10 grams. Later there is
fluctuation in the gold price having ups and downs represented by the black and white
candles.
2. Crude Oil
The price level of different period is quoted below.
Table 2: Changes in the Crude Oil Price
Open High Low Close
Apr 6-12 3933.75 4020 3552.75 3910.76
Apr 13-19 4098 4098 3768 3929
Apr 20-26 3922.5 3922.5 3504.75 3867
Apr 27- May 3 3867.75 4023.75 3600.75 3959.25
May 4-10 3959.25 4401.75 3942.75 4390.5
May 11-17 4392 4505.25 4205.25 4239.75
May 18-24 4284.75 4668.75 4257 4616.25
May 25-31 4616.25 4787.5 4465.5 4981.5
It is shown in the figure below:
Figure 2: Changes in the Crude Oil Price
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Apr 6-12
Apr 13-19
Apr 20-26
Apr 27- May 3
May 4-10
May 11-17
May 18-24
May 25-31
3000
3500
4000
4500
5000
5500
Close
The figure shows that the price of crude oil is not stable too. In the whole month of April,
Crude oil price seems to be struggling to be stable. Its price closes at lower than its
opening. But in the May, 2009 its price is in the increasing trend up to Rs 4981.5 at the
highest in the two months.
3. Silver
The price level of different period is quoted below.
Table 3: Changes in the Price of Silver
Open High Low Close
Apr 6-12 307.8 305.52 289.8 296.76
Apr 13-19 296.88 311.52 284.04 285.36
Apr 20-26 286.32 311.64 284.52 309.84
Apr 27- May 3 311.04 318.24 290.04 300.36
May 4-10 297.96 341.16 297.96 337.08
May 11-17 337.08 343.125 306.225 308.25
May 18-24 337.32 358.2 328.8 354.48
May 25-31 354.48 378.72 345.12 378.12
It is shown in the figure below:
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Figure 3: Changes in the Price of Silver
Apr 6-12
Apr 13-19
Apr 20-26
Apr 27-May 3
May 4-10
May 11-17
May 18-24
May 25-31
250
270
290
310
330
350
370
390
Close
In the figure, after the series of downfall in the silver price in April, It seems to be
recover later in the month of May having the highest price of Rs 378.12 and last week of
May and lowest at the Rs 284.04 in third week of April.
4. Soyabin
The price level of different period is quoted below.
Table 4: Changes in the Price of Soyabin
Open High Low Close
Apr 6-12 27.44 28.27 27.05 27.77
Apr 13-19 27.7 29.57 27.51 28.97
Apr 20-26 29.27 29.32 27.91 28.52
Apr 27- May 3 28.45 30.15 26.88 30.11
May 4-10 30.12 31.17 29.91 30.55
May 11-17 30.01 32.77 30.69 28.09
May 18-24 31.02 32.77 30.69 32.09
May 25-31 32.11 33.09 31.72 32.65
It is shown in the figure below:
Figure 4: Changes in the Price of Soyabin
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Apr 6-12 Apr 13-19
Apr 20-26
May 4-10 May 4-10 May 11-17
May 18-24
May 25-31
25
27
29
31
33
35
Close
The figure shows that the price of Soyabin is in increasing trend. There are only two
weeks where its opening price is lower than the opening price shown by black candle
while in rest of the weeks the price has been increasing reaching highest of Rs.33.09 at
end of May.
5. Soyabin Oil
The price level of different period is quoted below.
Table 5: Changes in the Price of Soyabin
Open High Low
Clos
e
Apr 6-12 58.42 59.28 56.92 58.52
Apr 13-19 58.58 61.76 58.1 60.78
Apr 20-26 60.8 61.18 58.24 60.4
Apr 27- May 3 60.58 62.54 57.66 62.3
May 4-10 62.32 65.62 62.32 65.42
May 11-17 64.56 66.46 62.62 62.78
May 18-24 62.78 64.4 61.66 62.84
May 25-31 62.74 64.52 60.9 64.5
It is shown in the figure below:
Figure 5: Changes in the Price of Soyabin
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Apr 6-12 Apr 13-19
Apr 20-26
Apr 27- May 3
May 4-10
May 11-17
May 18-24
55
57
59
61
63
65
67
69
Close
The figure shows that the price of crude oil is not stable. In the whole month of April,
Crude oil price seems to be increasing till second week of May. Later in the month its
price faces some obstruction. After the highest price change up to Rs.66.46, it decreases
to the about average price of Rs.64.5.
6. Natural Gas
The price level of different period is quoted below.
Table 6: Changes in the Price of Natural Gas
Open High Low Close
Apr 6-12 285.825 288.6 264.825 270.15
Apr 13-19 270.3 283.875 262.95 279.9
Apr 20-26 279.9 280.275 245.175 245.25
Apr 27- May 3 253.65 269.325 244.575 265.65
May 4-10
265.65 326.85 260.25
325.57
5
May 11-17 315.8 343.125 306.225 308.25
May 18-24 308.25 317.85 260.85 270.75
May 25-31 271.95 307.8 262.5 290.55
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It is shown in the figure below:
Figure 6: Changes in the Price of Natural Gas
Apr 6-12
Apr 13-19
Apr 20-26
Apr 27- May 3
May 4-10
May 11-17
May 18-24
May 25-31
200
220
240
260
280
300
320
340
360
Close
The figure shows that crude oil price faces ups and downs. It price increases and
decreases in the consequent weeks. After reaching the months lowest at Rs.244.575 it
covers and reaches to its highest price of Rs. 343.125 a week later.
7. Heating Oil
The price level of different period is quoted below.
Table 7: Changes in the Price of Heating Oil
Open High Low Close
Apr 6-12 28.59 29.15 26.96 28.28
Apr 13-19 28.28 28.79 26.65 28.25
Apr 20-26 28.25 28.25 25.72 27.06
Apr 27- May 3 27.46 27.7 25.64 27.28
May 4-10 27.29 32.49 27.29 30.01
May 11-17 30.01 30.45 28.01 28.09
May 18-24 28.09 30.62 28.02 30.34
May 25-31 30.86 33.32 29.73 33.33
It is shown in the figure below:
Figure 7: Changes in the Price of Heating Oil
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Apr 6-12
Apr 13-19
Apr 20-26
Apr 27- May 3
May 4-10
May 11-17
May 18-24
May 25-31
25
26
27
28
29
30
31
32
33
34
Close
The heating Oil face a severe blow in the month of April followed by continuous fall in
its price. But after reaching its lowest at Rs.25.64, it gradually recovers and has greater
flight up to Rs. 32.49 in next week. It does well in the month of May by reaching the two
months highest of Rs. 33.33.
8. Coffee
The price level of different period is quoted below.
Table 8: Changes in the Price of Coffee
Open High Low Close
Apr 6-12 328.2
4 343.84 319.6 343.92
Apr 13-19 197.0
4 198.88 183.6 184.64
Apr 20-26 187.8
4 197.6 186.4 197.12
Apr 27- May 3 197.1
2 199.68 191.2 198.56
May 4-10 198.8 211.36 197.04 210.72
May 11-17 210.8 216.16 206.4 211.28
May 18-24 221.2 227.2 210.08 222.24
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8
May 25-31 221.7
6 229.6 218.88 226
It is shown in the figure below:
Figure 8: Changes in the Price of Coffee
Apr 6-12
Apr 13-19
Apr 20-26
Apr 27- May 3
May 4-10
May 11-17
May 18-24
May 25-31
180
200
220
240
260
280
300
320
340
360
Close
The figure shows that the price of coffee shows the abnormal price change. Its price in
second week of April is irrespectively higher than its price in other times. After the great
depression in its price in third week its price is gradually increasing. Its highest price is
Rs.343.84 and its lowest is Rs. 183.6.
9. Cotton
The price level of different period is quoted below.
Table 9: Changes in the Price of Cotton
Open High Low Close
Apr 6-12 78.84 82.54 76.88 79.6
Apr 13-19 77.78 82.9 77.56 82.66
Apr 20-26 93.98 87.26 79.9 86.88
Apr 27- May 3 87.46 94.64 84.86 94.8
May 4-10 94.34 99.16 93.52 98.96
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May 11-17 99.04 101.96 92.76 92.98
May 18-24 92.98 95.72 91.8 93.5
May 25-31 94.66 94.66 89.54 94.1
It is shown in the figure below:
Figure 9: Changes in the Price of Cotton
Apr 6-12
Apr 13-19
Apr 20-26
Apr 27- May 3
May 4-10
May 11-17
May 18-24
May 25-31
70
75
80
85
90
95
100
105
Close
The figure shows that the overall price of the cotton is increasing and after reaching the
highest in the second week of May it declines. On the weekly overview, there is three
weeks of lower closing price. It highest price is Rs.101.96 and lowest is76.88.
10. Wheat
The price level of different period is quoted below.
Table 10: Changes in the Price of Wheat
Open High Low Close
Apr 6-12 15.5 15.78 14.39 14.39
Apr 13-19 14.38 14.7 11.16 14.45
Apr 20-26 14.41 14.71 13.81 14.39
Apr 27- May 3 14.96 15.63 14.28 15.71
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May 4-10 15.76 16.24 15.06 16.27
May 11-17 16.29 16.59 15.86 15.86
May 18-24 15.86 17.03 15.52 16.89
May 25-31 16.82 17.81 16.6 17.54
It is shown in the figure below:
Figure 10: Changes in the Price of Wheat
Apr 6-12
Apr 13-19
Apr 20-26
Apr 27- May 3
May 4-10
May 11-17
May 18-24
May 25-31
10
12
14
16
18
20
Close
The figure shows that the price of wheat is stable as compared to other commodities. In
the overall price structure, it is in increasing in slow and gradual trend. Besides it price
decreases in April but in the month of May, it gradually increases.
11.Copper
The price level of different period is quoted below.
Table 11: Changes in the Price of Copper
Open High Low Close
Apr 6-12 328.24 343.92 319.6 343.84
Apr 13-19 343.92 369.52 344.32 362.16
Apr 20-26 358.4 362.24 323.36 338.32
Apr 27- May 3 338.24 350.56 314.4 350.0
May 4-10 350.16 366.56 340.8 354.72
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May 11-17 355.12 356.32 325.44 332.46
May 18-24 332.48 353.76 327.48 346.64
May 25-31 346.64 364.16 337.28 363.68
It is shown in the figure below:
Figure 11: Changes in the Price of Copper
Apr 6-12
Apr 13-19
Apr 20-26
Apr 27- May 3
May 4-10
May 11-17
May 18-24
May 25-31
310
320
330
340
350
360
370
380
Close
The figure shows that the price of crude oil consists of ups and downs. Its overall price
curve is like a wave; sometimes it increases and sometimes its price decreases. Its highest
price is Rs.369.52 and lowest is Rs.314.4.
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CHAPTER IV
4. SUMMARY AND CONCLUSIONS
While studying and analyzing the Exchanges working in Nepal, both positive and
negative (area that need to have concern) are pointed out. They are listed below:
4.1 Summary finding
1. In the short span of time, commodity market has successfully attracted the enormous
investors
2. One of the major roles of the commodity market id the price discovery and price risk
management.
3. Helpful for the farmers to get the fair price of their products.
4. Future price of the commodity can be known so that the farmers can cultivate the
most profitable and suitable for themselves
5. By knowing the possible future price of the commodity, consumer can maintain its
possible future expense budget and minimize the expenses by future contracts.
6. It is useful for the importer since they can hedge the risk associated in the import
business by quoting the price to customer based on the future possible price of
commodity.
7. Commodity market is not governed by any governing body. Therefore the investors’
are not fully secure about their investment. Due to this there is not as liquidity as the
share market.
8. These Nepalese exchanges are ‘cost based’ because pricing of commodity is based on
the pricing of the other foreign exchange rather than the demand and supply of the
buyer and seller respectively.
9. It seems that the commodity exchange has failed to establish its objective of
developing the fully balanced market where price risk is mitigated and price
discovery are made.
10. The main objective of commodity market is to hedge the risk associated with the
future price change in the commodity. Since the price discovery is not made in
Nepalese Exchanges, hedging is not possible.
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11. The Margin maintain by the investor while transactions is comparatively larger than
the paid up capital of the exchanges where there is no guarantee of safety regarding
investors’ wealth.
12. Exchanges is own and control by the limited shareholder where its transparency is the
biggest question.
13. Since there is no clear rules and regulation, the market can be driven as per the will.
So these market cannot be said as the future market but rather the ‘over the counter’
market. The market transaction is based on speculation rather than the hedging and
physical delivery of the commodity.
14. Due to the lack of warehouse the physical delivery of the agro based product is
impossible and costly. Therefore the COMEN have stopped the transactions of agro-
based product while the MEX is only doing the transaction not the physical delivery
of the goods.
4.4 Conclusions and Recommendations
The research was conducted with an objective to give insights about the commodity
exchanges of Nepal. In the past few years of establishment, commodity market has grown
rapidly. Due to the possibility of buying the commodity of high cost just by keeping the
margin has attracted many investors.
The commodity that are traded in the exchange are of different sizes and cost so that the
investor have the choice of selecting the commodity on the basis of the price change,
price of the product, time duration and so on.
I suggest that there should be governing body that regulates the exchanges like by Nepal
Rastra Bank regulating the bank and financial institution. It also helps to improve the
investors’ faith in the business. They should organize the awareness programme
regarding the commodity market and its opportunities and threats
Price discovery mechanism should be made by the interaction of demand and supply of
the buyer and seller for the safeguard of the interest of the farmers. So that the seller gets
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the full value of its product while the buyers pays the real value of the product. Similarly
the exchanges should facilitate the warehouse so that the physical delivery of the goods
can be possible especially of agro-based products.
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REFERNCES
‘Abhiyan’ Weekly newspaper. April 13, 2009- June, 2009.
Wolf, H. k., & Pant, P. R. (2005). Social Science Research and Thesis Writing.
Kathmandu: Buddha Academic Publisher and Distributors Pvt. Ltd.,(4th ed)
http://www.comennepal.com
http://www.mexnepal.com
http://www.wikipedia.com
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Appendix
Things to be known regarding future market.
What is a Derivative contract?
A derivative contract is an enforceable agreement whose value is derived from the value
of an underlying asset; the underlying asset can be a commodity, precious metal,
currency, bond, stock, or, indices of commodities, stocks etc. Four most common
examples of derivative instruments are forwards, futures, options and swaps/spreads.
What is a forward contract?
A forward contract is a legally enforceable agreement for delivery of goods or the
underlying asset on a specific date in future at a price agreed on the date of contract. All
the contracts for delivery of goods, which are settled by payment of money difference or
where delivery and payment is made after a period of specific days, are forward
contracts.
Is delivery mandatory in futures contract trading?
The provision for delivery is made in the Byelaws of the Associations so as to ensure that
the futures prices in commodities are in conformity with the underlying. Delivery is
generally at the option of the sellers. However, provisions vary from Exchange to
Exchange. Byelaws of some Associations give both the buyer and seller the right to
demand/give delivery.
FUTURES CONTRACTS
What is a futures contract?
Futures Contract is specie of forward contract. Futures are exchange - traded contracts to
sell or buy standardized financial instruments or physical commodities for delivery on a
specified future date at an agreed price. Futures contracts are used generally for
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protecting against rich of adverse price fluctuation (hedging). As the terms of the
contracts are standardized, these are generally not used for merchandizing propose.
What are the commodities suitable for futures trading?
All the commodities are not suitable for futures trading and for conducting futures
trading. For being suitable for futures trading the market for commodity should be
competitive, i.e., there should be large demand for and supply of the commodity - no
individual or group of persons acting in concert should be in a position to influence the
demand or supply, and consequently the price substantially. There should be fluctuations
in price. The market for the commodity should be free from substantial government
control. The commodity should have long shelf-life and be capable of standardization and
gradation.
How are futures prices determined?
Futures prices evolve from the interaction of bids and offers emanating from all over the
country - which converge in the trading floor or the trading engine. The bid and offer
prices are based on the expectations of prices on the maturity date.
How professionals predict prices in futures?
Two methods generally used for predicting futures prices are fundamental analysis and
technical analysis. The fundamental analysis is concerned with basic supply and demand
information, such as, weather patterns, carryover supplies, relevant policies of the
Government and agricultural reports. Technical analysis includes analysis of movement
of prices in the past. Many participants use fundamental analysis to determine the
direction of the market, and technical analysis to time their entry and exist.
How is it possible to sell, when one doesn't own commodity?
One doesn't need to have the physical commodity or own a contract for the commodity to
enter into a sale contract in futures market. It is simply agreeing to sell the physical
commodity at a later date or selling short. It is possible to repurchase the contract before
the maturity, thereby dispensing with delivery of goods.
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What is long position?
In simple terms, long position is a net bought position.
What is short position?
Short position is net sold position.
What is cash settlement?
It is a process for performing a futures contract by payment of money difference rather
than by delivering the physical commodity or instrument representing such physical
commodity (like, warehouse receipt).
What is settlement price?
The settlement price is the price at which all the outstanding trades are settled, i.e., profits
or losses, if any, are paid. The method of fixing Settlement price is prescribed in the
Byelaws of the exchanges; normally it is a weighted average of prices of transactions
both in spot and futures market during specified period.
Can one give delivery against futures contract?
Futures contract are contracts for delivery of goods. But most of the futures contracts, the
world over, are performed otherwise than by physical delivery of goods.
What is delivery month?
It is the specified month within which a futures contract matures.
Why do we need speculators in futures market?
Participants in physical markets use futures market for price discovery and price risk
management. In fact, in the absence of futures market, they would be compelled to
speculate on prices. Futures market helps them to avoid speculation by entering into
hedge contracts. It is however extremely unlikely for every hedger to find a hedger
counterparty with matching requirements. The hedgers intend to shift price risk, which
they can only if there are participants willing to accept the risk. Speculators are such
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participants who are willing to take risk of hedgers in the expectation of making profit.
Speculators provide liquidity to the market; therefore, it is difficult to imagine a futures
market functioning without speculators.
What are the benefits from Commodity Forward/Futures Trading?
Forward/Futures trading performs two important functions, namely, price discovery and
price risk management with reference to the given commodity. It is useful to all segments
of the economy. It enables the ‘Consumer' in getting an idea of the price at which the
commodity would be available at a future point of time. He can do proper costing and
also cover his purchases by making forward contracts. It is very useful to the ‘exporter' as
it provides an advance indication of the price likely to prevail and thereby helps him in
quoting a realistic price and secure export contract in a competitive market. It ensures
balance in supply and demand position throughout the year and leads to integrated price
structure throughout the country. It also helps in removing risk of price uncertainty,
encourages competition and acts as a price barometer to farmers and other functionaries
in the economy.
What is hedging?
Hedging is a mechanism by which the participants in the physical/cash markets can cover
their price risk. Theoretically, the relationship between the futures and cash prices is
determined by cost of carry. The two prices therefore move in tandem. This enables the
participants in the physical/cash markets to cover their price risk by taking opposite
position in the futures market.
PARTICIPANTS IN DERIVATIVES MARKETS
Who are the participants in forward/futures markets?
Participants in forward/futures markets are hedgers, speculators, day-traders/scalpers,
market makers, and, arbitrageurs.
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Who is hedger?
Hedger is a user of the market, who enters into futures contract to manage the risk of
adverse price fluctuation in respect of his existing or future asset.
What is arbitrage?
Arbitrage refers to the simultaneous purchase and sale in two markets so that the selling
price is higher than the buying price by more than the transaction cost, so that the
arbitrageur makes risk-less profit.
Who are day-traders?
Day traders are speculators who take positions in spot, futures or options contracts and
liquidate them prior to the close of the same trading day.
Who is floor-trader?
A floor trader is an Exchange's associates or its employee, who executes trade by being
personally present in the trading ring or pit, floor trader has also place in electronic
trading systems.
Who is speculator?
A trader, who trades or takes position without having exposure in the physical market,
with the sole intention of earning profit is a speculator.
Who is market maker?
A market maker is a trader, who simultaneously quotes both bid and offer price for a
same commodity throughout the trading session.
What kinds of risks do participants face in derivatives markets?
Different kinds of risks faced by participants in derivatives markets are:
1. credit risk
2. market risk
3. liquidity risk
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4. legal risk
5. operational risk
What is credit risk?
Credit risk on account of default by counter party: This is very low or almost zeros
because the Exchange takes on the responsibility for the performance of contracts
what is market risk?
Market risk is the risk of loss on account of adverse movement of price.
What is liquidity risk?
Liquidity risks are the risk that unwinding of transactions may be difficult, if the market
is illiquid.
What is Legal risk?
Legal risk is that legal objections might be raised; regulatory framework might disallow
some activities.
What is operational risk?
Operational risk is the risk arising out of some operational difficulties, like, failure of
electricity, due to which it becomes difficult to operate in the market.
What is the role of an Exchange in futures trading?
An Exchange designs a contract, which alone would be traded on the Exchange. The
contract is not capable of being modified by participants, i.e., it is standardized. The
Exchange also provides a trading platform, which converges the bids and offers
emanating from geographically dispersed locations. This creates competitive conditions
for trading. The Exchange also provides facilities for clearing, settlement, arbitration
facilities. The Exchange may also provide financially secure environment by putting in
place suitable risk management mechanism (margining system etc.), and guaranteeing
performance of contract through the process of novation.
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Why does Exchange collect margin money?
The aim of margin money is to minimize the risk of default by either counter party. The
amount of initial margin is so fixed as to ensure that the probability of loss on account of
worst possible price fluctuation, which cannot be met by the amount of ordinary/initial
margin, is very low. The Exchanges fix rates of ordinary/initial margin keeping in view
need to balance high security of contract and low cost of entering into contract.
What are the different types of margins payable on futures?
Different margins payable on futures contracts are:
Ordinary/initial margin, maintenance margin, mark-to-market margin, special margin,
volatility margin, and delivery margin.
What is initial/ordinary margin?
It is the amount to be deposited by the market participants in his margin account with
clearing house before they can place order to buy or sell a futures contract. This must be
maintained throughout the time their position is open and is returnable at delivery,
exercise, expiry or closing out.
What is Mark-to-Market margin?
Mark-to-market margins (MTM or M2M) are payable based on closing prices at the end
of each trading day. These margins will be paid by the buyer if the price declines and by
the seller if the price rises. This margin is worked out on difference between the
closing/clearing rate and the rate of the contract (if it is entered into on that day) or the
previous day's clearing rate. The Exchange collects these margins from buyers if the
prices decline and pays to the sellers and vice versa.
What is the role of clearing House?
Clearing House performs post trading functions like confirming trades, working out gains
or losses made by the participants during the course of the clearing period - usually a day-
collecting the losses from the members and paying out to other who have made gains.
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How does an exchange ensure the guarantee of the performance of the contract?
The performances of the contracts registered by the exchange are guaranteed either by the
exchange or it's clearing house. The exchange interposes itself between each buyer and
seller thereby becoming a seller to every buyer and a buyer to every seller. The Exchange
In order to safeguard its interest by imposing mark to market margin (which is clearing
all the transactions at the closing price of the day. All the profits and losses are either
paid in or paid out). This minimizes the chances of default as buyer or seller is exposed
to one day of price movements. The Exchange also maintains its own TGF / SGF which
can be used in case of a default. The Exchange also puts in place criteria of associates
and some of the new Exchanges have also prescribed certain minimum capital adequacy
norms.
REGULATION
What is the present system of regulation in commodity forward/future trading in
Nepal?
At present, there are two tiers of regulations of forward/futures trading system exists in
Nepal, namely, Government of Nepal, and Commodity Exchanges.
What are the legal and regulatory provisions for customer protection?
As trading based on contractual form of agreement, so all the investors are protected
legally about their trade as contract. Apart from that exchange it is regulating the
behavior of its associates, so customers are fully protected through legal way and from
exchange's side as well.
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