1. Awareness of commodity market with reference Derivative investors A PROJECT REPORT ONAwareness of commodity market with reference Derivative investorsBABASAB PATIL MBA FINANCE PROJECT REPORT Page 1 2.Awareness of commodity market with reference Derivative investorsCONTENTSSL.NO PARTICULARS1. Executive Summary2. Research Methodology3. Company profile4. Introduction to the topic5. Analysis and interpretation6. Findings7. Suggestions8. Conclusion9. BibliographyBABASAB PATIL MBA FINANCE PROJECT REPORT Page 2 3.Awareness of commodity market with reference Derivative investors EXECUTIVE SUMMARY A project report containing the Awareness of commodity market withreference to Derivative investors a case study of Belgaum city At KARVY FinapolisBelgaum for fulfillment of requirement of MBA IVth semester in Institute ofManagement Education and research. It was an opportunity to learn the practical aspectsof the firmObjectives of the study 1. To know the perception of derivative investors towards commodity future market 2. To find the awareness level of commodity market in Belgaum city 3. To understand the commodity market and its working mechanism. 4. To know which commodity they prefer to invest. 5. To find the potential customer for commodity market The project was undertaken at KARVY Finapolis Belgaum the first part of the studyis done by collected information through net, journals, textbooks. And second part of thestudy is conducted through survey of the derivative investors.Scope of the study This study is limited to only Belgaum City the study is carried out to know theawareness level of derivative investors towards Commodity Futures market. This studyalso helps to know about trading mechanism of Commodity Market & the future tradinglevel.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 3 4.Awareness of commodity market with reference Derivative investors RESEARCH METHODOLOGYTitle of the Project Awareness of commodity market with reference to Derivative investorsSample Size The sample size is consist of traders in derivative market of Belgaum city.100random sample was taken to identify the awareness level of the derivative investorstowards Commodity Future MarketSample Type : Simple random sampling was adopted to select respondents.Sample Area : Belgaum cityDuration of Project: Ist Phase - December IInd Phase - January to April (weekly two days)TOOLS USED FOR ANALYSIS: 1. Graphical Representation of Analysis through SPSS. : a. Pie chartsDATA COLLECTION APPROACH: Primary data has been used to carry out the research successfully. The secondarydata has been collected from NDEX and MCX. For the purpose of gathering primary dataa structure and questionnaire was designed to collect data from the derivative investors.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 4 5.Awareness of commodity market with reference Derivative investorsMethod of Communication:In order to minimize the bias in data collection, the method of personal interview wasadopted.THE SOURCES OF THE DATA COLLECTION ARE AS FOLLOWSThe study relies to a great extent on primary data and to some extent on secondary data:Primary Data: Questionnaire Observation and interview techniqueSecondary Data: Information is collected through internet From various text books Journals and magazinesLIMITATION OF THE STUDY: Since the study is based on the convenient sampling it may not depict the accurate outcome Level of accuracy of results of research is restricted to the accuracy level with which the customers have given answers and the accuracy level of the answer cannot be predicted The findings are based solely on the information provided by the respondents and there is a possibility of biased results The study of project is limited to only BelgaumBABASAB PATIL MBA FINANCE PROJECT REPORT Page 5 6.Awareness of commodity market with reference Derivative investorsFINDINGS More than 50% of the Traders in are aware about the commodity future Market Hardly 30% traders are invested in the commodity future market Most of the investors are not ready to invest in commodity future market they feel it involve high risk. Returns and the Risk of the commodity are the most critical factors, which Traders will consider while investing in any commodity Most of the investors are ready to invest in commodity future market if proper information is provided As commodity future market is new and emerging ,many investors and farmers are not fully aware of this market .as the market helps to trade transparently without middlemen and agents While finding the reasons why most of the people are not trading in commodity market I found that many respondents are not interested at all in this trade this is because of unanawareness & mythical perception about commodity market.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 6 7.Awareness of commodity market with reference Derivative investorsSUGGESTION There is need to create awareness about commodity Future Market. Awareness program has to be conducted by Karvy consultants, because since this was new to the market .so it can be done through by giving advertisements in local channels, Newspapers, by sending E-mail to present customers etc From survey it is found that most of the potential customers are concerned about the Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage it will help to attract more and more customers. More agents and marketing executives should be appointed to educate the customers because the customers having many myths in there mind And also create the awareness of electronic commodity trading Firm should approach people who are already into the business of commodities .special campaigns / investors meets should be conducted for these people since they are aware of rate fluctuation ,market trends etc . They have got market idea that benefits them in price prediction. They will be in high spirits when price risk of them will be managed.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 7 8.Awareness of commodity market with reference Derivative investors Company Overview And InformationBABASAB PATIL MBA FINANCE PROJECT REPORT Page 8 9.Awareness of commodity market with reference Derivative investorsCOMPANY PROFILE The birth of Karvy was on a modest scale in 1981. It began with the vision andenterprise of a small group of practicing Chartered Accountants who founded the flagshipcompany Karvy Consultants Limited. We started with consulting and financialaccounting automation, and carved inroads into the field of registry and share accountingby 1985. Since then, we have utilized our experience and superlative expertise to go fromstrength to strengthto better our services, to provide new ones, to innovate, diversifyand in the process, evolved Karvy as one of Indias premier integrated financial serviceenterprise. Thus over the last 20 years Karvy has traveled the success route, towards buildinga reputation as an integrated financial services provider, offering a wide spectrum ofservices. And we have made this journey by taking the route of quality service, pathbreaking innovations in service, versatility in service and finally totality in services.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 9 10.Awareness of commodity market with reference Derivative investors Our highly qualified manpower, cutting-edge technology, comprehensiveinfrastructure and total customer-focus has secured for us the position of an emergingfinancial services giant enjoying the confidence and support of an enviable clienteleacross diverse fields in the financial world. Our values and vision of attaining total competence in our servicing has served asthe building block for creating a great financial enterprise, which stands solid on ourfortresses of financial strength - our various companies. With the experience of years of holistic financial servicing behind us and years ofcomplete expertise in the industry to look forward to, we have now emerged as a premierintegrated financial services provider. And today, we can look with pride at the fruits of our mastery and experiencecomprehensive financial services that are competently segregated to service and managea diverse range of customer requirements.OVERVIEW: KARVY, is a premier integrated financial services provider, and ranked amongthe top five in the country in all its business segments, services over 16 million individualinvestors in various capacities, and provides investor services to over 300 corporate,comprising the who is who of Corporate India. KARVY covers the entire spectrum offinancial services such as Stock broking, Depository Participants, Distribution offinancial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking,Commodities Broking, Personal Finance Advisory Services, Merchant Banking &Corporate Finance, placement of equity, IPOs, among others. Karvy has a professionalmanagement team and ranks among the best in technology, operations and research ofvarious industrial segments.Value and Vision of Karvy Stock Broking Ltd:BABASAB PATIL MBA FINANCE PROJECT REPORT Page 10 11.Awareness of commodity market with reference Derivative investors Our values and vision of attaining total competence in our servicing has servedas the building block for creating a great financial enterprise, which stands solid on ourfortress of financial strength our various companies.The Karvy Credo:Our Clients Our Focus Clients are the reason for our being. Personalized service, professional care; pro-activeness are the values that help us nurture enduring relationships with our clients.Respect for the Individual Each and every individual is an essential building block of our organization.We are the kiln that hones individuals to perfection. Be they our employees, shareholdersor investors. We do so by upholding their dignity & pride, inculcating trust and achievinga sensitive balance of their professional and personal lives.Teamwork None of us is more important than all of us.Each team member is the face ofKarvy. Together we offer diverse services with speed, accuracy and quality to deliveronly one product: excellence. Transparency, co-operation, invaluable individualcontributions for a collective goal, and respecting individual uniqueness within acorporate whole, is how we deliver again and again.Responsible CitizenshipA social balance sheet is as rewarding as a business one. As a responsible corporatecitizen, our duty is to foster a better environment in the society where we live and work.Abiding by its norms, and behaving responsibly towards the environment, is some of ourgrowing initiatives towards realizing it.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 11 12.Awareness of commodity market with reference Derivative investors Integrity Everything else is secondary Professional and personal ethics are our bedrock. We take pride in an environment that encourages honesty and the opportunity to learn from failures than camouflage them. We insist on consistency between works and actionAbout KARVY Group: About KARVY Group Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services for over 20 years. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 12 13.Awareness of commodity market with reference Derivative investors Karvy, a name long committed to service at its best. A fame acquired through therange of corporate and retail services including mutual funds, fixed income, equityinvestments, insurance to name a few. Our values and vision of attaining totalcompetence in our servicing has served as a building block for creating a great financialenterprise. The birth of Karvy was on a modest scale in the year 1982. It began with thevision and enterprise of a small group of practicing Chartered Accountants based inHyderabad, who founded Karvy. We started with consulting and financial accountingautomation, and then carved inroads into the field of Registry and Share Transfers. Since then, we have utilized our quality experience and superlative expertise to gofrom strength to strength to provide better and new services to the investors. And today,we can look with pride at the fruits of our experience into comprehensive financialservices provider in the Country.KARVY Group Companies are:Karvy Consultants LimitedThe first securities registry to receive ISO 9002 certification in India. Registered withSEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of beingMost Admired Registrar is one among many of the acknowledgements we received forour customer friendly and competent services.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 13 14.Awareness of commodity market with reference Derivative investorsKarvy Stock Broking LimitedThe company, Member of National Stock Exchange (NSE), offers a comprehensive rangeof services in the stock market through the benefits of in-depth research on crucial marketdynamics, done by qualified team of experts. Apart from stock broking activities, thecompany also provides Depository Participant Services to its corporate and retailcustomers.Karvy Investor Services LimitedRegistered with SEBI as a Category I Merchant Banker and ranked among the top 10merchant bankers in the country, the company has built a reputation as a professionaladvisor in structuring IPOs take over assignments and buy back exercises.Karvy Computershare Private LimitedKarvy Global Services LimitedBABASAB PATIL MBA FINANCE PROJECT REPORT Page 14 15.Awareness of commodity market with reference Derivative investorsKarvy Global Services is the global services arm of the Karvy Group of Companiesengaged in the business of offshore business process outsourcing in the areas of humanresource outsourcing, finance and accounting operations outsourcing, research andanalytics and back office processing operations.Karvy Comtrade LimitedThe company provides investment, advisory and brokerage services in IndianCommodities Markets. And most importantly, we offer a wide reach through our branchnetwork of over 225 branches located across 180 cities.Karvy Insurance Broking Private LimitedKarvy Mutual Fund ServicesKarvy Securities LimitedThe company is into distribution of Financial Products. It distributes a wide range offinancial products and services from insurance to credit cards and loans. The companyprovides sound advisory services to suit the different investment needs of customers.Stock Broking Services: It is an undisputed fact that the stock market is unpredictable and yet enjoys ahigh success rate as a wealth management and wealth accumulation option. Thedifference between unpredictability and a safety anchor in the market is provided by in-depth knowledge of market functioning and changing trends, planning with foresight andBABASAB PATIL MBA FINANCE PROJECT REPORT Page 15 16.Awareness of commodity market with reference Derivative investorschoosing one & rescues options with care. This is what we provide in our Stock Brokingservices. We offer services that are beyond just a medium for buying and selling stocks andshares. Instead we provide services, which are multi dimensional and multi-focused intheir scope. There are several advantages in utilizing our Stock Broking services, whichare the reasons why it is one of the best in the country. We offer trading on a vast platform; National Stock Exchange, Bombay StockExchange and Hyderabad Stock Exchange. More importantly, we make trading safe tothe maximum possible extent, by accounting for several risk factors and planningaccordingly. We are assisted in this task by our in-depth research, constant feedback andsound advisory facilities. Our highly skilled research team, comprising of technicalanalysts as well as fundamental specialists, secure result-oriented information on markettrends, market analysis and market predictions. This crucial information is given as aconstant feedback to our customers, through daily reports delivered thrice daily ; The Pre-session Report, where market scenario for the day is predicted, The Mid-session Report,timed to arrive during lunch break , where the market forecast for the rest of the day isgiven and The Post-session Report, the final report for the day, where the market and thereport itself is reviewed. To add to this repository of information, we publish a monthlymagazine. The Finapolis, which analyzes the latest stock market trends and takes a closelook at the various investment options, and products available in the market, while aweekly report, called Karvy Bazaar Baatein keeps you more informed on the immediatetrends in the stock market. In addition, our specific industry reports give comprehensiveinformation on various industries. Besides this, we also offer special portfolio analysispackages that provide daily technical advice on scripts for successful portfoliomanagement and provide customized advisory services to help you make the rightfinancial moves that are specifically suited to your portfolio. Our Stock Broking services are widely networked across India, with the numberof our trading terminals providing retail stock broking facilities. Our services haveBABASAB PATIL MBA FINANCE PROJECT REPORT Page 16 17.Awareness of commodity market with reference Derivative investorsincreasingly offered customer oriented convenience, which we provide to a spectrum ofinvestors, high-net worth or otherwise, with equal dedication and competence.Karvy Commodities Broking LimitedAt Karvy Commodities, we are focused on taking commodities trading to newdimensions of reliability and profitability. We have made commodities trading, anessentially age-old practice, into a sophisticated and scientific investment option.Here we enable trade in all goods and products of agricultural and mineral origin thatinclude lucrative commodities like gold and silver and popular items like oil, pulses andcotton through a well-systematized trading platform.Our technological and infrastructural strengths and especially our street-smart skills makeus an ideal broker. Our service matrix is holistic with a gamut of advantages, the first andforemost being our legacy of human resources, technology and infrastructure that comesfrom being part of the Karvy Group.Quality Policy: To achieve and retain leadership, Karvy shall aim for complete customersatisfaction, by combining its human and technological resources, to provide superiorquality financial services. In the process, Karvy will strive to exceed Customersexpectations.About Karvy Comodities Broking Limited: Commodities market, contrary to the beliefs of many people, has been in existence inIndia through the ages. However the recent attempt by the Government to permit Multi-commodity National levels exchanges has indeed given it, a shot in the arm. As a resulttwo exchanges Multi Commodity Exchange (MCX) and National Commodity andderivatives Exchange (NCDEX) have come into being. These exchanges, by virtue oftheir high profile promoters and stakeholders, bundle in themselves, online tradingfacilities, robust surveillance measures and a hassle-free settlement system.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 17 18.Awareness of commodity market with reference Derivative investors The futures contracts available on a wide spectrum of commodities like Gold, Silver,Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellentopportunities for hedging the risks of the farmers, importers, exporters, traders and largescale consumers. They also make open an avenue for quality investments in preciousmetals. The commodities market, as the movements of the stock market or debt marketdo not affect it provides tremendous opportunities for better diversification of risk.Realizing this fact, even mutual funds are contemplating of entering into this market. Karvy Commodities Broking Limited is another venture of the prestigious Karvygroup. With our well established presence in the multifarious facets of the modernFinancial services industry from stock broking to registry services, it is indeed a pleasurefor us to make foray into the commodities derivatives market which opens yet anotherdoor for us to deliver our service to our beloved customers and the investor public atlarge. With the high quality infrastructure already in place and a committed Governmentproviding continuous impetus, it is the responsibility of us, the intermediaries to deliverthese benefits at the doorsteps of our esteemed customers. With our expertise in financialservices, existence across the lengths and breadths of the country and an enviabletechnological edge, we are all set to bring to you, the pleasure of investing in thisburgeoning market, which can touch upon the lives of a vast majority of the populationfrom the farmer to the corporate alike. We are confident that the commodity futures canbe a good value addition to your portfolio. The company provides investment, advisory and brokerage services in IndianCommodities Markets. And most importantly, we offer a wide reach through our branchnetwork of over 225 branches located across 180 cities.KARVY Advantage:Trade from anywhere in India Karvy, with its network of branches across the length andbreadth of the country, is always within your reach, no matter where you are. This givesyou the facility to trade from anywhere in India.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 18 19.Awareness of commodity market with reference Derivative investorsReliable research Karvy has a dedicated team of research analysts who work round the clock toprovide the best research newsletters and advices. We reach your desk daily, weekly andmonthly.Personalized Services Karvy, with its wide array of personalized services from registry to stock brokingtakes the pleasure of adding one more service, commodities broking with the samepersonal touch .State of Infrastructure The strong IT backbone of Karvy helps us to provide customized direct servicesthrough our back office system, nation-wide connectivity and website.Round the clock operations in commodities trading Indian commodities market, unlike stock market keeps awake till 11 in the night andKarvy is all poised to offer round the clock services through its dedicated team ofprofessionals. The account opening forms are available at our branch offices and with our businessassociates. You are requested to kindly contact a branch nearby your area and completethe account opening formalities for commodities trading at the branches. Also you can take a print out and fill out a simple account opening form from ourwebsite and complete the necessary documentation as per the checklist enclosed in theform. The form after duly filled up may be deposited at the nearest Karvy Branch orAssociate along with a cheque/DD favouring Karvy Commodities Broking PrivateLimited payable at Hyderabad towards initial margin.Please remember the Member-Client agreement has to be executed on a non-judicial stamp paper, as per the applicableby the Stamp Duty Act of the relevant state.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 19 20.Awareness of commodity market with reference Derivative investorsDepositInitialMargin:You need to deposit an initial upfront margin as specified by the exchange (usuallybetween 5-10% of the contract value).The cheque/DD should be in favour of KarvyCommodities Broking Private LimitedMark to Market Margin: In addition to initial margin, you also need to keep a mark to market margin fortaking care of the adverse price movements, if any.Achievements Among the top 5 stock brokers in India (4% of NSE volumes) Indias No. 1 Registrar & Securities Transfer Agents Among the to top 3 Depository Participants Largest Network of Branches & Business Associates ISO 9002 certified operations by DNV Among top 10 Investment bankers Largest Distributor of Financial Products Adjudged as one of the top 50 IT uses in India by MIS Asia Full Fledged IT driven operationsBABASAB PATIL MBA FINANCE PROJECT REPORT Page 20 21.Awareness of commodity market with reference Derivative investors ORGANISATION CHART Managing Director Chief Managing DirectorVice-President Vice-President Vice-President Vice-President Karvy Karvy Karvy Karvy Securities Ltd. Stock Broking Ltd Consultants Ltd. Investors Services Ltd. . Deputy Deputy Deputy Deputy General General General General Manager Manager Manager Manager SeniorManager Senior Manager Senior Manager SenoirManager Branch Manager Number of Team Leaders Number of Executives BABASAB PATIL MBA FINANCE PROJECT REPORT Page 21 22.Awareness of commodity market with reference Derivative investors Introduction to the topicBABASAB PATIL MBA FINANCE PROJECT REPORT Page 22 23.Awareness of commodity market with reference Derivative investorsIntroduction to derivatives The origin of derivatives can be traced back to the need of farmers to protectthemselves against Fluctuations in the price of their crop. From the time it was sown tothe time it was ready for harvest, farmers would face price uncertainty. Through the useof simple derivative products, it was possible for the farmer to partially or fully transferprice risks by locking-in asset prices. These were simple contracts developed to meet theneeds of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he wouldreceive for his harvest in September. In years of scarcity, he would probably obtainattractive prices. However, during times of oversupply, he would have to dispose off hisharvest at a very low price. Clearly this meant that the farmer and his family wereexposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too wouldface a price risk that of having to pay exorbitant prices during dearth, althoughfavorable prices could be obtained during periods of oversupply. Under suchcircumstances, it clearly made sense for the farmer and the merchant to come togetherand enter into a contract whereby the price of the grain to be delivered in Septembercould be decided earlier. What they would then negotiate happened to be a futures-typecontract, which would enable both parties to eliminate the price risk. In 1848, theChicago Board of Trade, or CBOT, was established to bring farmers and merchantstogether. A group of traders got together and created the `to arrive contract thatpermitted farmers to lock in to price upfront and deliver the grain later. These to-arrivecontracts proved useful as a device for hedging and speculation on price changes. Thesewere eventually standardized, and in 1925 the First futures clearing house came intoBABASAB PATIL MBA FINANCE PROJECT REPORT Page 23 24.Awareness of commodity market with reference Derivative investorsexistence. Today, derivative contracts exist on a variety of commodities such as corn,pepper, cotton, wheat, silver, etc. Besides commodities, derivatives contracts also existon a lot of Financial underlying like stocks, interest rate, exchange rate, etc. Commodity Futures are contracts to buy specific quantity of a particularcommodity at a future date. It is similar to the index futures and stock futures but theunderlying happens to be commodities instead of stocks and indices. Commodity futuresmarket has been in existence in India for centuries. The Government of India banned futures trading in certain commodities in70s.However trading in commodity futures has banned permitted again by thegovernment in order to help the commodity products ,traders, and investors. Worldwide,commodity exchanges originated before the other financial exchanges. In fact most ofthe derivatives instruments had their birth in commodity exchanges. Commodity marketsare markets where raw or primary products are exchanged.These raw commodities are traded on regulated exchanges, in which they are bought andsold in standardized Contracts. Commodity Future is a Derivative instrument where theunderlying asset is a commodity. Commodity future are exchanges traded contracts tosell or buy standardized futures contract.Some commonly used derivativesForwards: As we discussed, a forward contract is an agreement between two entities tobuy or sell the underlying asset at a future date, at todays pre-agreed price.Futures: A futures contract is an agreement between two parties to buy or sell theunderlying asset at a future date at todays future price. Futures contracts differ fromforward contracts in the sense that they are standardized and exchange traded.Options: There are two types of options - calls and puts. Calls give the buyer the rightbut not the obligation to buy a given quantity of the underlying asset, at a given price onBABASAB PATIL MBA FINANCE PROJECT REPORT Page 24 25.Awareness of commodity market with reference Derivative investorsor before a given future date. Puts give the buyer the right, but not the obligation to sell agiven quantity of the underlying asset at a given price on or before a given date.Warrants: Options generally have lives of upto one year, the majority of options tradedon options exchanges having a maximum maturity of nine months. Longer dated optionsare called warrants and are generally traded over the counter.Baskets: Basket options are options on portfolios of underlying assets. The underlyingasset is usually a weighted average of a basket of assets. Equity index options are a formof basket options.Swaps: Swaps are private agreements between two parties to exchange cash flows in thefuture according to a prearranged formula. They can be regarded as portfolios of forwardcontracts. The two commonly used swaps are :Interest rate swaps: These entail swapping only the interest related cash flows betweenthe parties in the same currencyCurrency swaps: These entail swapping both principal and interest between the parties,with the cash flows in one direction being in a different currency than those in theopposite direction.Exchange traded versus OTC derivativesDerivatives have probably been around for as long as people have been trading with oneanother. Forward contracting dates back at least to the 12th century, and may well havebeen around before then. These contracts were typically OTC kind of contracts. Over thecounter (OTC) derivatives are privately negotiated contracts. Merchants entered intocontracts with one another for future delivery of specified amount of commodities atspecified price. A primary motivation for pre- arranging a buyer or seller for a stock ofcommodities in early forward contracts was to lessen the possibility those large swingswould inhibit marketing the commodity after a harvest Later many of these contractsBABASAB PATIL MBA FINANCE PROJECT REPORT Page 25 26.Awareness of commodity market with reference Derivative investorswere standardized in terms of quantity and delivery dates and began to trade on anexchange.The OTC derivatives markets have the following features compared to exchange-traded derivatives:1. The management of counter-party (credit) risk is decentralized and located withinindividual Institutions.2. There are no formal centralized limits on individual positions, leverage, or margining.3. There are no formal rules for risk and burden sharing.4. There are no formal rules or mechanisms for ensuring market stability and integrity,and forSafeguarding the collective interests of market participants.5. The OTC contracts are generally not regulated by a regulatory authority and theexchanges self-regulatory organization, although they are affected indirectly by nationallegal systems, banking supervision and market surveillance.The OTC derivatives markets have witnessed rather sharp growth over the last few years,which has accompanied the modernization of commercial and investment banking andglobalization of financial activities. The recent developments in information technologyhave contributed to a great extent to these developments. While both exchange-tradedand OTC derivative Contracts offer many benefits, the former have rigid structurescompared to the latter. The largest OTC derivative market is the interbank foreignexchange market. Commodity derivatives the world over are typically exchange tradedand not OTC in nature.Exchange traded versus OTC derivativesDerivatives have probably been around for as long as people have been trading with oneanother. Forward contracting dates back at least to the 12th century, and may well havebeen around before then. These contracts were typically OTC kind of contracts. Over theBABASAB PATIL MBA FINANCE PROJECT REPORT Page 26 27.Awareness of commodity market with reference Derivative investorscounter (OTC) derivatives are privately negotiated contracts. Merchants entered intocontracts with one another for future delivery of specified amount of commodities atspecified price. A primary motivation for pre- arranging a buyer or seller for a stock ofcommodities in early forward contracts was to lessen the possibility those large swingswould inhibit marketing the commodity after a harvest Later many of these contractswere standardized in terms of quantity and delivery dates and began to trade on anexchange.The OTC derivatives markets have the following features compared to exchange-traded derivatives:1. The management of counter-party (credit) risk is decentralized and located withinindividual Institutions.2. There are no formal centralized limits on individual positions, leverage, or margining.3. There are no formal rules for risk and burden sharing.4. There are no formal rules or mechanisms for ensuring market stability and integrity,and forSafeguarding the collective interests of market participants.5. The OTC contracts are generally not regulated by a regulatory authority and theexchanges self-regulatory organization, although they are affected indirectly by nationallegal systems, banking supervision and market surveillance. The OTC derivatives markets have witnessed rather sharp growth over the lastfew years, which has accompanied the modernization of commercial and investmentbanking and globalization of financial activities. The recent developments in informationtechnology have contributed to a great extent to these developments. While bothexchange-traded and OTC derivative Contracts offer many benefits, the former have rigidstructures compared to the latter. The largest OTC derivative market is the interbankBABASAB PATIL MBA FINANCE PROJECT REPORT Page 27 28.Awareness of commodity market with reference Derivative investorsforeign exchange market. Commodity derivatives the world over are typically exchangetraded and not OTC in nature.Commodities tradingOver the modern age of investing, commodity trading has emerged as an important playerin the way that people invest in and speculate. It was developed as a reaction to the waythat business is conducted, and it continues today in the form of commodities tradingonline. Many different people turn their business know how into a profitable venture, andit is commodities and futures trading that helps them get there. Simply put, commoditiesare items like, wheat, corn, gold and silver, and cattle and pork bellies, and crude oil.When farmers take their crop to "market", they are selling commodities. Tradingcommodities is the worlds one perfect business. The upside potential is unlimited andyou can control the downside. You can trade commodities on a part time basis or a full-time basis. You can spend as little as an and earn a full time incomeCommodities exchanges usually trade futures contracts on commodities, such as tradingcontracts to receive something, say corn, in a certain month. A farmer raising corn cansell a future contract on his corn, which will not be harvested for several months, andguarantee the price he will be paid when he delivers; a breakfast cereal producer buys thecontract now and guarantees the price will not go up when it is delivered. This protectsthe farmer from price drops and the buyer from price rises.Speculators and investors also buy and sell the futures contracts to make a profit andprovide liquidity to the systemPeople have started with a small account and in a short period of time built their accountup to the point that they have been able to quit their jobs and trade commodities full-timeproviding themselves with a very comfortable living.Commodities are raw materials used to create the products consumers buy, from food tofurniture to gasoline. Commodities include agricultural products such as wheat and cattle,energy products such as oil and gasoline, and metals such as gold, silver and aluminum.There are also soft commodities, or those that cannot be stored for long periods of time.Soft commodities are sugar, cotton, cocoa and coffee.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 28 29.Awareness of commodity market with reference Derivative investorsThe commodity market has evolved significantly from the days when farmers hauledbushels of wheat and corn to the local market. In the 1800s, demand for standardizedcontracts for trading agricultural products led to the development of commodity futuresexchanges. Today, futures and options contracts on a huge array of agricultural products,metals, energy products and soft commodities can be traded on exchanges all over theworld.Commodities have also evolved as an asset class with the development of commodityfutures indexes and, more recently, the introduction of investment vehicles that trackcommodity indexes.Commodity prices have been driven higher by a number of factors, including increaseddemand from China, India and other emerging countries that need oil, steel and othercommodities to support manufacturing and infrastructure development. The commoditysupply chain has also suffered from a lack of investment, creating bottlenecks and addingan insurance premium and/or a convenience yield to the returns of many commodityfutures. Over the long term, these economic factors are likely to support continued gainsin commodity index returns.The potential for attractive returns is probably the most obvious reason for increasedinvestor interest in commodities, but it isnt the only factor. Commodities may offerinvestors other significant benefits, including portfolio diversification and a hedge againstinflation and risk.Commodities are real assets, unlike stocks and bonds, which are financial assets.Commodities, therefore, tend to react to changing economic conditions in different waysthan traditional financial assets. For example, commodities are one of the few assetBABASAB PATIL MBA FINANCE PROJECT REPORT Page 29 30.Awareness of commodity market with reference Derivative investorsclasses that tend to benefit from rising inflation. As demand for goods and servicesincreases, the price of those goods and services usually goes up as well, as do the pricesof thecommodities used to produce those goods and services. Because commodity pricesusually rise when inflation is accelerating, investing in commodities may provideportfolios with a hedge against inflation.Why invest in commodities?Leverage is very important to the commodities markets. Unlike the stock market, whereyou might have to invest 10,000 dollars to leverage 10,000 dollars. A commodities tradercan leverage tens of thousands of dollars worth of a commodity for pennies on the dollar.Also unlike stocks, commodities have intrinsic value and will not go bankrupt.The futures markets are so crucial to the well being of our nation, that the governmentestablished the Commodity Futures Trading Commission (CFTC) to oversee the industry.There is also a self-regulatory body, the National Futures Association (NFA), whomonitor the activities of all futures market professionals to ensure the integrity of thefutures markets.Commodities also give the investor the ability to participate in virtually all sectors of theworld economy and have the potential to produce returns that tend to be independent ofother markets. In fact portfolios that add commodity investments can actually lower theoverall portfolio risk by diversification.What is the difference between hedging and speculating?Just about every product that you consume would likely cost dramatically more withoutthe commodities futures markets. Because of the intrinsic risks associated to being inbusiness, lacking the ability to shift risk, a manufacturer/producer of goods or servicesBABASAB PATIL MBA FINANCE PROJECT REPORT Page 30 31.Awareness of commodity market with reference Derivative investorswould be forced to charge higher prices, and the consumer would have to pay thosehigher prices. This shifting of risk to someone willing to accept it is called hedging.Manufacturers could effectively lock in a sales price by going short an equivalent amountof goods with futures contracts. If a mining company knew that they were going to sell1000 ounces of gold in several months, they could protect themselves for a future pricedecline by going short 10 gold futures contracts today. If the price of gold fell by $30 inthe following months, they would receive that much less in the cash marketplace for theirgold, but earn that much back when they offset their short gold futures position. Thefutures price will eventually become the cash price. A user or buyer of goods can use thefutures market in the same manner. They would need to protect themselves from a futureprice increase, and therefore go long futures contracts.The person willingly accepting a risk does so because of the opportunity to profit fromprice movements, this is known as speculating. The cotton in your shirt, the orange juice,cereal and coffee you had for breakfast, the lumber, copper and mortgage for your home,the gas or ethanol that you put in your car all would be priced many times higher withoutthe participation of speculators in the futures markets. Through supply and demandmarket forces, equilibrium prices are reached in an orderly and equitable manner withinthe exchanges, and world economies, and you, benefit tremendously from futures trading.What commodity futures markets do? A well-developed and effective commodity futures market, unlike physical market, facilitates off setting the transactions without impacting on physical goods until the expiry of a contract. Futures market attractsBABASAB PATIL MBA FINANCE PROJECT REPORT Page 31 32.Awareness of commodity market with reference Derivative investors hedgers who minimize their risks, and encourages competition from other traders who possess market information and price judgment. While hedgers have long-term perspective of the market, the traders, or arbitragers as they are often called, hold an immediate view of the market. A large number of different market players participate in buying and selling activities in the market based on diverse domestic and global information, such as price, demand and supply, climatic conditions and other market related information. All these factors put together result in efficient price discovery as a result of large number of buyers and sellers Transacting in the futures market. Futures market, as observed from the cross-country experience of active commodity futures markets, helps in efficient price discovery of the respective commodities and does not impair the long-run equilibrium Price of commodities. At times, however, price behavior of a commodity in the futures market might show Some aberrations reacting to the element of speculation and bandwagon effect inherent in any market, but it quickly reverts to long-run equilibrium price, as information flows in, reflecting fundamentals of the respective commodity. In futures market, speculators play a role in providing liquidity to the markets and may sometimes benefit from price movements, but do not have a systematic causal influence on prices. An effective architecture for regulation of trading and for ensuring transparency as well as timely flow of information to the market participants would enhance the utility of commodity exchanges in efficient price discovery and minimize price shocks triggered by unanticipated supply demand mismatches.Participants of Commodity Market:The participants who trade in the commodity derivatives markets can be classified asfollows;Hedgers: Hedgers are participants who use commodity derivative instruments to hedge /eliminate the price risk associated with the underlying commodity asset held them.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 32 33.Awareness of commodity market with reference Derivative investorsHedgers are those who protect themselves from the risk associated with the price of anasset by using derivatives. A person keeps a close watch upon the prices discovered intrading and when the comfortable price is reflected according to his wants, he sellsfutures contracts. In this way he gets an assured fixed price of his produce.In general, hedgers use futures for protection against adverse future price movements inthe underlying cash commodity. Hedgers are often businesses, or individuals, who at onepoint or another deal in the underlying cash commodity.Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices goup. For protection against higher prices of the produce, he hedges the risk exposure bybuying enough future contracts of the produce to cover the amount of produce he expectsto buy. Since cash and futures prices do tend to move in tandem, the futures position willprofit if the price of the produce rise enough to offset cash loss on the produce.Speculators: Speculators are participants who bet on future movements in the price ofan asset i.e. I commodity to make short term gain from the price movements.Commodity future s gives theme the leverage so to take risks on nominal marginpayments and thereby increasing for bigger gains or losses. Speculators are some whatlike a middle man. They are never interested in actual owing the commodity. They willjust buy from one end and sell it to the other in anticipation of future price movements.They actually bet on the future movement in the price of an asset.They are the second major group of futures players. These participants includeindependent floor traders and investors. They handle trades for their personal clients orbrokerage firms.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 33 34.Awareness of commodity market with reference Derivative investorsBuying a futures contract in anticipation of price increases is known as going long.Selling a futures contract in anticipation of a price decrease is known as going short.Speculative participation in futures trading has increased with the availability ofalternative methods of participation.Speculators have certain advantages over other investments they are as follows:If the traders judgment is good, he can make more money in the futures market fasterbecause prices tend, on average, to change more quickly than real estate or stock prices.Futures are highly leveraged investments. The trader puts up a small fraction of the valueof the underlying contract as margin, yet he can ride on the full value of the contract as itmoves up and down. The money he puts up is not a down payment on the underlyingcontract, but a performance bond. The actual value of the contract is only exchanged onthose rare occasions when delivery takes place.Arbitrageurs: Arbitrageurs work at making profits by taking advantaged of existence ofdifference in prices of the same product across different markets (MCX and NCDEX).Investors: Investors are participants having a a longer term view as compared tospeculators when they enter into trade in the commodes market. E.g. Farmers, Producers,consumers, etc.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 34 35.Awareness of commodity market with reference Derivative investorsMajor Commodity Exchanges:The Government of India permitted establishment of National-level Multi- Commodityexchanges in the year 2002 and accordingly three exchanges have come into picture. Multi-Commodity Exchange of India Ltd, Mumbai.(MCX). National Commodity and Derivative Exchange of India, Mumbai (NCDEX). National Multi Commodity Exchange, Ahemdabad (NMCE). However there is regional commodity exchanges functioning all over the country. Karvy commodities Broking Pvt.Ltd has got membership of both the premier commodity exchanges i.e. MCX and NCDEX.The two exchanges (NCEDX&MCX) have seen tremendous growth in less than twoyears . the daily average on these two exchanges put together has now grown to aBABASAB PATIL MBA FINANCE PROJECT REPORT Page 35 36.Awareness of commodity market with reference Derivative investorshealthy Rs.7800 Crores. It has been believed by experts that the volumes on theseexchanges would the stock market in the days to come. Commodity exchanges areregulated by Forwards Market mission (FMC); Forwards Market Commission worksunder the purview of the ministry of Food ,Agriculture and Public Distribution.At NCDEX the contracts expire on 20th day of each month .if 20th happens to be a holidaythe expiry day will be the previous working day.At MCE the expiry day is 15th of every month .if 15th happens to be a holiday the expiryday will be the previous day. The expiry day differs for different commodities in both theexchanges. Generally commodity futures require an initial margin between 5-10% of the contractvalue. The exchanges levy higher additional margin in case of excess volatility. Themargin amount varies between exchanges and commodities. Therefore they provide greatbenefits of leverage in comparison to the stock and index futures trade on the stockexchanges. The exchange also requires the daily profits and losses to be paid in/out onopen positions (mark to Market or MTM) so that the buyers and sellers do not carry a riskof not more than one day. Functions of an Exchange Product Conceptualization and Design Price Discovery & Dissemination Robust Trading & Settlement systems Management of Counter party Credit Risk Self Regulation to ensure Overview of Trading and Surveillance Audit and review of Members Enforcement of Exchange rulesBABASAB PATIL MBA FINANCE PROJECT REPORT Page 36 37.Awareness of commodity market with reference Derivative investorsCommodities selected in Phase I Bullion Gold SilverAgri commodities Soya bean Soya oil Rapeseed/Mustard Seed Rapeseed/ Mustard Seed Oil Crude Palm oil RBD Palmolein40 Commodities introduced in Phase II Rubber Jute Pepper Chana (Gram) Guar Wheat Commodities exchanges across the worldMain commodity exchanges worldwide:Americas Exchange Abbreviation Location Product TypesBrazilian Mercantile and BMF Brazil Agricultural, Biofuels, PreciousBABASAB PATIL MBA FINANCE PROJECT REPORT Page 37 38.Awareness of commodity market with reference Derivative investorsFutures Exchange Metals Agricultural, Biofuels, PreciousCME Group CME Chicago MetalsChicago Climate Exchange CCX Chicago EmissionsHedgeStreet Exchange California Energy, industrial MetalsIntercontinental Exchange ICE Energy, EmissionsKansas City Board of Trade KCBT Kansas City AgriculturalMemphis Cotton Exchange Memphis AgriculturalMercado a Termino de MATba Argentina AgriculturalBuenos AiresMinneapolis Grain MGEX Minneapolis AgriculturalExchangeNew York Board of Trade NYBOT New York Agricultural, BiofuelsNew York Mercantile Energy, Agricultural, Industrial NYMEX New YorkExchange Metals, Precious MetalsU.S. Futures Exchange USFE Chicago EnergyWinnipeg Commodity WCE Winnipeg AgriculturalExchangeBABASAB PATIL MBA FINANCE PROJECT REPORT Page 38 39.Awareness of commodity market with reference Derivative investorsAsia Exchange Abbreviation Location Product TypesBursa Malaysia MDEX Malaysia BiofuelsCentral Japan Commodity Energy, Industrial Metals, NagoyaExchange RubberDalian Commodity DCE China Agricultural, PlasticsExchangeDubai Mercantile Exchange DME Dubai EnergyDubai Gold & Commodities DGCX Dubai Precious MetalsExchangeKansai Commodities KANEX Osaka AgriculturalExchange Energy, Precious Metals, Metals,Multi Commodity Exchange MCX India AgriculturalNational Commodity Karachi Precious Metals, AgriculturalExchange LimitedNational Commodity and NCDEX Mumbai AllDerivatives ExchangeBABASAB PATIL MBA FINANCE PROJECT REPORT Page 39 40.Awareness of commodity market with reference Derivative investorsSingapore Commodity SICOM Singapore Agricultural, RubberExchange Energy, Precious Metals,Tokyo Commodity Exchange TOCOM Tokyo Industrial Metals, AgriculturalTokyo Grain Exchange TGE Tokyo AgriculturalZhen Zhou Commodity CZCE China AgriculturalExchangeEurope Exchange Abbreviation Location Product TypesClimex CLIMEX Amsterdam EmissionsNYSE Euro next Europe AgriculturalEuropean Climate Exchange ECX Europe EmissionsLondon Metal Exchange LME London Industrial Metals, PlasticsRisk Management Exchange RMX Hanover AgriculturalOceania Exchange Abbreviation Location Product TypesAustralian Securities Exchange ASX Sydney AgriculturalBABASAB PATIL MBA FINANCE PROJECT REPORT Page 40 41.Awareness of commodity market with reference Derivative investorsIndian Commodities Market In India commodity markets have been in existence for decades. However in 1975the Government banned forward contracts on commodities. Later in 2003 theGovernment of India again allowed forward contracts in commodities. There have beenover 20 exchanges existing for commodities all over the country. However theseexchanges are commodity specific and have a strong regional focus. The Government, inorder to make the commodities market more transparent and efficient, accorded approvalfor setting up of national level multi commodity exchanges. Accordingly three exchangesare there which deal in a wide variety of commodities and which allow nation-widetrading. They are Multi Commodity Exchange (MCX) National Commodities Derivatives Exchange (NCDEX) National Multi Commodity Exchange (NMCE) The MCX is Mumbai-based and is promoted by Financial Technologies Pvt Ltd.MCX allows trading on a host of commodities ranging from bullion to grains. Pleasecheck the Commodities traded menu. MCX has become the first exchange in the worldto launch futures on steel. Recently on 11th August 2004, MCX crossed a peak dailyturnover of Rs.950 Crores. NCDEX is promoted by an elite group of financial institutions including NSE,LIC, SBI, UBI etc., NCDEX also allows trading of futures on a host of commodities.National Commodities and Derivatives Exchange, NCDEX At Karvy Commodities, weare focused on taking commodities trading to new dimensions of reliability andBABASAB PATIL MBA FINANCE PROJECT REPORT Page 41 42.Awareness of commodity market with reference Derivative investorsprofitability. We have made commodities trading, an essentially age-old practice, into asophisticated and scientific investment option. Here we enable trade in all goods and products of agricultural and mineral originthat include lucrative commodities like gold and silver and popular items like oil, pulsesand cotton through a well-systematized trading platform. Our technological and infrastructure strengths and especially our street-smartskills make us an ideal broker. Our service matrix is holistic with a gamut of advantages,the first and foremost being our legacy of human resources, technology and infrastructurethat comes from being part of the Karvy Group. Our wide national network, spanning the length and breadth of India, furthersupports these advantages. Regular trading workshops and seminars are conducted tohone trading strategies to perfection. Every move made is a calculated one, based onreliable research that is converted into valuable information through daily, weekly andmonthly newsletters, calls and intraday alerts. Further, personalized service is providedhere by a dedicated team committed to giving hassle-free service while the brokeragerates offered are extremely competitive. Our commitment to excel in this sector stems from the immense importance that commodities broking has to a cross-section of investors farmers, exporters, importers, manufacturers and the Government of India itself. Commodities market essentially represents another kind of organized market justlike the stock market and the debt market. However, commodities market, because of itsunique nature lends to the benefits of a wide spectrum of people like investors, importers,exporters, producers, corporate etc.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 42 43.Awareness of commodity market with reference Derivative investorsCOMMODITY MARKET IN INDIAN PERSPECTIVE. India, a commodity based economy where 75% of the one billion populationsdepend on agriculture, surprisingly has an underdeveloped commodity market. Thehistory of commodity markets in India is more than a century old. The institution offormal commodity market in India is almost as old as the UK and the US. The first organized commodity market in India was established in the late 19thcentury, Bombay Cotton Association Ltd. was set up in 1875 by the Bombay CottonExchange ltd. In 1893, due to widespread discontent amongst leading cotton mill ownersand merchants over functioning of Bombay Cotton Trade Association. Commodities markets offer immense potential to become a separate asset classfor market savvy investors, arbitrageurs and speculators. Commodities markets are easyto understand as far as the demand and supply fundamentals are concerned as these aretwo things that guide these markets. The investors will have to understand the risks andthe advantages before jumping the band wagon. Commodities futures are less volatile ascompared to equity and bonds. Some of the other advantages linked to commodity futuresare better risk adjusted, good hedge against downfall in equities or bonds as there is no orvery less correlation and also a very effective hedge against inflation.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 43 44.Awareness of commodity market with reference Derivative investors The futures market in commodities offers both cash and delivery-basedsettlement. Investors can choose between the two. If the buyer chooses to take delivery ofthe commodity, a transferable receipt from the warehouse where goods are stored isissued in favor of the buyer. On producing this receipt, the buyer can claim thecommodity from the warehouse. All open contracts not intended for delivery are cash-settled. While speculators and arbitrageurs generally prefer cash settlement, commoditystock lists and wholesalers go for delivery. Trading in any contract month will open onthe twenty first day of the month, three months prior to the contract month. For example,the December 2005 contracts open on 21 September 2005 and the due date is the 20-dayof the delivery month. All contracts settling in cash will be settled on the following day after thecontract expiry date. Commodity trading follows a T + 1 settlement system, where thesettlement date is the next working day after expiry. However, in case of delivery-basedtraders, settlement takes place five to seven days after expiry Commodities like chana, urad, soya bean oil, guar gum, sugar, pepper, wheat,jeera, gold, silver and crude oil have found fancy with Indian Investors. Expecting theturnover on the three online commodity exchanges to spurt to more than Rs.15000 croresper day, banks are keen to tap the commodity trade-financing front. Commercial banksare chasing the commodity industry with attractive lending rates between 8% and 8.5% asagainst the normal lending rate between 11% and 14%. Commodity exchanges in India will contribute significantly towards thedevelopment of Indian economy as a whole. Commodity market is undergoing somebreakthrough changes like demat, trading of commodities like crude oil and plastics, alsoGOI is contemplating of implenting Options trading.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 44 45.Awareness of commodity market with reference Derivative investors Today commodity market has provided investors with an opportunity to invest inan asset class which yields high returns with low risk. In next 5 years time will be seeingresurgence of the century old commodity market The commodity market in India comprises of all palpable markets that we comeacross in our daily lives. Such markets are social institutions that facilitate exchange ofgoods for money. The cost of goods is estimated in terms of domestic currency . IndiaCommodity Market can be subdivided into the following two categories: Wholesale Market Retail MarketLet us now take a look at what the present scenario of each of the above markets is like. The traditional wholesale market in India dealt with whole sellers who boughtgoods from the farmers and manufacturers and then sold them to the retailers aftermaking a profit in the process. It was the retailers who finally sold the goods to theconsumers. With the passage of time the importance of whole sellers began to fade outfor the following reasons: The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers. The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt. In recent years, the extent of the retail market (both organized and unorganized)has evolved in leaps and bounds. In fact, the success stories of the commodity market ofIndia in recent years has mainly centered around the growth generated by the RetailSector. Almost every commodity under the sun both agricultural and industrial is nowbeing provided at well distributed retail outlets throughout the country.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 45 46.Awareness of commodity market with reference Derivative investors Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand is owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually sell a wide range of articles both agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is. What can commodity market offer? If you are an investor, commodities futures represent a good form of investment because of the following reasons.. High Leverage The margins in the commodity futures market are less than the F&O section of the equity market. Less Manipulations - Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations. Diversification The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification. If you are an importer or an exporter, commodities futures can help you in the following ways Hedge against price fluctuations Wide fluctuations in the prices of import or export products can directly affect your bottom-line as the price at which you import/export is BABASAB PATIL MBA FINANCE PROJECT REPORT Page 46 47.Awareness of commodity market with reference Derivative investors fixed before-hand. Commodity futures help you to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any change in prices that happen subsequently. If you are a producer of a commodity, futures can help you as follows: Lock-in the price for your produce If you are a farmer, there is every chance that the price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures you can effectively lock-in the price at which you wish to sell your produce Assured demand Any glut in the market can make you wait unendingly for a buyer. Selling commodity futures contract can give you assured demand at the time of harvest. If you are a large scale consumer of a product, here is how this market can help you: Control your cost If you are an industrialist, the raw material cost dictates the final price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying commodity futures, you can fix the price of your raw material. Ensure continuous supply Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time. The effective mechanism of settlement and delivery procedures adopted and employed by MCX has once again undergone rigorous tests and have come out extremely successful. This is signified with the surging trading volume in bullion contracts and high open interest entering the settlement period resulting in healthy quantities getting physically delivered. This whole process underscores the efficacy & transparency of the complete trading, settlement and delivery process employed by MCX. The complete delivery procedure right from getting the possession of the precious metal from the sellers, necessary quality certifications, consignment movement, handing over the precious metal to the buyers, etc was completed in flat 5 days period. The BABASAB PATIL MBA FINANCE PROJECT REPORT Page 47 48.Awareness of commodity market with reference Derivative investorscomplete process has been worked out at a very optimal cost and on an average eachparticipant involved in the delivery process had incurred only Rs. 350/- per transaction. When the MCX Gold Contract entered into settlement period the Open Interest inGold was 670 Kgs after reducing from over 4000 Kgs few days ago. This open interestresulted in 152 Kgs of gold getting delivered and the balance gold, which entered into thedelivery period, was squared up. The total volume in MCX Gold December futurescontract was 230233 Kgs valuing around Rs. 14577 crores.On the same pattern Open Interest in Silver was 16,740 Kgs after reducing from over1,60,000 Kgs few days back. However, the actual delivery in Silver was 12,698 kgs andthe balance Silver that entered into the delivery period was squared up. The total volumein MCX Silver December futures contract was 22950 M. Tons valuing around Rs. 25024crores. In all the previous settlements also MCX platform has always seen appropriatepercentage of open interest position resulting in physical delivery. Gold has seen acumulative physical delivery of 245 Kgs and Silver 2190 Kgs across all the settlementscompleted before the current settlement. Gold & silver futures contracts are getting recognized as the most reliable &dependable investment options that are today available to traders and investors who arelooking to widen their portfolio beyond equity instruments. This is because of thecredibility that these commodities have enjoyed globally and the technical & fundamentalanalysis that has gone in arriving at various trading strategies.India is the largest importer for Gold in the world, around 800 tons per year, realizing thispotential of Gold, Government of India has set up a committee to examine the regulatorystructure of the gold industry to make India a gold trading hub. This committee isconstituted under the Chairmanship of Secretary, Department of Commerce, and Ministryof Commerce & Industry. MCX is a member of the committee and looks forward tocontributing suggestions on the role that Futures market can play in making India a globalgold trading hub. The first meeting for the Gold Committee is being held under the Chairmanshipof Commerce Secretary on 10th December 2004.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 48 49.Awareness of commodity market with reference Derivative investorsProblems Facing by Commodity Future market1. The spot/physical markets are fragmented. This may be because of the restrictions on the free movement of commodities in the physical form under the Essential Commodities Act, APMC Act, Licensing restrictions, etc. Hence, the creation of an integrated and vibrant domestic market for physical trading in commodities with adequate infrastructure and transparent trading system is a pre-requisite for broad based commodity derivatives markets.2. Lack of mechanism for standardization of warehousing receipts. The absence of the regulatory authority for accreditation of warehouses and for setting standards for scientific grading, packaging, storage and preservation. As a result, though Banks grant credit against warehouse receipts now, they are largely restricted to the ones issued by the Central Warehousing Corporation and those promoted by the State Governments. However, this problem is being sorted out by the Food Ministry, which is in the process of drafting a Warehouse Development and Regulation Act to promote warehouse receipts-based lending and commodity derivative transactions.3. Dematerialized settlement system for commodities which has the standardization of warehouse receipts as a pre-requisite. A system of physical delivery of commodities backed by warehouse receipt system can help eliminate the quality risk and price risk. It will facilitate seamless nation wide spot market for commodities.4. Creation of depository system for electronically facilitating transfer and delivery of commodities in dematerialized form.5. Need to make warehouse receipts transferable. We understand that a bill to amend the Forward Contracts (Regulation) Act, 1952 is slated to be taken up during the current budget session of the Parliament, which proposes to permit the transferability of warehouse receipts by scrapping Section 18(2) of the Act. This will also easyBABASAB PATIL MBA FINANCE PROJECT REPORT Page 49 50.Awareness of commodity market with reference Derivative investors access to finance from banks and financial institutions against produce stored in warehouses.6. Most of the commodity exchanges function as specialized product bourses. This is even true of the national multi commodity exchanges because of lack of volumes in many commodities in spite the trading being allowed in many formally. While NCDEX technically trades in 35 commodities, about 90 per cent of its volume comes from just 8 products. In case of MCX, gold and silver account for a major share in the trading volume, though it trades in 41 commodities. Pepper, cardamom, rubber, coffee and jute products are the five products that are prominently traded in NMCE even though about 59 commodities are traded here. This may be attributed to the fact that there are different players for different commodities.7. There are no uniform contract specifications for the same commodity traded on various exchanges. As a result, there is no proper mechanism to assess price of the same commodity across various exchanges, as price depends on the contract specification.8. Online trading at the national level is mandatory only in respect of National level multi commodity exchanges, while such a compulsion is not applicable to the regional ones. Hence transparency suffers.9. Demutualization is yet to happen completely. Many exchanges are associations of members who retain trading rights and ownership. This interest of the promoters as traders has serious implications for the integrity of these exchanges.10. Residents in India, engaged in import and export trade, may hedge the price risk of commodities in the international commodity exchanges/markets. Applications for commodity hedging are to be forwarded to RBI. A one-time approval will be given by RBI along with the guidelines for undertaking this activity. The Reserve Bank of India, which is considering a proposal to grant blanket approval to Indian companiesBABASAB PATIL MBA FINANCE PROJECT REPORT Page 50 51.Awareness of commodity market with reference Derivative investors that have an exposure to commodities to freely hedge in the international exchanges, must also ensure that they use the products available in the Indian commodity derivatives markets. 11. Options trading in commodities are prohibited as of now which puts constraints on the markets. Introduction of options trading in commodities is a necessary condition for institutional investors to trade in commodity derivatives trading, as this would make it easier for the institutional investors to convert the commodity derivatives products as financial products. If the institutional investors, like banks and mutual funds, whose presence as of now is only in capital markets need to start operating in commodity derivatives markets as well then these additional issues are also required to be addressed. 12. Convergence of the regulators of capital markets and commodity markets is a pre- requisite for free flow of funds between markets. 13. The players in capital markets must acquire the required expertise for trading in commodity markets and vice versa to have an integrated view of all markets.Why are Commodity Derivatives Required? India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets it was supposed to encourage and nurture to grow with times. It BABASAB PATIL MBA FINANCE PROJECT REPORT Page 51 52.Awareness of commodity market with reference Derivative investorswas a mistake other emerging economies of the world would want to avoid. However, it isnot in India alone that derivatives were suspected of creating too much speculation thatwould be to the detriment of the healthy growth of the markets and the farmers. Suchsuspicions might normally arise due to a misunderstanding of the characteristics and role ofderivative product. It is important to understand why commodity derivatives are required and the role theycan play in risk management. It is common knowledge that prices of commodities, metals,shares and currencies fluctuate over time. The possibility of adverse price changes in futurecreates risk for businesses. Derivatives are used to reduce or eliminate price risk arising fromunforeseen price changes. A derivative is a financial contract whose price depends on, or isderived from, the price of another asset.Two important derivatives are futures and options.(i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a Commodity for apredetermined delivery price at a specific future time. Futures are standardize contracts thatare traded on organized futures exchanges that ensure performance of the contracts and thusremove the default risk. The commodity futures have existed since the Chicago Board of BABASAB PATIL MBA FINANCE PROJECT REPORT Page 52 53.Awareness of commodity market with reference Derivative investorsTrade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchantstogether. The major function of futures markets is to transfer price risk from hedgers tospeculators. For example, suppose a farmer is expecting his crop of wheat to be ready in twomonths time, but is worried that the price of wheat may decline in this period. In order tominimize his risk, he can enter into a futures contract to sell his crop in two months time at aprice determined now. This way he is able to hedge his risk arising from a possible adversechange in the price of his commodity. (ii) Commodity Options contracts: Like futures, options are also financial instruments used for hedging andspeculation. The commodity option holder has the right, but not the obligation, to buy (orsell) a specific quantity of a commodity at a specified price on or before a specified date.Option contracts involve two parties the seller of the option writes the option in favour ofthe buyer (holder) who pays a certain premium to the seller as a price for the option. Thereare two types of commodity options: a call option gives the holder a right to buy acommodity at an agreed price, while a put option gives the holder a right to sell acommodity at an agreed price on or before a specified date (called expiry date). The option holder will exercise the option only if it is beneficial to him; otherwisehe will let the option lapse. For example, suppose a farmer buys a put option to sell 100Quintals of wheat at a price of $25 per quintal and pays a premium of $0.5 per quintal (or atotal of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercisehis option and sell his wheat at the agreed price of $25 per quintal. However, if the marketprice of wheat increases to say $30 per quintal, it would be advantageous for the farmer tosell it directly in the open market at the spot price, rather than exercise his option to sell at$25 per quintal Modern Commodity Exchanges To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting up of the BABASAB PATIL MBA FINANCE PROJECT REPORT Page 53 54.Awareness of commodity market with reference Derivative investors commodity exchanges using the most modern systems and practices in the world. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee fund, back-office computerization for the existing single commodity Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and one-third representation of independent Directors on the Boards of existing Exchanges etc. Unresolved Issues and Future Prospects Even though the commodity derivatives market has made good progress in the last few years, the real issues facing the future of the market have not been resolved. Agreed, the number of commodities allowed for derivative trading have increased, the volume and the value of business has zoomed, but the objectives of setting up commodity derivative exchanges may not be achieved and the growth rates witnessed may not be sustainable unless these real issues are sorted out as soon as possible. Some of the main unresolved issues are discussed below. a. Commodity Options: Trading in commodity options contracts has been banned since 1952. The market for commodity derivatives cannot be called complete without the presence of this important derivative. Both futures and options are necessary for the healthy growth of the market. While futures contracts help a participant (say a farmer) to hedge against downside price movements, it does not allow him to reap the benefits of an increase in prices. No doubt there is an immediate need to bring about the necessary legal and regulatory changes to introduce commodity options trading in the country. The matter is said to be under the active consideration of the Government and the options trading may be introduced in the near future.b. The Warehousing and Standardization: For commodity derivatives market to work efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient warehousing system in the country. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 54 55.Awareness of commodity market with reference Derivative investorsThe Habibullah (2003) task force admitted, A sophisticated warehousing industry hasyet to come about. Further, independent labs or quality testing centers should be set upin each region to certify the quality, grade and quantity of commodities so that they areappropriately standardized and there are no shocks waiting for the ultimate buyer whotakes the physical delivery. Warehouses also need to be conveniently located. CentralWarehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehousesacross the country with a storage capacity of 10.4 million tonnes. This is obviously notadequate for a vast country. To resolve the problem, a Gramin Bhandaran Yojana (RuralWarehousing Plan) has been introduced to construct new and expand the existing ruralgodowns. Large scale privatization of state warehouses is also being examined.c. Cash versus Physical Settlement: It is probably due to the inefficiencies in the present warehousing system that onlyabout 1% to 5% of the total commodity derivatives trade in the country are settled inphysical delivery. Therefore the warehousing problem obviously has to be handled on awar footing, as a good delivery system is the backbone of any commodity trade. AInternational Research Journal of Finance and Economics - Issue 2 (2006) 161particularly difficult problem in cash settlement of commodity derivative contracts is thatat present, under the Forward Contracts (Regulation) Act 1952, cash settlement ofoutstanding contracts at maturity is not allowed. In other words, all outstanding contractsat maturity should be settled in physical delivery. To avoid this, participants square offtheir positions before maturity. So, in practice, most contracts are settled in cash butbefore maturity. There is a need to modify the law to bring it closer to the widespreadpractice and save the participants from unnecessary hassles.d. The Regulator:BABASAB PATIL MBA FINANCE PROJECT REPORT Page 55 56.Awareness of commodity market with reference Derivative investors As the market activity pick-up and the volumes rise, the market will definitelyneed a strong and independent regular, similar to the Securities and Exchange Board ofIndia (SEBI) that regulates the securities markets. Unlike SEBI which is an independentbody, the Forwards Markets Commission (FMC) is under the Department of ConsumerAffairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on itfor funds. It is imperative that the Government should grant more powers to the FMC toensure an orderly development of the commodity markets. The SEBI and FMC also needto work closely with each other due to the inter-relationship between the two markets.e. Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity exchanges.Though over 80 commodities are allowed for derivatives trading, in practice derivativesare popular for only a few commodities. Again, most of the trade takes place only on afew exchanges. All this splits volumes and makes some exchanges unviable. Thisproblem can possibly be addressed by consolidating some exchanges. Also, the questionof convergence of securities and commodities derivatives markets has been debated for along time now. The Government of India has announced its intention to integrate the twomarkets. It is felt that convergence of these derivative markets would bring in economiesof scale and scope without having to duplicate the efforts, thereby giving a boost to thegrowth of commodity derivatives market. It would also help in resolving some of theissues concerning regulation of the derivative markets. However, this would necessitatecomplete coordination among various regulating authorities such as Reserve Bank ofIndia, Forward Markets commission, the Securities and Exchange Board of India, and theDepartment of Company affairs etc.f. Tax and Legal bottlenecks: There are at present restrictions on the movement of certain goods from one stateBABASAB PATIL MBA FINANCE PROJECT REPORT Page 56 57.Awareness of commodity market with reference Derivative investorsto another. These need to be removed so that a truly national market could develop forcommodities and derivatives. Also, regulatory changes are required to bring aboutuniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005,but has not yet been uniformly implemented by all states.To study the Trading mechanism of Commodity Future market and Wholesale/ LocalmarketSecond objective is completed by Collecting Primary as well as secondary data. Primarydata is collected through personal interview and discussion with the Wholesale merchantsin APMC yard Belgaum and secondary data is collected through Web sites. Thefollowing Chart Shows the Present Trading System of Local /Wholesale market. Chart showing Trading System of Local Mark Consumer Super Markets Local Retail Ration/Fair Stores Price Shops Large retailers Sub Wholesaler Food Corporation of India Wholesaler Market Yard Operated be either Govt Mandis or Private Players Village level Consolidation Small & Marginal FarmersThe emergence of organized sector retail chain stores and a rise in competition is likely toBABASAB PATIL MBA FINANCE PROJECT REPORT Page 57 58.Awareness of commodity market with reference Derivative investorsbe a catalyst for bringing about much needed reform in the agriculture-related supplychain. The large players in the retail sector and fast moving consumer goods are alsoinfluencing the government to liberalize the regulations, which hitherto have constrictedthe operational environment. In addition, political pressure is rising, invoking a responsefrom the government to change the regulations so as to enable farmers to operate moreproductively. First, instead of using the current chain, which results in large mark-ups due to a multiple number of intermediaries, the farmers are beginning to transact directly with the large corporate, reducing inefficiencies. Second, some of the large retail players will start contract manufacturing with farmers, providing them with the right quality inputs (fertilizers and seeds), capital support and signals on the mix of output they need to produce to earn maximum returns. Third, an increase in direct sourcing by large players will also encourage the private sector to invest in the logistics and infrastructure needed to improve the productivity and efficiency of the supply chain.Trading System of NCDEXThe trading system on the NCDEX provides a fully automated screen based trading forfutures on commodities on a nationwide basis as well as an online monitoring andsurveillance mechanism. It supports an order driven market and provides completetransparency of trading operations. The trade timings of the NCDEX are 10.00 a.m. to4.00 p.m. After hours trading has also been proposed for implementation at a later stage.The NCDEX system supports an order driven market, where orders match automatically.Order matching is essentially on the basis of commodity, its price, time and quantity. AllBABASAB PATIL MBA FINANCE PROJECT REPORT Page 58 59.Awareness of commodity market with reference Derivative investorsquantity Fields are in units and price in rupees. The exchange specifies the unit of tradingand the delivery unit for futures contracts on various commodities. The exchange notifiesthe regular lot size and tick size for each of the contracts traded from time to time. Whenany order enters the trading system, it is an active order. It tries to find a match on theother side of the book. If it finds a match, a trade is generated. If it does not find a match,the order becomes passive and gets queued in the respective outstanding order book inthe system. Time stamping is done for each trade and provides the possibility for acomplete audit trail if required.NCDEX trades commodity futures contracts having one month, two month and threeMonth expiry cycles. All contracts expire on the 20th of the expiry month. Thus aJanuary expiration contract would expire on the 20th of January and a February expirycontract would cease trading on the 20th of February. If the 20th of the expiry month is atrading holiday, the contracts shall expire on the previous trading day. New contracts willbe introduced on the trading day following the expiry of the near month contract.Contract cycleThe following figure shows the contract cycle for futures contracts on NCDEX. As canbe seen, at any given point of time, three contracts are available for trading a near-month, a middle-month and a far-month. As the January contract expires on the 20th ofthe month, a new three month contract starts trading from the following day, once moremaking available three index futures contracts for trading.BABASAB PATIL MBA FINANCE PROJECT REPORT Page 59 60.Awareness of commodity market with reference Derivative investorsINTRODUCTION TO PULSE MARKETIndia is the worlds largest pulse producer, consumer and importer accounting for 27% ofthe global pulse production. However, stagnant production has led to declining per capitaconsumption over the past 20 years. The per capita availability has progressively declinedfrom 60 g in 1950-51 to 32 g at present. The burgeoning demand-supply gap has led theGovernment of India to ease the norms related to importing of pulses.In India, pulses are grown on 22-23 million hectares area with an annual production of13-15 million tons and per hectare of yield of 600-650 kg. Pulses account for around 19%of the gross cropped area and less than 8% of the total food grain production of thecountry. The major pulses grown in India are - Pigeon peas (Arhar) and Tyson chick peas(Gram or Desi Chana). Their share