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CHAPTER-1 INTRODUCTION Page 1
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CHAPTER-1
INTRODUCTION
Page 1
Introduction:
Futures markets have been described as continuous auction markets and as
clearing houses for the latest information about supply and demand. They are the
meeting places of buyers and sellers of an ever-expanding list of commodities that
today includes agricultural products, metals, petroleum, financial instruments,
foreign currencies and stock indexes. Trading has also been initiated in options on
futures contracts, enabling option buyers to participate in futures markets with
known risks.
Notwithstanding the rapid growth and diversification of futures markets,
their primary ++purpose remains the same as it has been for nearly a century and a
half, to provide an efficient and effective mechanism for the management of price
risks. By buying or selling futures contracts--contracts that establish a price level
now for items to be delivered later--individuals and businesses seek to achieve
what amounts to insurance against adverse price changes. This is called hedging.
Other futures market participants are speculative investors who accept the
risks that hedgers wish to avoid. Most speculators have no intention of making or
taking delivery of the commodity but, rather, seek to profit from a change in the
price. That is, they buy when they anticipate rising prices and sell when they
anticipate declining prices. The interaction of hedgers and speculators helps to
provide active, liquid and competitive markets. Speculative participation in futures
trading has become increasingly attractive with the availability of alternative
methods of participation. Whereas many futures traders continue to prefer to make
their own trading decisions--such as what to buy and sell and when to buy and
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sell--others choose to utilize the services of a professional trading advisor, or to
avoid day-to-day trading responsibilities by establishing a fully managed trading
account or participating in a commodity pool which is similar in concept to a
mutual fund.
Speculation in futures contracts, however, is clearly not appropriate for
everyone. Just as it is possible to realize substantial profits in a short period of
time, it is also possible to incur substantial losses in a short period of time. The
possibility of large profits or losses in relation to the initial commitment of capital
stems principally from the fact that futures trading are a highly leveraged form of
speculation. Only a relatively small amount of money is required to control assets
having a much greater value. As we will discuss and illustrate, the leverage of
futures trading can work for you when prices move in the direction you anticipate
or against you when prices move in the opposite direction.
Forward Contract
Under this contract the seller undertakes to provide the client with a fixed
amount of a commodity on a fixed future date at a fixed price.
A forward contract differs from a futures contract in that the former is a once-only
deal (while futures contracts are standardized contracts), which cannot be closed
out by a matching transaction.
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Commodity option
A commodity option is the right (not an obligation!) to buy or sell a fixed
quantity of a commodity at a particular date, or within a specified period, and at a
fixed price, called exercise price or strike price). An option to buy is called a call
option and is purchased in the expectation of a rising price; an option to sell is
called a put option and is bought in the expectation of a falling price. The holder
will only exercise his option, if the price of the underlying commodity moves
favorably, by an amount sufficient to provide a profit when the option is sold. If
the price moves in the opposite direction, only the price for the option (called
premium is lost. The option price is therefore a kind of insurance premium. The
seller of the option is correspondingly more exposed to risk. Apart from exercising
an option or letting it expire, there is on some options exchanges also the
possibility to sell it.
Options, as well as futures, enable users and producers to hedge against the
risk of wide price fluctuations. However, they also allow speculators to gamble for
large profits with limited liability. Therefore the range of users is diverse: a
speculator may buy coffee call options in the expectation that unseasonable
weather in Brazil will drive up world coffee prices, or, an airline may hedge its fuel
requirements with kerosene calls.
Page 4
Professional traders in options make use of a large range of strategies, often
purchasing combinations of options that reflect particular expectations (e.g.
butterfly; straddle).
It is important to know, that there are two different types of options:
European-style options can only be exercised on the expiry date, whereas
American-style options can be exercised at any time between the date of purchase
and the expiration date. European-style options are therefore cheaper, but most
exchange-traded options are of American-style.
Commodity swap
This is an over-the-counter product, which is very important for the
individual hedger. The user of a particular commodity who wants to secure a
maximum contract price for the long term may agree to pay a financial institution a
fixed price, in return for receiving payments based on the market price for the
commodity involved.
A producer, however, who wishes to fix his income, may agree to pay the market
price to a financial institution, in return for receiving a fixed payment stream.
The vast majority of commodity swaps involve oil. Although most commodities
are priced in dollars, commodity swaps are also available in other currencies, so
that a user of a commodity may obtain protection in his own currency.
Placing of order
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Usually, orders are placed, by telephone, with brokers representing users and
producers. If an order is executed the client receives a confirmation.
An order should contain the following specifications: Buy or sale, the number of
contracts, the month of contract, type and quality of the commodity, the exchange,
a price specification and the period of validity.
Possible price specifications:
Good Till Cancelled (GTC) Order:
An order to buy or sell that remains in effect until it is either executed or
cancelled. Also called "open order".
Limit Order:
An 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 execution.
Market Order:
An order to buy or sell a stated amount of a commodity at the most
advantageous price obtainable after the order is represented in the trading crowd.
Stop Limit Order:
An order to buy or sell at a specified price or better (called a stop-limit
price), but only after a given stop price has been reached or passed. It is a
combination of a stop order and a limit order.
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Stop Order:
An order to buy or sell at the market price once the commodity has been
traded at a specified price, called the stop price. A stop order may be a day-limit
order, a GTC order, or any other form of time-limit order. A stop order becomes a
market order when the stop price is reached.
Arbitrage
Arbitrage denotes the purchase and simultaneous sale of the same
commodity in different commodity markets in order to take advantage of
differences in commodity prices between the two markets.
Such a transfer of funds is risk-free, because an arbitrageur will only switch
from one market to another if prices in both markets are known and if the profit
outweighs the costs of the operation.
Opportunities for arbitrage tend to be self-correcting: due to the increased
demand for the commodity, there is an upward pressure on its price in the market
where it is bought, whereas the increased supply in the market where it is sold
results in a downward price movement.
Modern computer technology has accelerated the arbitrage mechanism,
reducing the opportunity for exploiting price differences.
In futures and options markets, cash and carry arbitrage exploits a situation
where the price of a particular future is higher than the spot price of the underlying
commodity (plus the interest cost of borrowing that amount until the future
Page 7
becomes deliverable), namely by buying the physical commodity and
simultaneously selling a future.
Cash and carry arbitrage with futures on commodities is rare, since the
purchase and delivery of the underlying commodity is onerous. It is more
frequently used with financial and currency futures.
Hedging
Hedging is used both to insure against losses due to a change in the value of
a commodity already held, and to protect an open position, especially a future
purchase or sale of a commodity that is likely to fluctuate in price.
Commodities transactions can be hedged by futures and options contracts
sometimes put and call together. In the commodity markets hedging is generally
effected by taking a position in the futures market opposite to that held in the
physicalmarket.
For instance, a manufacturer who needs a certain amount of a raw material, say, in
six months, may (instead of buying it forward) engage in a hedging operation:
He will first buy an equivalent amount of futures to be settled at the time he
requires the actual raw material (i.e. in six months). Secondly, he will buy the raw
material in the spot market in six months time. Any fall or rise in the price of the
actual raw material will be offset by the profit or loss that results from the futures
contracts. A trader who wants to sell at some future time will hedge by selling an
equivalent amount of futures.
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Hedgers
The details of hedging can be somewhat complex but the principle is simple.
Hedgers are individuals and firms that make purchases and sales in the futures
market solely for the purpose of establishing a known price level--weeks or months
in advance--for something they later intend to buy or sell in the cash market (such
as at a grain elevator or in the bond market). In this way they attempt to protect
themselves against the risk of an unfavorable price change in the interim. Or
hedgers may use futures to lock in an acceptable margin between their purchase
cost and their selling price.
Speculators
Were you to speculate in futures contracts, the person taking the opposite
side of your trade on any given occasion could be a hedger or it might well be
another speculator--someone whose opinion about the probable direction of prices
differs from your own.
The arithmetic of speculation in futures contracts--including the
opportunities it offers and the risks it involves--will be discussed in detail later on.
For now, suffice it to say that speculators are individuals and firms who seek to
profit from anticipated increases or decreases in futures prices. In so doing, they
help provide the risk capital needed to facilitate hedging.
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Someone who expects a futures price to increase would purchase futures
contracts in the hope of later bring able to sell them at a higher price. This is
known as "going long." Conversely, someone who expects a futures price to
decline would sell futures contracts in the hope of later being able to buy back
identical and offsetting contracts at a lower price. The practice of selling futures
contracts in anticipation of lower prices is known as "going short." One of the
attractive features of futures trading is that it is equally easy to profit from
declining prices (by selling) as it is to profit from rising prices (by buying).
Floor Traders
Persons known as floor traders or locals, who buy and sell for their own
accounts on the trading floors of the exchanges, are the least known and
understood of all futures market participants. Yet their role is an important one.
Like specialists and market makers at securities exchanges, they help to provide
market liquidity. If there isn't a hedger or another speculator who is immediately
willing to take the other side of your order at or near the going price, the chances
are there will be an independent floor trader who will do so, in the hope of minutes
or even seconds later being able to make an offsetting trade at a small profit. In the
grain markets, for example, there is frequently only one-fourth of a cent a bushel
difference between the prices at which a floor trader buys and sells.
Floor traders, of course, have no guarantee they will realize a profit. They
may end up losing money on any given trade. Their presence, however, makes for
more liquid and competitive markets. It should be pointed out, however, that unlike
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market makers or specialists, floor traders are not obligated to maintain a liquid
market or to take the opposite side of customer orders.
Reasons for Buying futures
contracts
Reasons for Selling futures
contracts
Hedgers
To lock in a price and thereby
obtain protection inst rising
prices
To lock in a price and thereby
obtain protection against
declining prices
Speculators and
floor Traders
To profit from rising
propagatesTo profit from declining prices
Futures Contract
There are two types of futures contracts:
1) Those that provide for physical delivery of a particular commodity or item
2) Those which call for a cash settlement. The month during which delivery or
settlement is to occur is specified. Thus, a July futures contract is one providing for
delivery or settlement in July.
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Why Delivery
Since delivery on futures contracts is the exception rather than the rule, why
do most contracts even have a delivery provision? There are two reasons. One is
that it offers buyers and sellers the opportunity to take or make delivery of the
physical commodity if they so choose. More importantly, however, the fact that
buyers and sellers can take or make delivery helps to assure that futures prices will
accurately reflect the cash market value of the commodity at the time the contract
expires--i.e., that futures and cash prices will eventually converge. It is
convergence that makes hedging an effective way to obtain protection against an
adverse change in the cash market price.
The Process of Price Discovery
Futures prices increase and decrease largely because of the myriad factors
that influence buyers' and sellers' judgments about what a particular commodity
will be worth at a given time in the future (anywhere from less than a month to
more than two years).
As new supply and demand developments occur and as new and more
current information becomes available, these judgments are reassessed and the
price of a particular futures contract may be bid upward or downward. The process
of reassessment--of price discovery--is continuous.
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Thus, in January, the price of a July futures contract would reflect the
consensus of buyers' and sellers' opinions at that time as to what the value of a
commodity or item will be when the contract expires in July. On any given day,
with the arrival of new or more accurate information, the price of the July futures
contract might increase or decrease in response to changing expectations.
Competitive price discovery is a major economic function--and, indeed, a
major economic benefit--of futures trading. The trading floor of a futures exchange
is where available information about the future value of a commodity or item is
translated into the language of price. In summary, futures prices are an ever
changing barometer of supply and demand and, in a dynamic market, the only
certainty is that prices will change.
After the Closing Bell
Once a closing bell signals the end of a day's trading, the exchange's clearing
organization matches each purchase made that day with its corresponding sale and
tallies each member firm's gains or losses based on that day's price changes--a
massive undertaking considering that nearly two-thirds of a million futures
contracts are bought and sold on an average day. Each firm, in turn, calculates the
gains and losses for each of its customers having futures contracts.
What to Look for in a Futures Contract
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Whatever type of investment you are considering--including but not limited
to futures contracts--it makes sense to begin by obtaining as much information as
possible about that particular investment. The more you know in advance, the less
likely there will be surprises later on. Moreover, even among futures contracts,
there are important differences which--because they can affect your investment
results--should be taken into account in making your investment decisions.
Basic Trading Strategies
A. Buying (Going Long) to Profit from an Expected Price Increase
Someone expecting the price of a particular commodity or item to increase
over from a given period of time can seek to profit by buying futures contracts. If
correct in forecasting the direction and timing of the price change, the futures
contract can later be sold for the higher price, thereby yielding a profit.* If the
price declines rather than increases, the trade will result in a loss. Because of
leverage, the gain or loss may be greater than the initial margin deposit.
B. Going short to profit from an expected price decrease the only way
going short to profit from an expected price decrease differs from going long to
profit from an expected price increase is the sequence of the trades. Instead of first
buying a futures contract, you first sell a futures contract. If, as expected, the price
declines, a profit can be realized by later purchasing an offsetting futures contract
at the lower price. The gain per unit will be the amount by which the purchase
price is below the earlier selling price.
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HEDGING COMMODITIES WITH FUTURES
Producers of commodities are faced with price and production risk over time
and within a marketing year. Furthermore, increased global free trade and changes
in domestic policy have increased the price and production risks of producers. As
price and production variability increases, producers are realizing the importance
of risk management as a component of their management strategies. One means of
reducing these risks is through the use of the commodity futures exchange markets.
Like the use of car insurance to hedge the potential costs of a car accident,
producers can use the commodity futures markets to hedge the potential costs of
commodity price volatility. However, like car insurance the gains from an
insurance claim may not exceed the cost of the cumulative sum of premiums, the
gains from hedging may not cover the costs of hedging. The primary objective of
hedging is not to make money. The primary objective of hedging is to minimize
price risk and this includes using hedging to minimize losses.
Page 15
CHAPTER-2
PROFILE OF THE COMPANY
Page 16
Name of the company : Shyam Group of Companies
Year of establishment : 1977Location : Present in 23 cities across the country.
Board of Directors : Mr. Chandra Prakash Ramsisaria : Mr. Suresh Kumar Ramsisaria : Mr. Murli Manohar Saraf
No. of Employees : 250 (excluding factory workers) : 1000 indirect bread earners.
Activities:
ManufacturingName of the company Location Activity TurnoverBig Bags International/India Ltd.
Bangalore
PP & Jumbo Bags 150.00
Nylo Films Pvt. Ltd. Bangalore
Multi Layer Film 50.00
Virgo Polymers Ltd. Chennai PP & Jumbo Bags 50.00Others 150.00
Trading:Name of the company Location Activity TurnoverP. P. Products Pvt. Ltd. Bangalor
eDistribution 135.00
Kamdhenu Polymers Pvt. Ltd. Bangalore
Distribution 135.00
Tarajyot Polymers Ltd. Bangalore
Distribution 90.00
Others 50.00
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AgenciesName of the company Location Activity TurnoverShyam Agencies Karnataka Del Credre for GAIL 150.00Visura Trading & Inv. (I) Ltd. Andhra P. Del Credre for GAIL 75.00Pradeep Industrial Packers Pvt. Ltd.
Karnataka Del Credre for IOCL 100.00
Diversification:Name of the company Location Activity TurnoverRamsisaria Flower Estates Bangalore Cultivation &
Marketing10.00
Sanjay Alloys Pvt. Ltd Palamaner Iron Ignot & TMT Bars
25.00
Meriton Group Noida Real Estate 400.00
Grand Total Rs Crores
1560.00
Contact - : Mr. Murli Manohar Saraf (C.E.O.): Shyam Group of Companies,: 37/12-1, Archana Complex,: IV Cross, Lal Bagh Road,: Bangalore - 27: Direct +91 80 2295 5141: Fax +91 80 2223 7620: Cell +91 99 860 40141
INTRODUCTION
The Group has come a long way in the field of polymer since its small beginning in 1977 with a negative capital.
Page 18
We have associates at 15 places in the Southern India. We have 250 office employees & 1000 factory workers. Group Turnover is about US $ 200 million. Import exposure:
Trading : 65KTAs Consumption : 25KTAs
Credit facilities from Banking System about US $ 35mn. Good presence in CSR. Sizeable efforts in maintaining the cultural heritage of India
Our Activities
Manufacturing Distribution Agency Diversifications
\
OUR VISIONS
Shyam Group has been built on a very strong foundation and the enduring principles of fair play, mutual co operation and growing investor value.
As a strong and mature company, Shyam Group recognises that change is inevitable in corporate life and that the challenge of change can be handled best by pursuing the same principles and vision that provided order and growth in the past.
To be strong to withstand all calamities of natural and business risks and can stand tall with the head touching the sky and feet in the earth.
Page 19
We feel business comes automatically when they are happy and confident about our service and have trust in our information.
Group Philosophy
All the Stake holders in our business shall be satisfied and happy. We believe in adding value in whatever business we are. We wish to be in the top 10 in the country in whatever business we are. We believe in upholding human values in life. Our dealings are open for ethical and moral standards.
Manufacturing:-
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Distribution
Page 21
Agencies
Page 22
Diversification:
A. Floriculture
B. Iron & Steel
Page 23
C. Education
D. Real Estate
Page 24
Strengths:
7 x 24 Model Enjoy trust of Suppliers, Customers & Bankers. Marketing Network. Value Added Services to the Customer. Financial Model. Information Network. Research & Analysis. No Litigation with Customers or Suppliers. No Rejection / Crystallization of Documents.
Weakness:
Page 25
Volatility in the International Market. Operating in a Monopolized Market. Adverse Taxation Policy – CST. Exchange Fluctuation.
Growth in Polymer Imports
Page 26
0
20000
40000
60000
80000
Category 1
1994-1995 1999-2000 2010-11
Page 27
CHAPTER-3
RESEARCH METHODOLOGY
1. TITLE OF THE STUDY:
“A STUDY ON THE HEDGING PROCESS IN THE COMMODITIES
MARKET”
2. STATEMENT OF THE PROBLEM:
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“The statement of the problem is hedging process of commodity market.
3. AREA OF STUDY:
The area of the study is in “FINANCE (FUTURE COMMODITIES)”
4. METHOD OF THE STUDY:
The method adopted for the study is “Survey Method”
5. SCOPE FOR THE STUDY:
The futures commodities are the up coming market and is it gaining its
power in the market. Hence a detail study of commodity market will help us
to grow well in terms of knowledge, wealth and we can say as overall
development of an individual.
6. TARGETED RESPONDENTS:
“20” people of different categories like: Professionals, Businessmen, Self
employed and others.
7. OBJECTIVES OF THE STUDY:
To understand the conceptual frame work within which the key
decisions of commodities trading can be analyzed.
Page 29
To study management of risk using hedging process in the
commodities market.
To analyze various techniques or methods used in managing the
risk exposure in commodities market.
8. RESEARCH DESIGN:
It is a planned, designed and detail analysis of the commodities futures,
conducted in a systematic manner to check and verify hedging processes. It
also extends the frontiers of knowledge.
Market research design can be classified on the basis of fundamental
objectives of the research.
Research Design
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↓
↓ ↓ ↓
Exploratory Descriptive Casual
9. SAMPLE DESIGN:
Definition of the population : The sample respondents are those who are
trading in Commodities market.
Sampling Size : The number of sample size is “20”
Sampling technique : “QUESTIONNAIRE”
PRIMARY DATA: Data collected from the professionals in the field.
SECONDARY DATA:
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a) Internal Sources : Company brochure, formal and informal business
records
b) External Sources : Internet, Websites, Text Books etc.,
10. DATA COLLECTION INSTRUMENTS:
Questionnaire: Filled in by the target customers.
11. ASSUMPTIONS:
The mechanisms used in analyzing the hedging process are assumed to
be universally applicable.
The instruments such as commodity futures and options are assumed to
be apt in the process risk management.
The basic assumption is the futures market participants are speculative
investors who accept the risks that hedgers wish to avoid.
12. LIMITATIONS:
The effort has been made to make the study complete and exhaustive as
possible. However the study is not free from certain limitations.
The commodities market involves a high degree of volatility in price
fluctuations and more complex in nature.
Though there are various risk management techniques the factors such
as acts of god, political and economic factors are risky to determine.
Hedging process as such helps in reduction of risks but it fails in
eliminating risk of losses completely.
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Due to lack of time a detailed study was not possible.
Page 33
CHAPTER-4
ANALYSIS OF THE STUDY
POSITION OF THE INVESTOR:
BUSINESS MEN 11
Page 34
PROFESSIONAL 5SELF EMPLOYED 2
OTHERS 2
ANALYSIS
63%
21%
8%
8%
POSITION OF THE INVESTOR
BUSINESSMAN PROFESSIONAL SELFEMPLOYED OTHERES
INTERPRETATION
Page 35
The analysis shows that the businessmen hold the major share in the market and have the potential to make future decisions n understand the market well and analyze the trend of demand and supply affecting the future trading decisions.
THE BEST WAY TO DESCRIBE COMMODITIES FUTURES TRADING
Based on market news 8Driven by customer orders 4Based on technical analysis 6The "jobbing" approach 2
OTHERS 0ANALYSIS
45%
18%
27%
9%
COMMODITY FUTURE
Based on market news Driven by customer orders Based on technical analysisJOBBING APPROACH OTHERS
INTERPRETATIONThe future trading of the commodities depends on various factors out of which the market news has the most important significance in trading of the commodities as
Page 36
it reflects accurate information about the market and gives the investor a clear view on how to go about the trade.
HOW FAST DO YOU BELIEVE THE MARKET CAN ASSIMILIATE THE NEW INFORMATION WHEN THE
FOLLOWING ECONOMIC ANNOUNCEMENTS FROM THE MAJOR DEVELOPED COUNTRIES DIFFER FROM THEIR
MARKET EXPECTATIONS?
LESS THAN 10
SEC
LESS THAN 1
MIN
LESS THAN 10
MIN
LESS THAN 30
MIN
OVER30 MIN
TRADE DEFICIT
0 15 1 0
INFLATION 0 15 4 1 0INTEREST
RATE0 15 4 1 0
DEMAND & SUPPLY
0 15 4 1 0
ANALYSIS
Page 37
75%
20%
5%
DEMAND & SUPPLY
LESS THAN 10 SEC LESS THAN 1 MIN
LESS THAN 10 MIN LESS THAN 30 MIN
OVER 30 MIN
75%
20%
5%
TRADE DEFICIT
LESS THAN 10 SEC LESS THAN 1 MIN
LESS THAN 10 MIN LESS THAN 30 MIN
OVER 30 MIN
Page 38
75%
20%
5%
INFLATION
LESS THAN 10 SEC LESS THAN 1 MIN
LESS THAN 10 MIN LESS THAN 30 MIN
OVER 30 MIN
INTERPRETATIONAccording to the study the market can assimilate the new information within less than a minute in all the four factors which reflects that these four factors are always to be kept in mind before any decision making as any misinterpretation of data could lead to a loss.
Page 39
IN YOUR OPINION, WHICH ONE OF THE FOLLOWING ECONOMIC ANNOUNCEMENT FROM THE MAJOR DEVELOPED COUNTRIES HAS BIGGEST IMPACT ON THE COMMODITY MARKET?
NUMBER OF CLIENTSUNEMPLOYMENT
RATE2
TRADE DEFICIT 0INFLATION 8
GNP 2INTEREST RATE 8MONEY SUPPLY 0
ANALYSIS
UNEMPL TRADEDEF INFLATION GNP INT RATE MONEYSUPPLY012345678
2
0
8
2
8
0
ECONOMIC ANNOUNCEMENT
INTERPRETATION
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Inflation and Interest rate have a great impact on the commodity market as any change in it affects the trading decisions.
IF THE COMMODITY MARKET DOES NOT ACCURATELY REFLECT THE EXCHANGE RATE FUNDAMENTAL VALUE, WHICH OF THE FOLLOWING FACTORS DO YOU BELIEVE
ARE RESPONSIBLE FOR THIS?
YES NO NO OPINION
EXCESSIVE SPECULATION
20 0 0
MANIPULATION BY THE MAJOR
TRADING BANKS
0 10 10
CUSTOMERS/HEDGE FUNDS
6 10 4
EXCESSIVE CENTRAL BANK
INTERVENTION
20 0 0
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100%
EXCESSIVE SPECULATION
YES NO NO OPINION
50%50%
MANIPULATION BY THE MAJOR TRADING BANKS
YES NO NO OPINION
30%
50%
20%
CUSTOMER/HEDGE FUNDS
YES NO NO OPINION
100%
EXCESSIVE CENTRAL BANK INTERVENTION
YES NO NO OPINION
INTERPRETATIONIf the commodity market does not accurately reflect the exchange rate fundamental value then excessive central bank intervention and excessive speculation are responsible for the same to reflect the rate of exchange.
Page 42
SELECT SINGLE MOST IMPORTANT FACTOR THAT
DETERMINES PRICE MOVEMENTS IN EACH OF THE 3
HORIZONS LISTED?
INTRADAY MEDIUMRUN LONGRUN
OVER REACTION TO NEWS
5 0 0
SPECULATIVE FORCES
10 0 0
ECONOMIC FUNDAMENTALS
4 16 16
TECHNICAL TRADING 6 4 4
ANALYSIS
20%
40%16%
24%
INTRADAY
OVERREACTION TO NEWS
SPECULATIVE FORCES
ECONOMIC FUNDAMENTALS
TECHNICAL TRADING
80%
20%
MEDIUM RUN(UPTO 6 MONTHS)
OVERREACTION TO NEWS
SPECULATIVE FORCES
ECONOMIC FUNDAMENTALS
TECHNICAL TRADING
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80%
20%
LONGRUN (OVER 6 MONTHS)
OVERREACTION TO NEWS
SPECULATIVE FORCES
ECONOMIC FUNDAMENTALS
TECHNICAL TRADING
INTERPRETATIONEconomic fundamentals is the most important factor that determines the price
movement as it is the most beneficiary in the mid run and long run and the least important factor being over reaction to news as it sustains only for a day and does
not has any reflection in the mid run and the long run.
Page 44
IF THE COMMODITY MARKET DOES NOT ACCURATELY REFLECT THE EXCHANGE RATE TECHNICAL VALUE, WHICH OF THE FOLLOWING FACTORS DO YOU BELIEVE ARE RESPONSIBLE FOR THIS?
YES NO NO OPINION
EXCESSIVE SPECULATION
20 0 0
MANIPULATION BY THE MAJOR TRADING BANKS
0 10 10
CUSTOMERS/HEDGE FUNDS
6 10 4
EXCESSIVE CENTRAL BANK INTERVENTION
20 0 0
ANALYSIS
100%
EXCESSIVE SPECULATION
YES NO NO OPINION
50%50%
MANIPULATION BY THE MAJOR TRADING BANKS
YES NO NO OPINION
Page 45
30%
50%
20%
CUSTOMER/HEDGE FUNDS
YES NO NO OPINION
100%
EXCESSIVE CENTRAL BANK INTERVENTION
YES NO NO OPINION
INTERPRETATIONThe exchange rate traditional value again depends on excessive central bank intervention which shows that these two factors play a vital role in the trading and that an investor should keep a check on it.
Page 46
CHAPTER-5
FINDINGS AND SUGGESTIONS
Page 47
FINDINGS:
1) The commodity futures market is an efficient market as compared to the spot
market wherein volatility is high in spot market.
2) The market factors which includes government policies, weather – acts of
God, production and supply of commodities in the market etc are the major
determinants of price fluctuations in the market.
3) Commodity market is highly speculative in nature wherein there is much
scope for misleading the participants by few major players in the market.
4) Notwithstanding the rapid growth and diversification of futures markets, their
primary purpose remains the same as it has been for nearly a century and a
half, to provide an efficient and effective mechanism for the management of
price risks.
5) The possibility of large profits or losses in relation to the initial commitment
of capital stems principally from the fact that futures trading are a highly
leveraged form of speculation. Only a relatively small amount of money is
required to control assets having a much greater value.
6) Futures prices arrived at through competitive bidding are immediately and
continuously relayed around the world by wire and satellite
7) Spurred by the need to manage price and interest rate risks that exist in
virtually every type of modern business, today's futures markets have also
become major financial markets.
8) Whatever the hedging strategy, the common denominator is that hedgers
willingly give up the opportunity to benefit from favorable price changes in
order to achieve protection against unfavorable price changes.
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9) Futures prices increase and decrease largely because of the myriad factors
that influence buyers' and sellers' judgments about what a particular
commodity will be worth at a given time in the future (anywhere from less
than a month to more than two years).
10) Exchange rate depends widely depends on two factors which play a important role in the trading decisions i.e. excessive speculation and
excessive central bank intervention.
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SUGGESTIONS:
1) Follow the trends. This is probably some of the hardest advice for a trader to
follow because the personality of the typical futures trader is not "one of the
crowd." Futures traders (and futures brokers) are highly individualistic; the
markets seem to attract those who are. Very simply, it takes a special kind of
person, not "one of the crowd," to earn enough risk capital to get involved in
the futures markets. So the typical trader and the typical broker must guard
against their natural instincts to be highly individualistic, to buck the trend.
2) Trade with the trends, rather than trying to pick tops and bottoms.
3) Use technical signals (charts) to maintain discipline – the vast majority of
traders are not emotionally equipped to stay disciplined without some
technical tools. Use discipline to eliminate impulse trading.
4) Have a disciplined, detailed trading plan for each trade; i.e., entry, objective,
exit, with no changes unless hard data changes. Disciplined money
management means intelligent trading allocation and risk management. The
overall objective is end-of-year bottom line, not each individual trade
5) Cut losses short. Most importantly, cut your losses short, let your profits run.
It sounds simple, but it isn't. Let's look at some of the reasons many traders
have a hard time "cuttings losses short." First, it's hard for any of us to admit
we've made a mistake. Let's say a position starts going against you, and all
your "good" reasons for putting the position on are still there. You say to
yourself, "it's only a temporary set-back. After all (you reason), the more the
position goes against me, the better chance it has to come back – the odds
will catch up." Also, the reasons for entering the trade are still there. By now
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you've lost quite a bit; you sell yourself on giving it "one more day." It's easy
to convince yourself because, by this time, you probably aren't thinking very
clearly about the position. Besides, you've lost so much already, what's a
little more? Panic sets in, and then comes the worst, the most devastating,
the most fallacious reasoning of all, when you figure: "That contract doesn't
expire for a few more months; things; are bound to turn around in the
meantime.
6) Let profits run. Now to the "letting profits run" side of the equation. This is
even harder because who knows when those profits will stop running? Well,
of course, no one does, but there are some things to consider.
7) That kind of reasoning and emotionalism have no place in futures trading;
therefore, the next time you are about to close out a winning position, ask
yourself why. If the cold, calculating, sound reasons you used to put on the
position are still there, you should strongly consider staying. Of course, you
can use trailing stops to protect your profits, but if you are exiting a winning
position out of fear...don't; out of greed...don't; out of ego... don't; out of
impatience...don't; out of anxiety...don't; out of sound fundamental and/or
technical reasoning...do.
8) The losses should not be the factor for bad performance instead it should act
as an instrument to boost the morale of the investor and perform well in the
coming future as ups and downs is a phase of trade cycle and depends on
how an investor reacts to it.
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Conclusion
The Commodities market is an avenue for the investors wherein they
can transfer the risks of future price changes. But market as such is
highly volatile and is based on the factors such as economic factors etc.
the risks caused due to uncertainties can be minimized by the hedging
process effectively in order to safeguard the interest of the investors.
If the factors determining the various market structure is studied
carefully and analyzed technically it would lead to lower risk of bearing
the loss which has been shown from the above study.
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BIBLIOGRAPHY
WEB SITES VISITED:
www.commodityfutures.com
www.google.com
OTHER SOURCES:
COMPANY BROUCHER
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QUESTIONNAIRE
PERSONAL AND BACKGROUND INFORMATION:
NAME :
1. AGE :
2. SEX :
3. Your current position
Business man/commodity trader Professional
Self employed other: ________
4. The best way to describe your Commodity future trading is
Based on market news Driven by customer orders
Based on technical analysis The "jobbing"
approach
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5. How fast do you believe that the market can assimilate the new
information when the following economic announcements from the
major developed countries differ from their market expectations?
trade deficit Inflation
Interest rate Demand supply
Other: _______________
6. In your opinion, which one of the following economic announcements
from the major developed countries has biggest impact on the
commodity market
□ Unemployment rate □ G.N.P
□ Trade deficit □ Interest rate
□ Inflation □ Money Supply
7. If the commodity market does not accurately reflect the exchange rate
fundamental value, which of the following factors do you believe are
responsible for this?
Yes No No Opinion
Excessive speculation
Manipulation by the major
Customers/hedge funds
Excessive central bank
intervention
Other: ________
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8. Select single most important factor that determines price movements in
each of the three horizons listed.
Intraday Medium Run Long Run
a. Over reaction to news
b. Speculative forces
c. Economic fundamentals
d. Technical trading
9. If the commodity market does not accurately reflect the exchange rate
technical value, which of the following factors do you believe are
responsible for this?
Yes No No Opinion
Excessive speculation
Manipulation by the major
trading banks
Customers/hedge funds
Excessive central bank
interventions
10. Does the failure of a commodity in the market fuelled by Hedging affect
the general market trend of the demand for the said commodity, what
are your views with regard to the same ?
Strongly agree Maybe
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Depends on the commodity Disagree
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