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CHAPTER 1-
INTRODUCTION
1
11 INTRODUCTION TO ORGANIZATION
111 HISTORY
The Karvy group was formed in 1983 at Hyderabad India Karvy ranks among the
top player in almost all the fields it operates Karvy Computershare Limited is Indiarsquos largest
Registrar and Transfer Agent with a client base of nearly 500 blue chip corporates managing
over 2 crore accounts Karvy Stock Brokers Limited member of National Stock Exchange of
India and the Bombay Stock Exchange ranks among the top 5 stock brokers in India With
over 600000 active accounts it ranks among the top 5 Depositary Participant in India
registered with NSDL and CDSL Karvy Comtrade Member of NCDEX and MCX ranks
among the top 3 commodity brokers in the country Karvy Insurance Brokers is registered as
a Broker with IRDA and ranks among the top 5 insurance agent in the country Registered
with AMFI as a corporate Agent Karvy is also among the top Mutual Fund mobilizer with
over Rs 5000 crores under management Karvy Realty Services which started in 2006 has
quickly established itself as a broker who adds value in the realty sector Karvy Global offers
niche off shoring services to clients in the US Karvy has 575 offices over 375 locations
across India and overseas at Dubai and New York Over 9000 highly qualified people staff
Karvy
112 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners
decided to offer other than the audit services value added services like corporate advisory
services to their clients The first firm in the group Karvy Consultants Limited was
incorporated on 23rd July 1983 In a very short period it became the largest Registrar and
Transfer Agent in India This business was spun off to form a separate joint venture with
Computershare of Australia in 2005 Karvyrsquos foray into stock broking began with marketing
IPOs in 1993 Within a few years Karvy began topping the IPO procurement league tables
and it has consistently maintained its position among the top 5 Karvy was among the first
few members of National Stock Exchange in 1994 and became a member of The Stock
Exchange Mumbai in 2001 Dematerialization of shares gathered pace in mid-90s and Karvy
2
was in the forefront educating investors on the advantages of dematerializing their shares
Today Karvy is among the top 5 Depositary Participant in India
While the registry business is a 5050 Joint Venture with Computershare of Australia
we have equity participation by ICICI Ventures Limited and Barings Asia Limited in Karvy
Stock Broking Limited
Karvy has always believed in adding value to services it offers to clients A top-notch
research team based in Mumbai and Hyderabad supports its employees to advise clients on
their investment needs With the information overload today Karvyrsquos team of analysts help
investors make the right calls be it equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
Mails 25000 envelopes containing Annual Reports dividend cheques advises
allotment refund advises
Executes 150000+ trades on NSE BSE
Executes 50000 debit credit in the depositary accounts
Advises 3000+ clients on the investments in mutual funds
113 SERVICES OFFERED
KARVY Stock Broking Limited one of the cornerstones of the KARVY edifice flows freely
towards attaining diverse goals of the customer through varied services It creates a plethora
of opportunities for the customer by opening up investment vistas backed by research-based
advisory services Here growth knows no limits and success recognizes no boundaries
Helping the customer create waves in his portfolio and empowering the investor completely
is the ultimate goal KARVY Stock Broking Limited is a member of
National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)
3
Hyderabad Stock Exchange (HSE)
Karvy Com trade Limited an ISO 90012000 certified company is another venture of the
prestigious Karvy group With our well established presence in the multifarious facets of the
modern Financial services industry from stock broking to registry services it is indeed a
pleasure for us to make foray into the commodities derivatives market which opens yet
another door for us to deliver our service to our beloved customers and the investor public at
large
At Karvy Insurance Broking Limited we provide both life and non-life insurance products to
retail individuals high net-worth clients and corporates With the opening up of the insurance
sector and with a large number of private players in the business we are in a position to
provide tailor made policies for different segments of customers In our journey to emerge as
a personal finance advisor we will be better positioned to leverage our relationships with the
product providers and place the requirements of our customers appropriately with the product
providers With Indian markets seeing a sea change both in terms of investment pattern and
attitude of investors insurance is no more seen as only a tax saving product but also as an
investment product By setting up a separate entity we would be positioned to provide the
best of the products available in this business to our customers
Our wide national network spanning the length and breadth of India further supports these
advantages Further personalized service is provided here by a dedicated team committed in
giving hassle-free service to the clients
Deepening of the Financial Markets and an ever-increasing sophistication in corporate
transactions has made the role of Investment Bankers indispensable to organizations seeking
professional expertise and counseling in raising financial resources through capital market
apart from Capital and Corporate Restructuring Mergers amp Acquisitions Project Advisory
and the entire gamut of Financial Market activities
4
Karvy Investor Services Limited (lsquoKISLrsquo) a SEBI registered Merchant Banker has emerged
as a leading Investment Banking entity in the country with over a decade of experience KISL
has built its reputation by capitalizing on its qualified professionals who have successfully
executed a large number of complex and unique transactions
Our quality professional team and our work-oriented dedication have propelled us to offer
value-added corporate financial services and act as a professional navigator for long term
growth of our clients who include leading corporates State Governments Foreign
Institutional Investors public and private sector companies and banks in Indian and global
markets
We have also emerged as a trailblazer in the arena of relationships both at the customer and
trade levels because of our unshakable integrity seamless service and innovative solutions
that are tuned to meet varied needs Our team of committed industry specialists having
extensive experience in capital markets further nurtures this relationship
Credentials
Emerging as a leading Investment Banker with a strong support from its Group entities in
Research Stock Broking Institutional Sales and Retail Distribution
Strong team of more than 25 qualified professionals operating from six cities Hyderabad
Mumbai Delhi Kolkata Chennai and Bangalore apart from two overseas offices at New
York (USA) and Dubai
One of the largest retail distribution networks with over 584 branches in over 389
citiestowns
Excellent Institutional Sales Desk
Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group Indiarsquos largest
financial services group The group carries forward its legacy of trust and excellence in
5
investor and customer services delivered with passion and the highest level of quality that
align with global standards
Karvy Realty (India) Limited is engaged in the business of real estate and property services
offering
Buying selling renting of properties
Identifying valuable investments opportunities in the real estate sector
Facilitating financial support for real estate and investments in properties
Real estate portfolio advisory services
KRIL is your personal real estate advisor guiding and hand holding you through real estate
transactions and offering valuable investment opportunities Building on the KARVY brand
as a leading industry benchmark for world class customer servicing and quality standards
KRIL brings to investors a reputation of reliability dependability and honesty Our
understanding of the needs and preferences of our clients and our teams of qualified realty
professionals help us to establish fruitful relationships with buyers and sellers of properties
alike
A single stop shop for realty services offering
Transacting Options Choose to buy sell or rent properties (residential and
commercial)
Investing Options Give your investments a good opportunity with properties
marketed by KRIL
Financing Options Get unmatched deals for financing your investment
Research Options We undertake valuation and feasibility studies area analysis and
customized analysis on behalf of clients
6
KRIL has ongoing relations with builders and developers across the country which will help
you place your investments in the most genuine properties for a good value appreciation at
the right place and at the right price KRIL is committed to the guiding principles of
quality timely service delivery fair pricing transparency and integrity
Karvy Computershare Private Limited is a joint venture between Computershare
Australia and Karvy Consultants Limited India in the registry management services industry
Computershare Australia is the worldrsquos largest and only global share registry providing
financial market services and technology to the global securities industry Karvy Corporate
and Mutual Fund Share Registry and Investor Services business Indias No 1 Registrar and
Transfer Agent and rated as Indias Most Admired Registrar for its overall excellence in
volume management quality processes and technology driven services
Karvy Global Services is a knowledge services company We provide specialist resources to
extend in house analyst teams in driving clear business results We serve investment banks
insurance providers brokerages hedge funds research agencies and life settlement providers
across the United States Middle East and Europe Our clients have found our cost
advantage ability to scale efforts and specialist knowledge regarding emerging markets to be
a strong advantage in the new fast and unpredictable world Our areas of focus include
equity and industry research commodity research credit analytics technology-based
workflow solutions insurance policy and portfolio valuation and other specialized services
Incorporated in 2004 we are backed by over 25 years of experience through Indiarsquos largest
financial services company the Karvy Group We are headquartered in New York and have
our primary delivery center in Hyderabad India We encourage you to contact us to evaluate
your research or outsourcing needs
As the flagship company of the KARVY Group KARVY Consultants Limited has always
remained at the helm of organizational affairs pioneering business policies work ethic and
channels of progress Having emerged as a leader in the registry business the first of the
businesses that we ventured into we have now transferred this business into a joint venture
7
with Computershare Limited of Australia the worldrsquos largest registrar With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business we believe that we were best positioned to venture into this activity as a
Depository Participant We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited) the first Depository in the country and
then with CDSL (Central Depository Services Limited) Today we service over seven lakh
customer accounts in this business spread across over 540 citiestowns in India and are
ranked amongst the largest Depository Participants in the country With a growing secondary
market presence we have transferred this business to KARVY Stock Broking Limited
(KSBL) our associate and a member of NSE BSE and HSE
114 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners decided to
offer other than the audit services value added services like corporate advisory services to
their clients The first firm in the group Karvy Consultants Limited was incorporated on 23rd
July 1983 In a very short period it became the largest Registrar and Transfer Agent in India
This business was spun off to form a separate joint venture with Computershare of Australia
in 2005 Karvyrsquos foray into stock broking began with marketing IPOs in 1993 Within a few
years Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5 Karvy was among the first few members of National
Stock Exchange in 1994 and became a member of The Stock Exchange Mumbai in 2001
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares Today Karvy is among
the top 5 Depositary Participant in India While the registry business is a 5050 Joint Venture
with Computershare of Australia we have equity participation by ICICI Ventures Limited
and Barings Asia Limited in Karvy Stock Broking Limited Karvy has always believed in
adding value to services it offers to clients A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs With the
8
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
11 INTRODUCTION TO ORGANIZATION
111 HISTORY
The Karvy group was formed in 1983 at Hyderabad India Karvy ranks among the
top player in almost all the fields it operates Karvy Computershare Limited is Indiarsquos largest
Registrar and Transfer Agent with a client base of nearly 500 blue chip corporates managing
over 2 crore accounts Karvy Stock Brokers Limited member of National Stock Exchange of
India and the Bombay Stock Exchange ranks among the top 5 stock brokers in India With
over 600000 active accounts it ranks among the top 5 Depositary Participant in India
registered with NSDL and CDSL Karvy Comtrade Member of NCDEX and MCX ranks
among the top 3 commodity brokers in the country Karvy Insurance Brokers is registered as
a Broker with IRDA and ranks among the top 5 insurance agent in the country Registered
with AMFI as a corporate Agent Karvy is also among the top Mutual Fund mobilizer with
over Rs 5000 crores under management Karvy Realty Services which started in 2006 has
quickly established itself as a broker who adds value in the realty sector Karvy Global offers
niche off shoring services to clients in the US Karvy has 575 offices over 375 locations
across India and overseas at Dubai and New York Over 9000 highly qualified people staff
Karvy
112 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners
decided to offer other than the audit services value added services like corporate advisory
services to their clients The first firm in the group Karvy Consultants Limited was
incorporated on 23rd July 1983 In a very short period it became the largest Registrar and
Transfer Agent in India This business was spun off to form a separate joint venture with
Computershare of Australia in 2005 Karvyrsquos foray into stock broking began with marketing
IPOs in 1993 Within a few years Karvy began topping the IPO procurement league tables
and it has consistently maintained its position among the top 5 Karvy was among the first
few members of National Stock Exchange in 1994 and became a member of The Stock
Exchange Mumbai in 2001 Dematerialization of shares gathered pace in mid-90s and Karvy
2
was in the forefront educating investors on the advantages of dematerializing their shares
Today Karvy is among the top 5 Depositary Participant in India
While the registry business is a 5050 Joint Venture with Computershare of Australia
we have equity participation by ICICI Ventures Limited and Barings Asia Limited in Karvy
Stock Broking Limited
Karvy has always believed in adding value to services it offers to clients A top-notch
research team based in Mumbai and Hyderabad supports its employees to advise clients on
their investment needs With the information overload today Karvyrsquos team of analysts help
investors make the right calls be it equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
Mails 25000 envelopes containing Annual Reports dividend cheques advises
allotment refund advises
Executes 150000+ trades on NSE BSE
Executes 50000 debit credit in the depositary accounts
Advises 3000+ clients on the investments in mutual funds
113 SERVICES OFFERED
KARVY Stock Broking Limited one of the cornerstones of the KARVY edifice flows freely
towards attaining diverse goals of the customer through varied services It creates a plethora
of opportunities for the customer by opening up investment vistas backed by research-based
advisory services Here growth knows no limits and success recognizes no boundaries
Helping the customer create waves in his portfolio and empowering the investor completely
is the ultimate goal KARVY Stock Broking Limited is a member of
National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)
3
Hyderabad Stock Exchange (HSE)
Karvy Com trade Limited an ISO 90012000 certified company is another venture of the
prestigious Karvy group With our well established presence in the multifarious facets of the
modern Financial services industry from stock broking to registry services it is indeed a
pleasure for us to make foray into the commodities derivatives market which opens yet
another door for us to deliver our service to our beloved customers and the investor public at
large
At Karvy Insurance Broking Limited we provide both life and non-life insurance products to
retail individuals high net-worth clients and corporates With the opening up of the insurance
sector and with a large number of private players in the business we are in a position to
provide tailor made policies for different segments of customers In our journey to emerge as
a personal finance advisor we will be better positioned to leverage our relationships with the
product providers and place the requirements of our customers appropriately with the product
providers With Indian markets seeing a sea change both in terms of investment pattern and
attitude of investors insurance is no more seen as only a tax saving product but also as an
investment product By setting up a separate entity we would be positioned to provide the
best of the products available in this business to our customers
Our wide national network spanning the length and breadth of India further supports these
advantages Further personalized service is provided here by a dedicated team committed in
giving hassle-free service to the clients
Deepening of the Financial Markets and an ever-increasing sophistication in corporate
transactions has made the role of Investment Bankers indispensable to organizations seeking
professional expertise and counseling in raising financial resources through capital market
apart from Capital and Corporate Restructuring Mergers amp Acquisitions Project Advisory
and the entire gamut of Financial Market activities
4
Karvy Investor Services Limited (lsquoKISLrsquo) a SEBI registered Merchant Banker has emerged
as a leading Investment Banking entity in the country with over a decade of experience KISL
has built its reputation by capitalizing on its qualified professionals who have successfully
executed a large number of complex and unique transactions
Our quality professional team and our work-oriented dedication have propelled us to offer
value-added corporate financial services and act as a professional navigator for long term
growth of our clients who include leading corporates State Governments Foreign
Institutional Investors public and private sector companies and banks in Indian and global
markets
We have also emerged as a trailblazer in the arena of relationships both at the customer and
trade levels because of our unshakable integrity seamless service and innovative solutions
that are tuned to meet varied needs Our team of committed industry specialists having
extensive experience in capital markets further nurtures this relationship
Credentials
Emerging as a leading Investment Banker with a strong support from its Group entities in
Research Stock Broking Institutional Sales and Retail Distribution
Strong team of more than 25 qualified professionals operating from six cities Hyderabad
Mumbai Delhi Kolkata Chennai and Bangalore apart from two overseas offices at New
York (USA) and Dubai
One of the largest retail distribution networks with over 584 branches in over 389
citiestowns
Excellent Institutional Sales Desk
Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group Indiarsquos largest
financial services group The group carries forward its legacy of trust and excellence in
5
investor and customer services delivered with passion and the highest level of quality that
align with global standards
Karvy Realty (India) Limited is engaged in the business of real estate and property services
offering
Buying selling renting of properties
Identifying valuable investments opportunities in the real estate sector
Facilitating financial support for real estate and investments in properties
Real estate portfolio advisory services
KRIL is your personal real estate advisor guiding and hand holding you through real estate
transactions and offering valuable investment opportunities Building on the KARVY brand
as a leading industry benchmark for world class customer servicing and quality standards
KRIL brings to investors a reputation of reliability dependability and honesty Our
understanding of the needs and preferences of our clients and our teams of qualified realty
professionals help us to establish fruitful relationships with buyers and sellers of properties
alike
A single stop shop for realty services offering
Transacting Options Choose to buy sell or rent properties (residential and
commercial)
Investing Options Give your investments a good opportunity with properties
marketed by KRIL
Financing Options Get unmatched deals for financing your investment
Research Options We undertake valuation and feasibility studies area analysis and
customized analysis on behalf of clients
6
KRIL has ongoing relations with builders and developers across the country which will help
you place your investments in the most genuine properties for a good value appreciation at
the right place and at the right price KRIL is committed to the guiding principles of
quality timely service delivery fair pricing transparency and integrity
Karvy Computershare Private Limited is a joint venture between Computershare
Australia and Karvy Consultants Limited India in the registry management services industry
Computershare Australia is the worldrsquos largest and only global share registry providing
financial market services and technology to the global securities industry Karvy Corporate
and Mutual Fund Share Registry and Investor Services business Indias No 1 Registrar and
Transfer Agent and rated as Indias Most Admired Registrar for its overall excellence in
volume management quality processes and technology driven services
Karvy Global Services is a knowledge services company We provide specialist resources to
extend in house analyst teams in driving clear business results We serve investment banks
insurance providers brokerages hedge funds research agencies and life settlement providers
across the United States Middle East and Europe Our clients have found our cost
advantage ability to scale efforts and specialist knowledge regarding emerging markets to be
a strong advantage in the new fast and unpredictable world Our areas of focus include
equity and industry research commodity research credit analytics technology-based
workflow solutions insurance policy and portfolio valuation and other specialized services
Incorporated in 2004 we are backed by over 25 years of experience through Indiarsquos largest
financial services company the Karvy Group We are headquartered in New York and have
our primary delivery center in Hyderabad India We encourage you to contact us to evaluate
your research or outsourcing needs
As the flagship company of the KARVY Group KARVY Consultants Limited has always
remained at the helm of organizational affairs pioneering business policies work ethic and
channels of progress Having emerged as a leader in the registry business the first of the
businesses that we ventured into we have now transferred this business into a joint venture
7
with Computershare Limited of Australia the worldrsquos largest registrar With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business we believe that we were best positioned to venture into this activity as a
Depository Participant We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited) the first Depository in the country and
then with CDSL (Central Depository Services Limited) Today we service over seven lakh
customer accounts in this business spread across over 540 citiestowns in India and are
ranked amongst the largest Depository Participants in the country With a growing secondary
market presence we have transferred this business to KARVY Stock Broking Limited
(KSBL) our associate and a member of NSE BSE and HSE
114 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners decided to
offer other than the audit services value added services like corporate advisory services to
their clients The first firm in the group Karvy Consultants Limited was incorporated on 23rd
July 1983 In a very short period it became the largest Registrar and Transfer Agent in India
This business was spun off to form a separate joint venture with Computershare of Australia
in 2005 Karvyrsquos foray into stock broking began with marketing IPOs in 1993 Within a few
years Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5 Karvy was among the first few members of National
Stock Exchange in 1994 and became a member of The Stock Exchange Mumbai in 2001
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares Today Karvy is among
the top 5 Depositary Participant in India While the registry business is a 5050 Joint Venture
with Computershare of Australia we have equity participation by ICICI Ventures Limited
and Barings Asia Limited in Karvy Stock Broking Limited Karvy has always believed in
adding value to services it offers to clients A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs With the
8
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
was in the forefront educating investors on the advantages of dematerializing their shares
Today Karvy is among the top 5 Depositary Participant in India
While the registry business is a 5050 Joint Venture with Computershare of Australia
we have equity participation by ICICI Ventures Limited and Barings Asia Limited in Karvy
Stock Broking Limited
Karvy has always believed in adding value to services it offers to clients A top-notch
research team based in Mumbai and Hyderabad supports its employees to advise clients on
their investment needs With the information overload today Karvyrsquos team of analysts help
investors make the right calls be it equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
Mails 25000 envelopes containing Annual Reports dividend cheques advises
allotment refund advises
Executes 150000+ trades on NSE BSE
Executes 50000 debit credit in the depositary accounts
Advises 3000+ clients on the investments in mutual funds
113 SERVICES OFFERED
KARVY Stock Broking Limited one of the cornerstones of the KARVY edifice flows freely
towards attaining diverse goals of the customer through varied services It creates a plethora
of opportunities for the customer by opening up investment vistas backed by research-based
advisory services Here growth knows no limits and success recognizes no boundaries
Helping the customer create waves in his portfolio and empowering the investor completely
is the ultimate goal KARVY Stock Broking Limited is a member of
National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)
3
Hyderabad Stock Exchange (HSE)
Karvy Com trade Limited an ISO 90012000 certified company is another venture of the
prestigious Karvy group With our well established presence in the multifarious facets of the
modern Financial services industry from stock broking to registry services it is indeed a
pleasure for us to make foray into the commodities derivatives market which opens yet
another door for us to deliver our service to our beloved customers and the investor public at
large
At Karvy Insurance Broking Limited we provide both life and non-life insurance products to
retail individuals high net-worth clients and corporates With the opening up of the insurance
sector and with a large number of private players in the business we are in a position to
provide tailor made policies for different segments of customers In our journey to emerge as
a personal finance advisor we will be better positioned to leverage our relationships with the
product providers and place the requirements of our customers appropriately with the product
providers With Indian markets seeing a sea change both in terms of investment pattern and
attitude of investors insurance is no more seen as only a tax saving product but also as an
investment product By setting up a separate entity we would be positioned to provide the
best of the products available in this business to our customers
Our wide national network spanning the length and breadth of India further supports these
advantages Further personalized service is provided here by a dedicated team committed in
giving hassle-free service to the clients
Deepening of the Financial Markets and an ever-increasing sophistication in corporate
transactions has made the role of Investment Bankers indispensable to organizations seeking
professional expertise and counseling in raising financial resources through capital market
apart from Capital and Corporate Restructuring Mergers amp Acquisitions Project Advisory
and the entire gamut of Financial Market activities
4
Karvy Investor Services Limited (lsquoKISLrsquo) a SEBI registered Merchant Banker has emerged
as a leading Investment Banking entity in the country with over a decade of experience KISL
has built its reputation by capitalizing on its qualified professionals who have successfully
executed a large number of complex and unique transactions
Our quality professional team and our work-oriented dedication have propelled us to offer
value-added corporate financial services and act as a professional navigator for long term
growth of our clients who include leading corporates State Governments Foreign
Institutional Investors public and private sector companies and banks in Indian and global
markets
We have also emerged as a trailblazer in the arena of relationships both at the customer and
trade levels because of our unshakable integrity seamless service and innovative solutions
that are tuned to meet varied needs Our team of committed industry specialists having
extensive experience in capital markets further nurtures this relationship
Credentials
Emerging as a leading Investment Banker with a strong support from its Group entities in
Research Stock Broking Institutional Sales and Retail Distribution
Strong team of more than 25 qualified professionals operating from six cities Hyderabad
Mumbai Delhi Kolkata Chennai and Bangalore apart from two overseas offices at New
York (USA) and Dubai
One of the largest retail distribution networks with over 584 branches in over 389
citiestowns
Excellent Institutional Sales Desk
Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group Indiarsquos largest
financial services group The group carries forward its legacy of trust and excellence in
5
investor and customer services delivered with passion and the highest level of quality that
align with global standards
Karvy Realty (India) Limited is engaged in the business of real estate and property services
offering
Buying selling renting of properties
Identifying valuable investments opportunities in the real estate sector
Facilitating financial support for real estate and investments in properties
Real estate portfolio advisory services
KRIL is your personal real estate advisor guiding and hand holding you through real estate
transactions and offering valuable investment opportunities Building on the KARVY brand
as a leading industry benchmark for world class customer servicing and quality standards
KRIL brings to investors a reputation of reliability dependability and honesty Our
understanding of the needs and preferences of our clients and our teams of qualified realty
professionals help us to establish fruitful relationships with buyers and sellers of properties
alike
A single stop shop for realty services offering
Transacting Options Choose to buy sell or rent properties (residential and
commercial)
Investing Options Give your investments a good opportunity with properties
marketed by KRIL
Financing Options Get unmatched deals for financing your investment
Research Options We undertake valuation and feasibility studies area analysis and
customized analysis on behalf of clients
6
KRIL has ongoing relations with builders and developers across the country which will help
you place your investments in the most genuine properties for a good value appreciation at
the right place and at the right price KRIL is committed to the guiding principles of
quality timely service delivery fair pricing transparency and integrity
Karvy Computershare Private Limited is a joint venture between Computershare
Australia and Karvy Consultants Limited India in the registry management services industry
Computershare Australia is the worldrsquos largest and only global share registry providing
financial market services and technology to the global securities industry Karvy Corporate
and Mutual Fund Share Registry and Investor Services business Indias No 1 Registrar and
Transfer Agent and rated as Indias Most Admired Registrar for its overall excellence in
volume management quality processes and technology driven services
Karvy Global Services is a knowledge services company We provide specialist resources to
extend in house analyst teams in driving clear business results We serve investment banks
insurance providers brokerages hedge funds research agencies and life settlement providers
across the United States Middle East and Europe Our clients have found our cost
advantage ability to scale efforts and specialist knowledge regarding emerging markets to be
a strong advantage in the new fast and unpredictable world Our areas of focus include
equity and industry research commodity research credit analytics technology-based
workflow solutions insurance policy and portfolio valuation and other specialized services
Incorporated in 2004 we are backed by over 25 years of experience through Indiarsquos largest
financial services company the Karvy Group We are headquartered in New York and have
our primary delivery center in Hyderabad India We encourage you to contact us to evaluate
your research or outsourcing needs
As the flagship company of the KARVY Group KARVY Consultants Limited has always
remained at the helm of organizational affairs pioneering business policies work ethic and
channels of progress Having emerged as a leader in the registry business the first of the
businesses that we ventured into we have now transferred this business into a joint venture
7
with Computershare Limited of Australia the worldrsquos largest registrar With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business we believe that we were best positioned to venture into this activity as a
Depository Participant We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited) the first Depository in the country and
then with CDSL (Central Depository Services Limited) Today we service over seven lakh
customer accounts in this business spread across over 540 citiestowns in India and are
ranked amongst the largest Depository Participants in the country With a growing secondary
market presence we have transferred this business to KARVY Stock Broking Limited
(KSBL) our associate and a member of NSE BSE and HSE
114 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners decided to
offer other than the audit services value added services like corporate advisory services to
their clients The first firm in the group Karvy Consultants Limited was incorporated on 23rd
July 1983 In a very short period it became the largest Registrar and Transfer Agent in India
This business was spun off to form a separate joint venture with Computershare of Australia
in 2005 Karvyrsquos foray into stock broking began with marketing IPOs in 1993 Within a few
years Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5 Karvy was among the first few members of National
Stock Exchange in 1994 and became a member of The Stock Exchange Mumbai in 2001
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares Today Karvy is among
the top 5 Depositary Participant in India While the registry business is a 5050 Joint Venture
with Computershare of Australia we have equity participation by ICICI Ventures Limited
and Barings Asia Limited in Karvy Stock Broking Limited Karvy has always believed in
adding value to services it offers to clients A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs With the
8
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Hyderabad Stock Exchange (HSE)
Karvy Com trade Limited an ISO 90012000 certified company is another venture of the
prestigious Karvy group With our well established presence in the multifarious facets of the
modern Financial services industry from stock broking to registry services it is indeed a
pleasure for us to make foray into the commodities derivatives market which opens yet
another door for us to deliver our service to our beloved customers and the investor public at
large
At Karvy Insurance Broking Limited we provide both life and non-life insurance products to
retail individuals high net-worth clients and corporates With the opening up of the insurance
sector and with a large number of private players in the business we are in a position to
provide tailor made policies for different segments of customers In our journey to emerge as
a personal finance advisor we will be better positioned to leverage our relationships with the
product providers and place the requirements of our customers appropriately with the product
providers With Indian markets seeing a sea change both in terms of investment pattern and
attitude of investors insurance is no more seen as only a tax saving product but also as an
investment product By setting up a separate entity we would be positioned to provide the
best of the products available in this business to our customers
Our wide national network spanning the length and breadth of India further supports these
advantages Further personalized service is provided here by a dedicated team committed in
giving hassle-free service to the clients
Deepening of the Financial Markets and an ever-increasing sophistication in corporate
transactions has made the role of Investment Bankers indispensable to organizations seeking
professional expertise and counseling in raising financial resources through capital market
apart from Capital and Corporate Restructuring Mergers amp Acquisitions Project Advisory
and the entire gamut of Financial Market activities
4
Karvy Investor Services Limited (lsquoKISLrsquo) a SEBI registered Merchant Banker has emerged
as a leading Investment Banking entity in the country with over a decade of experience KISL
has built its reputation by capitalizing on its qualified professionals who have successfully
executed a large number of complex and unique transactions
Our quality professional team and our work-oriented dedication have propelled us to offer
value-added corporate financial services and act as a professional navigator for long term
growth of our clients who include leading corporates State Governments Foreign
Institutional Investors public and private sector companies and banks in Indian and global
markets
We have also emerged as a trailblazer in the arena of relationships both at the customer and
trade levels because of our unshakable integrity seamless service and innovative solutions
that are tuned to meet varied needs Our team of committed industry specialists having
extensive experience in capital markets further nurtures this relationship
Credentials
Emerging as a leading Investment Banker with a strong support from its Group entities in
Research Stock Broking Institutional Sales and Retail Distribution
Strong team of more than 25 qualified professionals operating from six cities Hyderabad
Mumbai Delhi Kolkata Chennai and Bangalore apart from two overseas offices at New
York (USA) and Dubai
One of the largest retail distribution networks with over 584 branches in over 389
citiestowns
Excellent Institutional Sales Desk
Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group Indiarsquos largest
financial services group The group carries forward its legacy of trust and excellence in
5
investor and customer services delivered with passion and the highest level of quality that
align with global standards
Karvy Realty (India) Limited is engaged in the business of real estate and property services
offering
Buying selling renting of properties
Identifying valuable investments opportunities in the real estate sector
Facilitating financial support for real estate and investments in properties
Real estate portfolio advisory services
KRIL is your personal real estate advisor guiding and hand holding you through real estate
transactions and offering valuable investment opportunities Building on the KARVY brand
as a leading industry benchmark for world class customer servicing and quality standards
KRIL brings to investors a reputation of reliability dependability and honesty Our
understanding of the needs and preferences of our clients and our teams of qualified realty
professionals help us to establish fruitful relationships with buyers and sellers of properties
alike
A single stop shop for realty services offering
Transacting Options Choose to buy sell or rent properties (residential and
commercial)
Investing Options Give your investments a good opportunity with properties
marketed by KRIL
Financing Options Get unmatched deals for financing your investment
Research Options We undertake valuation and feasibility studies area analysis and
customized analysis on behalf of clients
6
KRIL has ongoing relations with builders and developers across the country which will help
you place your investments in the most genuine properties for a good value appreciation at
the right place and at the right price KRIL is committed to the guiding principles of
quality timely service delivery fair pricing transparency and integrity
Karvy Computershare Private Limited is a joint venture between Computershare
Australia and Karvy Consultants Limited India in the registry management services industry
Computershare Australia is the worldrsquos largest and only global share registry providing
financial market services and technology to the global securities industry Karvy Corporate
and Mutual Fund Share Registry and Investor Services business Indias No 1 Registrar and
Transfer Agent and rated as Indias Most Admired Registrar for its overall excellence in
volume management quality processes and technology driven services
Karvy Global Services is a knowledge services company We provide specialist resources to
extend in house analyst teams in driving clear business results We serve investment banks
insurance providers brokerages hedge funds research agencies and life settlement providers
across the United States Middle East and Europe Our clients have found our cost
advantage ability to scale efforts and specialist knowledge regarding emerging markets to be
a strong advantage in the new fast and unpredictable world Our areas of focus include
equity and industry research commodity research credit analytics technology-based
workflow solutions insurance policy and portfolio valuation and other specialized services
Incorporated in 2004 we are backed by over 25 years of experience through Indiarsquos largest
financial services company the Karvy Group We are headquartered in New York and have
our primary delivery center in Hyderabad India We encourage you to contact us to evaluate
your research or outsourcing needs
As the flagship company of the KARVY Group KARVY Consultants Limited has always
remained at the helm of organizational affairs pioneering business policies work ethic and
channels of progress Having emerged as a leader in the registry business the first of the
businesses that we ventured into we have now transferred this business into a joint venture
7
with Computershare Limited of Australia the worldrsquos largest registrar With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business we believe that we were best positioned to venture into this activity as a
Depository Participant We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited) the first Depository in the country and
then with CDSL (Central Depository Services Limited) Today we service over seven lakh
customer accounts in this business spread across over 540 citiestowns in India and are
ranked amongst the largest Depository Participants in the country With a growing secondary
market presence we have transferred this business to KARVY Stock Broking Limited
(KSBL) our associate and a member of NSE BSE and HSE
114 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners decided to
offer other than the audit services value added services like corporate advisory services to
their clients The first firm in the group Karvy Consultants Limited was incorporated on 23rd
July 1983 In a very short period it became the largest Registrar and Transfer Agent in India
This business was spun off to form a separate joint venture with Computershare of Australia
in 2005 Karvyrsquos foray into stock broking began with marketing IPOs in 1993 Within a few
years Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5 Karvy was among the first few members of National
Stock Exchange in 1994 and became a member of The Stock Exchange Mumbai in 2001
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares Today Karvy is among
the top 5 Depositary Participant in India While the registry business is a 5050 Joint Venture
with Computershare of Australia we have equity participation by ICICI Ventures Limited
and Barings Asia Limited in Karvy Stock Broking Limited Karvy has always believed in
adding value to services it offers to clients A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs With the
8
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Karvy Investor Services Limited (lsquoKISLrsquo) a SEBI registered Merchant Banker has emerged
as a leading Investment Banking entity in the country with over a decade of experience KISL
has built its reputation by capitalizing on its qualified professionals who have successfully
executed a large number of complex and unique transactions
Our quality professional team and our work-oriented dedication have propelled us to offer
value-added corporate financial services and act as a professional navigator for long term
growth of our clients who include leading corporates State Governments Foreign
Institutional Investors public and private sector companies and banks in Indian and global
markets
We have also emerged as a trailblazer in the arena of relationships both at the customer and
trade levels because of our unshakable integrity seamless service and innovative solutions
that are tuned to meet varied needs Our team of committed industry specialists having
extensive experience in capital markets further nurtures this relationship
Credentials
Emerging as a leading Investment Banker with a strong support from its Group entities in
Research Stock Broking Institutional Sales and Retail Distribution
Strong team of more than 25 qualified professionals operating from six cities Hyderabad
Mumbai Delhi Kolkata Chennai and Bangalore apart from two overseas offices at New
York (USA) and Dubai
One of the largest retail distribution networks with over 584 branches in over 389
citiestowns
Excellent Institutional Sales Desk
Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group Indiarsquos largest
financial services group The group carries forward its legacy of trust and excellence in
5
investor and customer services delivered with passion and the highest level of quality that
align with global standards
Karvy Realty (India) Limited is engaged in the business of real estate and property services
offering
Buying selling renting of properties
Identifying valuable investments opportunities in the real estate sector
Facilitating financial support for real estate and investments in properties
Real estate portfolio advisory services
KRIL is your personal real estate advisor guiding and hand holding you through real estate
transactions and offering valuable investment opportunities Building on the KARVY brand
as a leading industry benchmark for world class customer servicing and quality standards
KRIL brings to investors a reputation of reliability dependability and honesty Our
understanding of the needs and preferences of our clients and our teams of qualified realty
professionals help us to establish fruitful relationships with buyers and sellers of properties
alike
A single stop shop for realty services offering
Transacting Options Choose to buy sell or rent properties (residential and
commercial)
Investing Options Give your investments a good opportunity with properties
marketed by KRIL
Financing Options Get unmatched deals for financing your investment
Research Options We undertake valuation and feasibility studies area analysis and
customized analysis on behalf of clients
6
KRIL has ongoing relations with builders and developers across the country which will help
you place your investments in the most genuine properties for a good value appreciation at
the right place and at the right price KRIL is committed to the guiding principles of
quality timely service delivery fair pricing transparency and integrity
Karvy Computershare Private Limited is a joint venture between Computershare
Australia and Karvy Consultants Limited India in the registry management services industry
Computershare Australia is the worldrsquos largest and only global share registry providing
financial market services and technology to the global securities industry Karvy Corporate
and Mutual Fund Share Registry and Investor Services business Indias No 1 Registrar and
Transfer Agent and rated as Indias Most Admired Registrar for its overall excellence in
volume management quality processes and technology driven services
Karvy Global Services is a knowledge services company We provide specialist resources to
extend in house analyst teams in driving clear business results We serve investment banks
insurance providers brokerages hedge funds research agencies and life settlement providers
across the United States Middle East and Europe Our clients have found our cost
advantage ability to scale efforts and specialist knowledge regarding emerging markets to be
a strong advantage in the new fast and unpredictable world Our areas of focus include
equity and industry research commodity research credit analytics technology-based
workflow solutions insurance policy and portfolio valuation and other specialized services
Incorporated in 2004 we are backed by over 25 years of experience through Indiarsquos largest
financial services company the Karvy Group We are headquartered in New York and have
our primary delivery center in Hyderabad India We encourage you to contact us to evaluate
your research or outsourcing needs
As the flagship company of the KARVY Group KARVY Consultants Limited has always
remained at the helm of organizational affairs pioneering business policies work ethic and
channels of progress Having emerged as a leader in the registry business the first of the
businesses that we ventured into we have now transferred this business into a joint venture
7
with Computershare Limited of Australia the worldrsquos largest registrar With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business we believe that we were best positioned to venture into this activity as a
Depository Participant We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited) the first Depository in the country and
then with CDSL (Central Depository Services Limited) Today we service over seven lakh
customer accounts in this business spread across over 540 citiestowns in India and are
ranked amongst the largest Depository Participants in the country With a growing secondary
market presence we have transferred this business to KARVY Stock Broking Limited
(KSBL) our associate and a member of NSE BSE and HSE
114 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners decided to
offer other than the audit services value added services like corporate advisory services to
their clients The first firm in the group Karvy Consultants Limited was incorporated on 23rd
July 1983 In a very short period it became the largest Registrar and Transfer Agent in India
This business was spun off to form a separate joint venture with Computershare of Australia
in 2005 Karvyrsquos foray into stock broking began with marketing IPOs in 1993 Within a few
years Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5 Karvy was among the first few members of National
Stock Exchange in 1994 and became a member of The Stock Exchange Mumbai in 2001
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares Today Karvy is among
the top 5 Depositary Participant in India While the registry business is a 5050 Joint Venture
with Computershare of Australia we have equity participation by ICICI Ventures Limited
and Barings Asia Limited in Karvy Stock Broking Limited Karvy has always believed in
adding value to services it offers to clients A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs With the
8
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
investor and customer services delivered with passion and the highest level of quality that
align with global standards
Karvy Realty (India) Limited is engaged in the business of real estate and property services
offering
Buying selling renting of properties
Identifying valuable investments opportunities in the real estate sector
Facilitating financial support for real estate and investments in properties
Real estate portfolio advisory services
KRIL is your personal real estate advisor guiding and hand holding you through real estate
transactions and offering valuable investment opportunities Building on the KARVY brand
as a leading industry benchmark for world class customer servicing and quality standards
KRIL brings to investors a reputation of reliability dependability and honesty Our
understanding of the needs and preferences of our clients and our teams of qualified realty
professionals help us to establish fruitful relationships with buyers and sellers of properties
alike
A single stop shop for realty services offering
Transacting Options Choose to buy sell or rent properties (residential and
commercial)
Investing Options Give your investments a good opportunity with properties
marketed by KRIL
Financing Options Get unmatched deals for financing your investment
Research Options We undertake valuation and feasibility studies area analysis and
customized analysis on behalf of clients
6
KRIL has ongoing relations with builders and developers across the country which will help
you place your investments in the most genuine properties for a good value appreciation at
the right place and at the right price KRIL is committed to the guiding principles of
quality timely service delivery fair pricing transparency and integrity
Karvy Computershare Private Limited is a joint venture between Computershare
Australia and Karvy Consultants Limited India in the registry management services industry
Computershare Australia is the worldrsquos largest and only global share registry providing
financial market services and technology to the global securities industry Karvy Corporate
and Mutual Fund Share Registry and Investor Services business Indias No 1 Registrar and
Transfer Agent and rated as Indias Most Admired Registrar for its overall excellence in
volume management quality processes and technology driven services
Karvy Global Services is a knowledge services company We provide specialist resources to
extend in house analyst teams in driving clear business results We serve investment banks
insurance providers brokerages hedge funds research agencies and life settlement providers
across the United States Middle East and Europe Our clients have found our cost
advantage ability to scale efforts and specialist knowledge regarding emerging markets to be
a strong advantage in the new fast and unpredictable world Our areas of focus include
equity and industry research commodity research credit analytics technology-based
workflow solutions insurance policy and portfolio valuation and other specialized services
Incorporated in 2004 we are backed by over 25 years of experience through Indiarsquos largest
financial services company the Karvy Group We are headquartered in New York and have
our primary delivery center in Hyderabad India We encourage you to contact us to evaluate
your research or outsourcing needs
As the flagship company of the KARVY Group KARVY Consultants Limited has always
remained at the helm of organizational affairs pioneering business policies work ethic and
channels of progress Having emerged as a leader in the registry business the first of the
businesses that we ventured into we have now transferred this business into a joint venture
7
with Computershare Limited of Australia the worldrsquos largest registrar With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business we believe that we were best positioned to venture into this activity as a
Depository Participant We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited) the first Depository in the country and
then with CDSL (Central Depository Services Limited) Today we service over seven lakh
customer accounts in this business spread across over 540 citiestowns in India and are
ranked amongst the largest Depository Participants in the country With a growing secondary
market presence we have transferred this business to KARVY Stock Broking Limited
(KSBL) our associate and a member of NSE BSE and HSE
114 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners decided to
offer other than the audit services value added services like corporate advisory services to
their clients The first firm in the group Karvy Consultants Limited was incorporated on 23rd
July 1983 In a very short period it became the largest Registrar and Transfer Agent in India
This business was spun off to form a separate joint venture with Computershare of Australia
in 2005 Karvyrsquos foray into stock broking began with marketing IPOs in 1993 Within a few
years Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5 Karvy was among the first few members of National
Stock Exchange in 1994 and became a member of The Stock Exchange Mumbai in 2001
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares Today Karvy is among
the top 5 Depositary Participant in India While the registry business is a 5050 Joint Venture
with Computershare of Australia we have equity participation by ICICI Ventures Limited
and Barings Asia Limited in Karvy Stock Broking Limited Karvy has always believed in
adding value to services it offers to clients A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs With the
8
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
KRIL has ongoing relations with builders and developers across the country which will help
you place your investments in the most genuine properties for a good value appreciation at
the right place and at the right price KRIL is committed to the guiding principles of
quality timely service delivery fair pricing transparency and integrity
Karvy Computershare Private Limited is a joint venture between Computershare
Australia and Karvy Consultants Limited India in the registry management services industry
Computershare Australia is the worldrsquos largest and only global share registry providing
financial market services and technology to the global securities industry Karvy Corporate
and Mutual Fund Share Registry and Investor Services business Indias No 1 Registrar and
Transfer Agent and rated as Indias Most Admired Registrar for its overall excellence in
volume management quality processes and technology driven services
Karvy Global Services is a knowledge services company We provide specialist resources to
extend in house analyst teams in driving clear business results We serve investment banks
insurance providers brokerages hedge funds research agencies and life settlement providers
across the United States Middle East and Europe Our clients have found our cost
advantage ability to scale efforts and specialist knowledge regarding emerging markets to be
a strong advantage in the new fast and unpredictable world Our areas of focus include
equity and industry research commodity research credit analytics technology-based
workflow solutions insurance policy and portfolio valuation and other specialized services
Incorporated in 2004 we are backed by over 25 years of experience through Indiarsquos largest
financial services company the Karvy Group We are headquartered in New York and have
our primary delivery center in Hyderabad India We encourage you to contact us to evaluate
your research or outsourcing needs
As the flagship company of the KARVY Group KARVY Consultants Limited has always
remained at the helm of organizational affairs pioneering business policies work ethic and
channels of progress Having emerged as a leader in the registry business the first of the
businesses that we ventured into we have now transferred this business into a joint venture
7
with Computershare Limited of Australia the worldrsquos largest registrar With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business we believe that we were best positioned to venture into this activity as a
Depository Participant We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited) the first Depository in the country and
then with CDSL (Central Depository Services Limited) Today we service over seven lakh
customer accounts in this business spread across over 540 citiestowns in India and are
ranked amongst the largest Depository Participants in the country With a growing secondary
market presence we have transferred this business to KARVY Stock Broking Limited
(KSBL) our associate and a member of NSE BSE and HSE
114 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners decided to
offer other than the audit services value added services like corporate advisory services to
their clients The first firm in the group Karvy Consultants Limited was incorporated on 23rd
July 1983 In a very short period it became the largest Registrar and Transfer Agent in India
This business was spun off to form a separate joint venture with Computershare of Australia
in 2005 Karvyrsquos foray into stock broking began with marketing IPOs in 1993 Within a few
years Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5 Karvy was among the first few members of National
Stock Exchange in 1994 and became a member of The Stock Exchange Mumbai in 2001
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares Today Karvy is among
the top 5 Depositary Participant in India While the registry business is a 5050 Joint Venture
with Computershare of Australia we have equity participation by ICICI Ventures Limited
and Barings Asia Limited in Karvy Stock Broking Limited Karvy has always believed in
adding value to services it offers to clients A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs With the
8
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
with Computershare Limited of Australia the worldrsquos largest registrar With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business we believe that we were best positioned to venture into this activity as a
Depository Participant We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited) the first Depository in the country and
then with CDSL (Central Depository Services Limited) Today we service over seven lakh
customer accounts in this business spread across over 540 citiestowns in India and are
ranked amongst the largest Depository Participants in the country With a growing secondary
market presence we have transferred this business to KARVY Stock Broking Limited
(KSBL) our associate and a member of NSE BSE and HSE
114 ORGANIZATION
Karvy was started by a group of five chartered accountants in 1979 The partners decided to
offer other than the audit services value added services like corporate advisory services to
their clients The first firm in the group Karvy Consultants Limited was incorporated on 23rd
July 1983 In a very short period it became the largest Registrar and Transfer Agent in India
This business was spun off to form a separate joint venture with Computershare of Australia
in 2005 Karvyrsquos foray into stock broking began with marketing IPOs in 1993 Within a few
years Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5 Karvy was among the first few members of National
Stock Exchange in 1994 and became a member of The Stock Exchange Mumbai in 2001
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares Today Karvy is among
the top 5 Depositary Participant in India While the registry business is a 5050 Joint Venture
with Computershare of Australia we have equity participation by ICICI Ventures Limited
and Barings Asia Limited in Karvy Stock Broking Limited Karvy has always believed in
adding value to services it offers to clients A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs With the
8
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
information overload today Karvyrsquos team of analysts help investors make the right calls be it
equities mf insurance On a typical working day Karvy
Has more than 25000 investors visiting our 575 offices
Publishes broadcasts at least 50 buy sell calls
Attends to 10000+ telephone calls
12 INTRODUCTION TO COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged These raw
commodities are traded on regulated commodities exchanges in which they are bought and
sold in standardized contracts
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like plam oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This will help investors hedge their commodity
risk take speculative positions in commodities and exploit arbitrage opportunities in the
market
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us
These commodities can be broadly classified into the following categories
Precious metals Gold Silver Platinum etc
Other metals Nickel Aluminum Copper etc
Agro-Based commodities Wheat Corn Cotton Oils Oilseeds
Soft commodities Coffee Cocoa Sugar etc
Live-Stock Live cattle Pork bellies etc
Energy Crude oil Natural Gas Gasoline etc
9
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
10
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
121 COMMODITIES AND COMMODITY MARKET IN INDIA
India a commodity based economy where two-third of the one billion population depends on
agricultural commodities surprisingly has an under developed commodity market Unlike the
physical market futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock
For instance a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets
The article aims at know how of the commodities market and how the commodities traded on
the exchange The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view In fact it was one of the most vibrant markets till
early 70s Its development and growth was shunted due to numerous restrictions earlier Now
with most of these restrictions being removed there is tremendous potential for growth of
this market in the country
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets It is believed that the establishment of Bombay
Cotton Trade Association Ltd in 1875 marks the beginning of organized futures Commodity
market in India Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd in
1919 Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country Over the years futures
Trading in various other commodities like pepper turmeric potato sugar and gur etc also
begun After independence Forward Contracts (Regulation) Act 1952 was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up
However in the seventies most of the registered associations became inactive as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether With the gradual withdrawal of the government from various sectors in
the post-liberalization era the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management Consequently the Government issued notifications on 142003
permitting futures trading in the commodities
11
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
122 COMMODITY
A commodity may be defined as an article a p
roduct or material that is bought and sold It can be classified as every kind of movable
property except Actionable Claims Money amp Securities
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors arbitrageurs and speculators Retail investors who claim to understand the
equity markets may find commodities an unfathomable market But commodities are easy to
understand as far as fundamentals of demand and supply are concerned Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap Historically pricing in commodities futures has been less volatile compared with equity
and bonds thus providing an efficient portfolio diversification option
In fact the size of the commodities markets in India is also quite significant Of the countrys
GDP of Rs 13 20730 crore (Rs 132073 billion) commodities related (and dependent)
industries constitute about 58 per cent
Currently the various commodities across the country clock an annual turnover of Rs 1
40000 crore (Rs 1400 billion) With the introduction of futures trading the size of the
commodities market grows many folds here on
123 COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country It is
the market where a wide range of products viz precious metals base metals crude oil
energy and soft commodities like palm oil coffee etc are traded It is important to develop a
vibrant active and liquid commodity market This would help investors hedge their
commodity risk take speculative positions in commodities and exploit arbitrage opportunities
in the market
Table 11
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No
Market segments 2009-10 2010-11 2011-12 (E)
1 Government Securities Market 1544376 (63) 2518322 (912) 2827872 (91)
2 Forex Market 658035 (27) 2318531 (84) 3867936 (1244)
12
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
3 Total Stock Market Turnover (I+ II) 1374405 (56) 3745507 (136) 4160702 (1338)
I National Stock Exchange (a+b) 1057854 (43) 3230002 (117) 3641672 (1171)
a)Cash 617989 1099534 1147027
b)Derivatives 439865 2130468 2494645
II Bombay Stock Exchange (a+b) 316551 (13) 515505 (187) 519030 (167)
a)Cash 314073 503053 499503
b)Derivatives 2478 12452 19527
4 Commodities Market NA 130215 (47) 500000 (161)
Note Fig in bracket represents percentage to GDP at market prices
Source SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us
These commodities can be broadly classified into the following
Precious Metals Gold Silver Platinum etc
Other Metals Nickel Aluminum Copper etc
Agro-Based Commodities Wheat Corn Cotton Oils Oilseeds
Soft Commodities Coffee Cocoa Sugar etc
Live-Stock Live Cattle Pork Bellies etc
Energy Crude Oil Natural Gas Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market Also as in equities there exists the spot and the
derivatives segment The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer
processor wholesaler etc Derivative trading takes place through exchange-based markets
with standardized contracts settlements etc
Leading commodity markets of world
13
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX)
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT)
Leading commodity markets of India
The government has now allowed national commodity exchanges similar to the BSE amp NSE
to come up and let them deal in commodity derivatives in an electronic trading environment
These exchanges are expected to offer a nation-wide anonymous order driven screen based
trading system for trading The Forward Markets Commission (FMC) will regulate these
exchanges
Consequently four commodity exchanges have been approved to commence business in this
regard They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at Ahmedabad
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT 1952 by the FORWARDS MARKET COMMISSION (FMC)
Which is an apex regulatory body for the commodities and futures market on the lines of
securities and exchange board of India (SEBI) for the securities market operations The
commodity exchanges are granted approval by FMC under the overall aegis of the Ministry
Of Consumer Affairs Food and Public Distribution Government of India All commodities
and future contracts traded on the exchange are required to be approved by the FMC along
14
MAIN COMMODITY EXCHANGES OF INDIA
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
with their contract specification which describes the quantity quality and place of the
commodities traded
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors And the reasons for the same are not difficult to understand
Supply Worldrsquos leading producers of 17 agro commodities
Demand Worlds largest consumer of edible oils GOLD
GDP driver Primarily an AGRAIRIAN ECONOMY
Captive market Agro Products are consumed locally
Waiting to explode Value of production around Rs 300000 crore and expected
future market potential around Rs 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature )
124 OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority
which is overseen by the Ministry of Consumer Affairs and Public Distribution Govt of
India It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act
1952
The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof Currently Commission comprises three
members among whom Dr Kewal Ram IES is acting as Chairman and Smt Padma
Swaminathan CSS and Dr (Smt) Jayashree Gupta CSS are the Members of the
Commission
The list of exchanges that has been allowed to trade in commodities are
1 Bhatinda Om amp Oil Exchange Ltd Batinda
2 The Bombay Commodity Exchange Ltd Mumbai
3 The Rajkot Seeds oil amp Bullion Merchants` Association Ltd
4 The Kanpur Commodity Exchange Ltd Kanpur
15
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
5 The Meerut Agro Commodities Exchange Co Ltd Meerut
6 The Spices and Oilseeds Exchange Ltd
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd Muzaffarnagar
9 India Pepper amp Spice Trade Association Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd Delhi
11 National Board of Trade Indore
12 The Chamber Of Commerce Hapur
13 The East India Cotton Association Mumbai
14 The Central India Commercial Exchange Ltd Gwaliar
15 The East India Jute amp Hessian Exchange Ltd
16 First Commodity Exchange of India Ltd Kochi
17 Bikaner Commodity Exchange Ltd Bikaner
18 The Coffee Futures Exchange India Ltd Bangalore
19 Esugarindia Limited
20 National Multi Commodity Exchange of India Limited
21 Surendranagar Cotton oil amp Oilseeds Association Ltd
22 Multi Commodity Exchange of India Ltd
23 National Commodity amp Derivatives Exchange Ltd
24 Haryana Commodities Ltd Hissar
25 e-Commodities Ltd
125 NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX
National Commodity amp Derivatives Exchange Limited
16
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
NCDEX is a public limited company incorporated on April 23 2003 under the Companies
Act 1956 It has commenced its operations on December 15 2003 National Commodity amp
Derivatives Exchange Limited (NCDEX) is a professionally managed online multi
commodity exchange promoted by ICICI Bank Limited (ICICI Bank) Life Insurance
Corporation of India (LIC) National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE) Punjab National Bank
(PNB) CRISIL Limited Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange Started with an authorized capital of Rs50crores ICICI
BANK LIC NABARD and NSE hold the maximum share in the share capital (15
each)NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India The reach will gradually be expanded to more centers NCDEX
is the only commodity exchange in the country promoted by national level institutions
NCDEX is a nation-level technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets
NCDEX currently facilitates trading of thirty six commodities - Cashew Castor Seed
Chana Chilli Coffee Cotton Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil
Gold Guar gum Guar Seeds Gur Jeera Jute sacking bags Mild Steel Ingot Mulberry
Green Cocoons Pepper Rapeseed - Mustard Seed Raw Jute RBD Palmolein Refined Soy
Oil Rice Rubber Sesame Seeds Silk Silver Soy Bean Sugar Tur Turmeric Urad (Black
Matpe) Wheat Yellow Peas Yellow Red Maize amp Yellow Soybean Meal At subsequent
phases trading in more commodities would be facilitated
Currently NCDEX has 700 members at 470 locations across the country The exchange saw
400 growth in the first year of its operations and expects 200 in the second year also
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel
tin and mentha oil
17
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Multi Commodity Exchange of India Limited (MCX)
MCX an independent multi commodity exchange has permanent recognition from
Government of India for facilitating online trading clearing and settlement operations for
commodity futures markets across the country It was inaugurated in November 2003 by Mr
Mukesh Ambani It is headquartered in Mumbai The key shareholders of MCX are Financial
Technologies (India) Ltd State Bank of India NABARD NSE HDFC Bank State Bank of
Indore State Bank of Hyderabad State Bank of Saurashtra SBI Life Insurance Co Ltd
Union Bank of India Bank Of India Bank Of Baroda Canara Bank Corporation Bank
MCX offers futures trading in the following commodity categories Agri Commodities
Bullion Metals- Ferrous amp Non-ferrous Pulses Oils amp Oilseeds Energy Plantations Spices
and other soft commodities
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers Processors Traders Corporate Regional
Trading Centers Importers Exporters Cooperatives and Industry Associations
In a significant development National Stock Exchange of India Ltd (NSE) countryrsquos largest
exchange and National Bank for Agriculture and Rural Development (NABARD) countryrsquos
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15 2005 This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country
MCX is an ISO 90012000 online nationwide multi commodity exchange It has over 900+
members spread across 500+ centers across the country with more than 750+VSATs and
leased line connections and 5000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals energy and agriculture commodities Exchange
has pioneered major innovations in Indian commodities market which has become the
industry benchmarks subsequently
18
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM) the 250 year old Baltic Freight Exchange London Dubai
Metals amp Commodity Centre (DMCC) amp Dubai Gold amp Commodity Exchange (DGCX) the
strategic initiative of Government of Dubai MCX has to its credit setting up of the National
spot exchange (NSEAP) which connects all India APMC markets thereby contributing in the
implementation of Government of Indiarsquos vision to create a common Indian market
The trading system of MCX is state- of-the -art new generation trading platform that permits
extremely cost effective operations at much greater efficiency The Exchange Central System
is located in Mumbai which maintains the Central Order Book Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time The controls in the
system are system driven requiring minimum human intervention The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange which matches on the Central System and sends a confirmation back to the
Member
Settlement Exchange maintains electronic interface with its Clearing Bank All Members of
the Exchange are having their Exchange operations account with the Clearing Bank
All debits and credits are affected electronically through such accounts only All contracts on
maturity are for delivery MCX specifies tender and delivery periods A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position holder for the tendered quantity Once the buyer is
identified seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges financial institutions and banks have a
feeling that the markets are not being fully exploited Education and regulation are the main
impediments to the growth of commodity trading Producers farmers and Agri- based
companies should enter into formal contracts to hedge against losses The use of commodity
exchanges will create more trading opportunities result in an integrated market and better
price discoveries
19
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges
which will include trading cum clearing membership and institutional clearing members to
start with MCX and NCDEX would also include other membership classes as may be
defined by the Exchange from time to time The different membership classes of MCX and
NCDEX for the present are as under
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a personcorporate who is admitted by the Exchange
as the member conferring upon them a right to trade and clear through the clearing house of
the Exchange as a Clearing Member
Moreover the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum ndashClearing Members
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements
Trading limit could be obtained by the Exchange Members on payment of a deposit
which is called as a Margin Deposit
They would be provided the software for trading on the exchange
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the
Members and the Exchange through which the daily receipts and payments of margin and
mark-to-margins would be accomplished
20
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
The Trading Mechanism
How Trading would take place on MCX and NCDEX
The trading system of MCX and NCDEX is state of the art new generation trading platform
that permits extremely cost effective operations at much greater efficiency The Exchange
Central System is located in Mumbai which will maintain the Central order book Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange which shall match on the Central System and
send a confirmation back to the member
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank All members need to have
their Exchange operation account with such clearing bank All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery MCX and NCDEX would specify a tender amp
delivery period For example such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month ndashas tender ampor delivery
period A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity Exchange would
select from the long open position for the tendered quantity Once the buyer is identified
seller has to initiate the process of giving delivery amp buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems
Lack of centralization of trading
Illiquidity and Counterparty risk
21
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
In the first two of these the basic problem is that of too much edibility and generality The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contracts non-tradable
Counterparty risk arises from the possibility of default by any one party to the transaction
When one of the two sides to the transaction declares bankruptcy the other suffers Even
when forward markets trade standardized contracts and hence avoid the problem of
illiquidity still the counterparty risk remains a very serious issue
126 COMMODITY DERIVATIVES
Derivatives as a tool for managing risk first originated in the commodities markets They
were then found useful as a hedging tool in financial markets as well In India trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875 Over a period of
time other commodities were permitted to be traded in futures exchanges Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets It is
only in the last decade that commodity future exchanges have been actively encouraged
However the markets have been thin with poor liquidity and have not grown to any
significant level In this chapter we look at how commodity derivatives differ from financial
derivatives We also have a brief look at the global commodity markets and the commodity
markets that exist in India
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset However there are some features which are very
peculiar to commodity derivative markets In the case of financial derivatives most of these
contracts are cash settled Even in the case of physical settlement financial assets are not
bulky and do not need special facility for storage Due to the bulky nature of the underlying
assets physical settlement in commodity derivatives creates the need for warehousing
Similarly the concept of varying quality of asset does not really exist as far as financial
underlying are concerned
However in the case of commodities the quality of the asset underlying a contract can vary
largely This becomes an important issue to be managed We have a brief look at these issues
22
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Futures
Futures markets were designed to solve the problems that exist in forward markets A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price But unlike forward contracts the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts the exchange specifies
certain standard features of the contract It is a standardized contract with standard underlying
instrument a standard quantity and quality of the underlying instrument that can be delivered
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction More than 99 of futures transactions are offset this way
The standardized items in a futures contract are
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Futures terminology
Spot price The price at which an asset trades in the spot market
Futures price The price at which the futures contract trades in the futures market
Contract cycle The period over which a contract trades The commodity futures contracts on
the NCDEX have one-month two-months and three-month expiry cycles which expire on the
20th day of the delivery month Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February On the
next trading day following the 20th a new contract having a three-month expiry is introduced
for trading
Expiry date It is the date specified in the futures contract This is the last day on which the
contract will be traded at the end of which it will cease to exist
23
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Delivery unit The amount of asset that has to be delivered less than one contract For
instance the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales The
delivery unit for the Gold futures contract is 1 kg
Basis Basis can be defined as the futures price minus the spot price There will be a different
basis for each delivery month for each contract In a normal market basis will be positive
This reflects that futures prices normally exceed spot prices
Cost of carry The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset
Initial margin The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin
Marking-to-market (MTM) In the futures market at the end of each trading day the
margin account is adjusted to re ect the investorrsquos gain or loss depending upon the futures
closing price This is called markingndashtondashmarket Maintenance margin This is somewhat
lower than the initial margin This is set to ensure that the balance in the margin account
never becomes negative
Introduction to options
In this section we look at another interesting derivative contract namely options Options are
fundamentally different from forward and futures contracts An option gives the holder of the
option the right to do something The holder does not have to exercise this right In contrast
in a forward or futures contract the two parties have committed themselves to doing
something Whereas it costs nothing (except margin requirements) to enter into a futures
contract the purchase of an option requires an upndashfront payment
Option terminology
Commodity options Commodity options are options with a commodity as the underlying
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract
24
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Stock options Stock options are options on individual stocks Options currently trade on
over 500 stocks in the United States A contract gives the holder the right to buy or sell shares
at the specified price
Buyer of an option The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller writer
Writer of an option The writer of a call put option is the one who receives the option
premium and is thereby obliged to sell buy the asset if the buyer exercises on him
There are two basic types of options call options and put options
Call option A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price
Put option A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price
Option price Option price is the price which the option buyer pays to the option seller It is
also referred to as the option premium
Expiration date The date specified in the options contract is known as the expiration date
the exercise date the strike date or the maturity
Strike price The price specified in the options contract is known as the strike price or the
exercise price
American options American options are options that can be exercised at any time upto the
expiration date Most exchange-traded options are American
European options European options are options that can be exercised only on the expiration
date itself European options are easier to analyze than American options and properties of
an American option are frequently deduced from those of its European counterpart
In-the-money option An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately A call option on the index is said to
25
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
be in-the-money when the current index stands at a level higher than the strike price (ie spot
price strike price) If the index is much higher than the strike price the call is said to be deep
ITM In the case of a put the put is ITM if the index is below the strike price
(At-the-money option An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately An option on the index is at-the-money when the
current index equals the strike price (ie spot price = strike price)
Out-of-the-money option An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price (ie spot
price strike price) If the index is much lower than the strike price the call is said to be deep
OTM In the case of a put the put is OTM if the index is above the strike price )
Intrinsic value of an option The option premium can be broken down into two components
ndash intrinsic value and time value The intrinsic value of a call is the amount the option is ITM
if it is ITM If the call is OTM its intrinsic value is zero Putting it another way the intrinsic
value of a call is I Similarly Q which means the intrinsic value of a call is the greater of 0 or
9 I K is the strike price Q ie the greater of 0 or 9 C is the spot price the intrinsic value of a
put is 0
Time value of an option The time value of an option is the difference between its premium
and its intrinsic value Both calls and puts have time value An option that is OTM or ATM
has only time value
127 WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity typically at
an accredited warehouse The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity This may sound simple
but the physical settlement of commodities is a complex process The issues faced in physical
settlement are enormous There are limits on storage facilities in different states There are
restrictions on interstate movement of commodities Besides state level octroi and duties have
26
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
an impact on the cost of movement of goods across locations The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets We take a general overview at the process of physical settlement of
commodities Later on we will look into details of how physical settlement happens on the
NCDEX
Delivery notice period
Unlike in the case of equity futures typically a seller of commodity futures has the option to
give notice of delivery This option is given during a period identified as lsquodelivery notice
periodrsquo Such contracts are then assigned to a buyer in a manner similar to the assignments to
a seller in an options market However what is interesting and different from a typical options
exercise is that in the commodities market both positions can still be closed out before expiry
of the contract The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members
Typically in all commodity exchanges delivery notice is required to be supported by a
warehouse receipt The warehouse receipt is the proof for the quantity and quality of
commodities being delivered Some exchanges have certified laboratories for verifying the
quality of goods In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice Some exchanges like LIFFE accept warehouse
receipts as quality verification documents while others like BMFndashBrazil have independent
grading and classification agency to verify the quality
In the case of BMF-Brazil a seller typically has to submit the following documents
A declaration verifying that the asset is free of any and all charges including fiscal debts
related to the stored goods A provisional delivery order of the good to BMampF (Brazil)
issued by the warehouse A warehouse certificate showing that storage and regular insurance
have been paid
Assignment
Whenever delivery notices are given by the seller the clearing house of the exchange
identifies the buyer to whom this notice may be assigned Exchanges follow different
27
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
practices for the assignment process One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery Among the international
exchanges BMF CBOT and CME display delivery notices Alternatively the clearing
houses may assign deliveries to buyers on some basis Exchanges such as COMMEX and the
Indian commodities exchanges have adopted this method
Any seller buyer who has given intention to deliver been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice After the close of
trading exchanges assign the delivery intentions to open long positions Assignment is done
typically either on random basis or firstndashinndashfirst out basis In some exchanges (CME) the
buyer has the option to give his preference for delivery location The clearing house decides
on the daily delivery order rate at which delivery will be settled Delivery rate depends on the
spot rate of the underlying adjusted for discount premium for quality and freight costs The
discount premium for quality and freight costs are published by the clearing house before
introduction of the contract The most active spot market is normally taken as the benchmark
for deciding spot prices Alternatively the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day
Delivery
After the assignment process clearing house exchange issues a delivery order to the buyer
The exchange also informs the respective warehouse about the identity of the buyer The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt The period available for the buyer to take
physical delivery is stipulated by the exchange Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellerrsquos account In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing In case of most exchangendashtraded financial derivatives all the positions are cash
settled Cash settlement involves paying up the difference in prices between the time the
28
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
contract was entered into and the time the contract was closed For instance if a trader buys
futures on a stock at Rs100 and on the day of expiration the futures on that stock close
Rs120 he does not really have to buy the underlying stock All he does is take the difference
of Rs20 in cash Similarly the person who sold this futures contract at Rs100 does not have
to deliver the underlying stock All he has to do is pay up the loss of Rs20 in cash
In case of commodity derivatives however there is a possibility of physical settlement
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash the buyer must take physical delivery of the underlying asset This requires the
exchange to make an arrangement with warehouses to handle the settlements The efficacy of
the commodities a settlement depends on the warehousing system available Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity The advantage
of this system is that a warehouse receipt becomes good collateral not just for settlement of
exchange trades but also for other purposes too In India the warehousing system is not as
efficient as it is in some of the other developed markets Central and state government
controlled warehouses are the major providers of Agrindashproduce storage facilities Apart from
these there are a few private warehousing being maintained However there is no clear
regulatory oversight of warehousing services
Quality of underlying assets
A derivatives contract is written on a given underlying Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing When the underlying asset is
a commodity the quality of the underlying asset is of prime importance There may be quite
some variation in the quality of what is available in the marketplace When the asset is
specified it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable Commodity derivatives demand good standards and quality
assurance certification procedures A good grading system allows commodities to be traded
by specification
Currently there are various agencies that are responsible for specifying grades for
Commodities For example the Bureau of Indian Standards (BIS) under Ministry of
29
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Consumer Affairs specifies standards for processed agricultural commodities whereas
AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities Apart from these
there are other agencies like EIA which specify standards for export oriented commodities
How does a Commodity Futures Exchange help in Price Discovery
Unlike the physical market a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract
As a result futures market attracts hedgers for risk management and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities While hedgers have long-term perspective of the market the
traders or arbitragers prefer an immediate view of the market However all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price demand and supply climatic and market related information
These factors together result in efficient price discovery allowing large number of buyers
and sellers to trade on the exchange MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function
Price Risk Management Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs
How does a seller tender delivery to a buyer
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies They also submit the
documents to the Exchange with the details of the warehouse within the city chosen as a
delivery center Sellers are free to use any warehouse as they are responsible for the goods
until the buyer picks up the delivery which is a practice followed in the commodities market
globally
30
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Seller would receive the money from the exchange against the goods delivered which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time
MCX has tied up with State Level Warehousing Corporations of Karalla Gujarat Tamil
Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and
other State level Warehousing Corporations
How settlement happens at the end of the contract
A contract has a life cycle of one month or longer At MCX two weeks before the expiry of a
contract the contract enters into a tender period At the start of the tender period both the
parties must state their intentions to give or receive delivery based on which the parties are
supposed to act or bear the penal charges for any failure in doing so
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract In case
they do not their positions are closed out at due date rate The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month The important provisions are listed below The billing for the all trades
done during the previous month will be raised in the succeeding month
1 Rate of charges The transaction charges are payable at the rate of Rs6 per Rs one Lakh
trade done This rate is subject to change from time to time
2 Due date The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month
3 Collection process NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System
4 Registration with BJPL and their services Members have to fill up the mandate form
and submit the same to NCDEX NCDEX then forwards the mandate form to BJPL BJPL
sends the logndashin ID and password to the mailing address as mentioned in the registration
form The members can then log on through the website of BJPL and view the billing amount
31
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
and the due date Advance email intimation is also sent to the members Besides the billing
details can be viewed on the website upto a maximum period of 12 months
5 Adjustment against advances transaction charges In terms of the regulations members
are required to remit Rs50 000 as advance transaction charges on registration The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction
6 Penalty for delayed payments If the transaction charges are not paid on or before the due
date a penal interest is levied as specified by the exchange
Finally the futures market is a zero sum game ie the total number of long in any contract
always equals the total number of short in any contract The total number of outstanding
contracts (long short) at any point in time is called the ldquoOpen interestrdquo This Open interest
figure is a good indicator of the liquidity in every contract
Regulatory framework
At present there are three tiers of regulations of forwardfutures trading system in India
namely government of India Forward Markets Commission (FMC) and commodity
exchanges The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions Proper regulation is needed to create competitive
conditions In the absence of regulation unscrupulous participants could use these leveraged
contracts for manipulating prices This could have undesirable in hence on the spot prices
thereby affecting interests of society at large Regulation is also needed to ensure that the
market has appropriate risk management system In the absence of such a system a major
default could create a chain reaction The resultant financial crisis in a futures market could
create systematic risk Regulation is also needed to ensure fairness and transparency in
trading clearing settlement and management of the exchange so as to protect and promote
the interest of various stakeholders particularly nonndashmember users of the market
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC) Under the Forward Contracts (Regulation) Act 1952 forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges
which are granted recognition by the central government (Department of Consumer Affairs
Ministry of Consumer Affairs Food and Public Distribution) All the exchanges which deal
32
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
with forward contracts are required to obtain certificate of registration from the FMC
Besides they are subjected to various laws of the land like the Companies Act Stamp Act
Contracts Act Forward Commission (Regulation) Act and various other legislations which
impinge on their working
1 Limit on net open position as on the close of the trading hours Some times limit is also
imposed on intrandashday net open position The limit is imposed operatorndashwise and in some
cases also memberndash wise
2 Circuitndashfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices
3 Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price By making further
purchasessales relatively costly the price rise or fall is sobered down This measure is
imposed only on the request of the exchange
4 Circuit breakers or minimummaximum prices These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors This measure is also imposed on the request of the exchanges
5 Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract These extreme measures are taken only in
emergency situations
Besides these regulatory measures the FC(R) Act provides that a clientrsquos position cannot be
appropriated by the member of the exchange except when a written consent is taken within
three days time The FMC is persuading increasing number of exchanges to switch over to
electronic trading clearing and settlement which is more customerndashfriendly The FMC has
also prescribed simultaneous reporting system for the exchanges following open outndashcry
system
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients etc The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises the
33
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
name address telephone number of the officer of the commission who can be contacted for
any grievance The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC Officers of the FMC have been
instructed to meet the members and clients on a random basis whenever they visit exchanges
to ascertain the situation on the ground instead of merely attending meetings of the board of
directors and holding discussions with the officendashbearers
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under exchanges are governed by its own rules and bye laws (approved by the
FMC) In this section we have brief look at the important regulations that govern NCDEX
For the sake of convenience these have been divided into two main divisions pertaining to
trading and clearing The detailed bye laws rules and regulations are available on the
NCDEX home page
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member He does not have any title rights or
interest whatsoever with respect to trading system its facilities software and the information
provided by the trading system
For the purpose of accessing the trading system the member will install and use equipment
and software as specified by the exchange at his own cost The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
34
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
time The cost of the equipment and software supplied by the exchange installation and
maintenance of the equipment is borne by the trading member
Trading members and users
Trading members are entitled to appoint (subject to such terms and conditions as may be
specified by the relevant authority) from time to time -
1048576 Authorized persons
1048576 Approved users
Trading members have to pass a certification program which has been prescribed by the
exchange In case of trading members other than individuals or sole proprietorships such
certification program has to be passed by at least one of their directors employees partners
members of governing body Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange The appointment of
approved users is subject to the terms and conditions prescribed by the exchange Each
approved user is given a unique identification number through which he will have access to
the trading system An approved user can access the trading system through a password and
can change the password from time to time The trading member or its approved users are
required to maintain complete secrecy of its password Any trade or transaction done by use
of password of any approved user of the trading member will be binding on such trading
member Approved user shall be required to change his password at the end of the password
expiry period
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time Other than the regular trading hours trading members are
provided a facility to place orders off-line ie outside trading hours These are stored by the
system but get traded only once the market opens for trading on the following working day
The types of order books trade books price a limit matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time Members can place orders on the trading system
during these sessions within the regulations prescribed by the exchange as per these bye
laws rules and regulations from time to time
35
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Trading hours and trading cycle
The exchange announces the normal trading hours open period in advance from time to time
In case necessary the exchange can extend or reduce the trading hours by notifying the
members Trading cycle for each commodity derivative contract has a standard period
during which it will be available for trading
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading This is notified by the exchange in advance The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time
Trading parameters
The exchange from time to time specifies various trading parameters relating to the trading
system Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity derivatives contract It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system It specifies parameters like lot size in
which orders can be placed price steps in which orders shall be entered on the trading
system position limits in respect of each commodity etc
Failure of trading member terminal
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
36
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
In the event of failure of trading memberrsquos workstation and or the loss of access to the
trading system the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for Only
requests made in writing in a clear and precise manner by the trading member would be
considered The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip modification slip must be made available to the constituents
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents
Trades generated on the system are irrevocable and `locked in The exchange specifies from
time to time the market types and the manner if any in which trade cancellation can be
effected Where a trade cancellation is permitted and trading member wishes to cancel a
trade it can be done only with the approval of the exchange
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force every clearing member in respect of the trades in which he is party to has to
deposit a margin with exchange authorities
The exchange prescribes from time to time the commodities derivative contracts the
settlement periods and trade types for which margin would be attracted The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time The margin is charged so as to cover
one day loss that can be encountered on the position on 99 of the days Additional margins
may be levied for deliverable positions on the basis of VaR from the expiry of the contract
37
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
till the actual settlement date plus a mark Up for default The margin has to be deposited
with the exchange within the time notified by the exchange The exchange also prescribes
categories of securities that would be eligible for a margin deposit as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount
The procedure for refund adjustment of margins is also specified by the exchange from time
to time The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement On failure to deposit margins as required
under this clause the exchangeclearing house can withdraw the trading facility of the trading
member After the pay-out the clearing house releases all margins
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract The margin
required for a futures contract is better described as performance bond or good faith money
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time The margin requirements for most futures contracts range from 2 to
15 of the value of the contract
In the futures market there are different types of margins that a trader has to maintain At
this stage we look at the types of margins as they apply on most futures exchanges
Initial margin The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin This margin is meant to cover the largest potential loss in
one day
The margin is a mandatory requirement for parties who are entering into the contract
Maintenance margin A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin To ensure that the balance in the margin account never becomes
negative a maintenance margin which is somewhat lower than the initial margin is set If
the balance in the margin account falls below the maintenance margin the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time The extra funds deposited are known as a variation margin If the
38
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
trader does not provide the variation margin the broker closes out the position by offsetting
the contract
Additional margin In case of sudden higher than expected volatility the exchange calls for
an additional margin which is a preemptive move to prevent breakdown This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis etc
Mark-to-Market margin (MTM) At the end of each trading day the margin account is
adjusted to re direct the traderrsquos gain or loss This is known as marking to market the account
of each trader All futures contracts are settled daily reducing the credit exposure to one dayrsquos
movement Based on the settlement price the value of all positions is markedndashtondashmarket
each day after the official close ie the accounts are either debited or credited based on how
well the positions fared in that dayrsquos trading session If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds On the other hand if the position generates a gain the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades
Unfair trading practices
No trading member should buy sell deal in derivatives contracts in a fraudulent manner or
indulge in any unfair trade practices including market manipulation This includes the
following
1048576 Effect take part either directly or indirectly in transactions which are likely to have effect
of artificially raising or depressing the prices of spot derivatives contracts
1048576 Indulge in any act which is calculated to create a false or misleading appearance of
trading resulting in refection of prices which are not genuine
1048576 Buy sell commodities contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract
1048576 Delay the transfer of commodities in the name of the transferee
39
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
1048576 Indulge in falsification of his books accounts and records for the purpose of market
manipulation
1048576 When acting as an agent execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange
1048576 Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange
Clearing
As mentioned earlier National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations bye laws and rules of the exchange
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract If the last trading day as specified in the respective
commodity contract is a holiday the last trading day is taken to be the previous working day
of exchange
On the expiry date of contracts the trading members clearing members have to give delivery
information as prescribed by the exchange from time to time If a trading member clearing
member fail to submit such information during the trading hours on the expiry date for the
contract the deals have to be settled as per the settlement calendar applicable for such deals
in cash together with penalty as stipulated by the exchange
Delivery
Delivery can be done either through the clearing house or outside the clearing house On the
expiry date during the trading hours the exchange provides a window on the trading system
to submit delivery information for all open positions After the trading hours on the expiry
date based on the available information the matching for deliveries takes place firstly on
the basis of locations and then randomly keeping in view the factors such as available
40
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
capacity of the vault warehouse commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time Matching done is binding on the clearing members After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery
notwithstanding that the commodities are located in the warehouse along with the
commodities of other constituents
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s)
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement shall be offset by process of
netting to arrive at net obligations
The relevant authority from time to time fixes the various clearing days the pay-in and pay-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities futures contracts
1 Settlement obligations statements for TCMs The exchange generates and provides to
each trading clearing member settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery deliveries is are to be given and or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and or taken and funds to be debited
and or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks institutions for the same
2 Settlement obligations statements for PCMs The exchange clearing house generates
and provides to each professional clearing member settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery deliveries is
41
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
are to be given and or taken and the funds payable or receivable by him The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein
Delivery of commodities
Based on the settlement obligations statements the exchange generates delivery statement
and receipt statement for each clearing member The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members the
details of the corresponding buying selling constituent and such other details The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent commodities as specified in the delivery and receipt
statements On respective pay-in day clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals Delivery
has to be made in terms of the delivery unitsrsquo notified by the exchange Commodities which
are to be received by a clearing member are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange clearing house
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange Electronic delivery is available for trading before expiry of the
validity date The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals for the collection of margins
by way of securities for all deals entered into through the exchange for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories Clearing Members operate the clearing account only for the purpose
42
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
of settlement of depository deals entered through the exchange for the collection of margins
by way of commodities for deals entered into through the exchange The clearing member
cannot operate the clearing account for any other purpose
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange
128 RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX
AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity Among these the price risk management is by far the
most important and is raison d lsquoetre of a commodity futures market
The need for price risk management through what is commonly called lsquohedgingrsquo arises from
price risks in most commodities The larger the more frequent and the more unforeseen is the
rice variability inn a commodity the greater is the price risk in it Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire
pilferage transport mishaps etc they do not cover the risks of value losses resulting from
adverse price variations The reason for this is obvious The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps
Commodity producers merchants stockists and importers face the risk of large value losses
on their production purchases stock and imports from the fall in prices Likewise the
processors manufacturers exporters and market functionaries entering into forward sale
commitments in either the domestic or export markets are exposed to heavy risks from
adverse price changes
True price variability may also lead to windfalls when losses move favorably In the long
run such gains may even offset the losses from adverse price movements But the losses
when incurred are at times so huge these may often cause insolvencies The greater the
exposure to commodity price risks the greater is the share of the commodity in the total
43
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
earnings or production costs Hence the needs for price risk management by hedging through
the use of futures contracts
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts So long as these two sets of prices move in close
unison and display a parallel relationship losses in the physical market are off set either fully
or substantially by the gains in the future market Hedging thus performs the economic
function of helping to reduce significantly if not eliminate altogether the losses emanating
from the price risks in commodities
BENEFITS OF COMMODITY MARKET
Why Commodity Futures
One answer that is heard in the financial sector is we need commodity futures markets so
that we will have volumes brokerage fees and something to trade I think that is missing the
point We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in Indias economy
In India agriculture has traditionally been an area with heavy government intervention
Government intervenes by trying to maintain buffer stocks they try to fix prices and they
have import-export restrictions and a host of other interventions Many economists think that
we could have major benefits from liberalization of the agricultural sector
In this case the question arises about who will maintain the buffer stock how will we
smoothen the price fluctuations how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out how will farmers get signals that in the future there will
be a great need for wheat or rice In all these aspects the futures market has a very big role to
play
If you think there will be a shortage of wheat tomorrow the futures prices will go up today
and it will carry signals back to the farmer making sowing decisions today In this fashion a
system of futures markets will improve cropping patterns
44
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Next if I am growing wheat and am worried that by the time the harvest comes out prices
will go down then I can sell my wheat on the futures market I can sell my wheat at a price
which is fixed today which eliminates my risk from price fluctuations These days
agriculture requires investments -- farmers spend money on fertilizers high yielding
varieties etc They are worried when making these investments that by the time the crop
comes out prices might have dropped resulting in losses Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices
The third is the role about storage Today we have the Food Corporation of India which is
doing a huge job of storage and it is a system which -- in my opinion -- does not work
Futures market will produce their own kind of smoothing between the present and the future
If the future price is high and the present price is low an arbitrager will buy today and sell in
the future The converse is also true thus if the future price is low the arbitrageur will buy in
the futures market These activities produce their own optimal buffer stocks smooth prices
They also work very effectively when there is trade in agricultural commodities arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets
Benefits to Industry from Futures trading
Hedging the price risk associated with futures contractual commitments
Spaced out purchases possible rather than large cash purchases and its storage
Efficient price discovery prevents seasonal price volatility
Greater flexibility certainty and transparency in procuring commodities would aid bank
lending
Facilitate informed lending
Hedged positions of producers and processors would reduce the risk of default faced by
banks
Lending for agricultural sector would go up with greater transparency in pricing and
storage
Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households
Provide trading limit finance to Traders in commodities Exchanges
45
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Benefits to Exchange Member
Access to a huge potential market much greater than the securities and cash market in
commodities
Robust scalable state-of-art technology deployment
Member can trade in multiple commodities from a single point on real time basis
Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met like bank credit information dissemination etc
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities At micro level also they provide several economic benefits to several different
sections of the society For example it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market Further after entering into an export contract it enables
him to hedge his risk by operating in futures market Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts
46
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
CHAPTER 2
NEED SCOPE
amp
OBJECTIVES
47
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
48
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
23 NEED OF THE STUDY
To create a world class commodity exchange platform for the market participants To bring
professionalism and transparency into commodity trading To include international best
practices like Demutualization technology platforms low cost solutions and information
dissemination without noise etc into our trade To provide nation wide reach and consistent
offering To bring together the names that market can trust
22 SCOPE OF THE STUDY
The area selected for my study is Karvy Stock Broking Company Ltd Bathinda from where
I filled questionnaires from customers of the karvy
21 OBJECTIVES OF STUDY
To study the awareness about commodity market
To know the nuances of commodities market in India
To study the growth of commodities future market
To know the working and structure of commodities exchanges in India
To discuss the available risk management tools
49
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
CHAPTER-3
REVIEW
OF LITERATURE
50
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
3 REVIEW OF LITERATURE
Few studies are available on the performance and efficiency of Indian commodity futures
market In spite of a considerable empirical literature there is no common consensus about
the efficiency of commodity futures market
31 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management The study
found some aspects to blame for deficient market such as poor management infrastructure
and logistics
33 Dominance of spectators also dejects hedgers to participate in the market Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges transparency and trading activity
The volume and value of commodity trade has shown unpredicted mark This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price
34 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities
35 Kamal (2007) concluded that in short span of time the commodity futures market has
achieved exponential growth in turnover He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing export and processing and the interests involved in their
actual production
36 K Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors Mutual Funds and banks in commodity derivative markets She found
51
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification
37 Arup et al (2008) to facilitate business development and to create market awareness
they conducted an index named MCX COMAX for different commodities viz agricultural
metal and energy traded on Multi Commodity Exchange in India By using weighted
geometric mean of the price relatives as the index weights were selected on the basis of
percentage contribution of contracts and value of physical market With weighted arithmetic
mean of group indices the combined index had been calculated It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers
38 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities Indian futures market has achieved sizeable growth Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities
39 Gurbandani and DN (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market
310 By applying autocorrelation and run tests on four commodities namely-Guar seed
Pepper Malbar refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation Indian agricultural commodity market
is efficient in week form of efficient market hypothesis
52
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Chapter ndash 4
RESEARCH
METHODOLOGY
53
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
41 RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge
According to Redman and Moray ldquoresearch is a systematized effort to gain new
knowledgerdquo
Research methodology
Research Methodology describes the research procedure This includes the overall research
design the sampling procedure the data-collection methods
1 Research Design
Research Design is the conceptual structure within which research is conducted It
constitutes the blueprint for collection measurement and analysis of data The design
used for carrying out this research is Descriptive A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study
2 Data Collection
Through both the primary and secondary methods
Primary data collection
1) Survey through a questionnaire
Secondary sources
1) Financial newspapers magazines journals reports and books
2) Interaction with experts and qualified professionals
3) Internet
3 Sampling plan
a) Sample Area
Bathinda
54
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
b) Sample size
The sample size is 60
c) Sampling technique
The simple random sample method is used
LIMITATIONS OF STUDY
No study is complete in itself however good it may be and every study has some limitations
Following are the limitations of my study
Time constraint
Unwillingness of respondents to reveal the information
Sample size is not enough to have a clear opinion
Lack of awareness about commodity market among respondents
Since the data collection methods involve opinion survey the personal bias may
influence the study due to the respondentsrsquo tendency to rationalize their views
55
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
CHAPTER 5-
DATA ANALYSIS
amp INTERPRETATION
56
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
DATA ANALYSIS amp INTERPRETATION
Q 1 You are aan
Table no-51
You are aan
Options No of responses Percentage
Broker 18 30
Investor 30 50
Financial expert 12 20
Total 60 100
Diagrammatically Presentation
Figure no- 51
You are aan
Interpretation- From the above data collected it is found that majority of the brokers having
knowledge Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE There are a number of private investment companies which are investing in
commodities through MCX and NCDEX
57
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 2 You are investing in------------
Table no- 52
You are investing in------------
Options No of responses Percentage
Shares amp Bonds 24 375
Derivatives 5 100
Commodities 16 2666
All of the above 10 1666
None 5 5
Total 60 100
Diagrammatically Presentation
Figure- 52
You are investing in------------
Interpretation - Majority of investors are investing in Share market but growth of
commodity market can be seen as in such a small time the number of investors is 16 ie share
of 2666 and some who are investing in all option of Capital Market
58
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 3 Degree of knowledge in commodities market
Table ndash 53
Degree of knowledge in commodities market
Options No of responses Percentage
Very High (8-10) 8 1333
High (6-8) 10 1666
Moderate (4-6) 20 3000
Low 10 2000
Very Low 12 2000
Total 60 100
Diagrammatically Presentation
Figure- 53
Degree of knowledge in commodities market
Interpretation- Being a new concept the knowledge of people is moderate or less only
1333 people have high knowledge
59
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 4 Are you trading in commodity market
Table no-54
Are you trading in commodity market
Options No of responses Percentage
Yes 42 90
No 1 10
Total 43 100
Diagrammatically Presentation
Figure-54
Are you trading in commodity market
Interpretation -Commodity market is certainly a very gilt market to invest because 90 of
people investing in it
60
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 5 Why you have not ever invested in Commodity Market
Table no-55
Why you have not ever invested in Commodity Market
Options No of responses Percentage
Lack of Awareness 3 5000
New Concept 1 1600
Less broker initiative 0 000
Risk 2 3333
Total 6 100
Diagrammatically Presentation
Figure- 55
Why you have not ever invested in Commodity Market
Interpretation- Lack of awareness is the major factors among the investors to not to trade in
the commodities
61
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 6 In future in which commodities you want to invest in Future
Table no- 56
Future of commodity investment by people
Options No of responses Percentage
Bullions (Gold amp Silver) 3 5333
Heavy Metals 1 1666
Agro- Commodities 1 1500
Energy 1 1500
Total 6 100
Diagrammatically Presentation
Figure-56
Future of commodity investment by people
Interpretation-Most of the people like to invest to in the Bullions as compared to other
commodities
62
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 7 You are trading through ______________________
Table- 57
People Trading Through
Options No of responses Percentage
LSE 35 5833
Master Trust 10 1666
Kotak 7 1166
Apollo Sindhoori 8 1333
Total 60 100
Diagrammatically Presentation
Figure- 57
People Trading Through
Interpretation- LSE is hot favorite among the investors to invest as 5833 investors are
investing through LSE
63
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 8 From how much time you are trading
Table - 58
From how much time you are trading
Options No of responses Percentage
Less than 1 month 8 1333
1 to 3 months 42 7000
3 to 6 months 4 666
More than 6 months 6 1000
Total 60 100
Diagrammatically Presentation
Figure - 58
From how much time you are trading
Interpretation- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions
64
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 9 In which commodities you are investing
Table ndash 59
Commodities in which you are investing
Options No of responses Percentage
Bullions (Gold amp Silver) 20 4000
Heavy Metals 6 1200
Agro commodities 5 833
Energy 15 2500
Total 46 85
Diagrammatically Presentation
Figure-59
Commodities in which you are trading
Interpretation-Mostly the investors are investing in Bullions (40) and the second
preference being Energy side (Crude Oil) with 25
65
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 10 What is the basis of trading
Table- 510
Basis of trading
Options No of responses Percentage
Arbitrage 6 1000
Speculation 2 333
Hedging 10 1667
Delivery 4 6669
All of above 38 6333
Total 60 100
Diagrammatically Presentation
Figure-510
Basis of trading
Interpretation- Survey shows that the investors are rational and selects the type which
offers maximum return They do not stick to a particular mode of trading
66
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 11 Growth of commodity market in India is
Table- 511
Growth of Commodity Market in India
Options No of responses Percentage
Very fast 15 2500
Fast 25 4166
Moderate 13 2166
Low 7 1168
Total 60 100
Diagrammatically Presentation
Figure- 511
Growth of commodity market in india
Interpretation- Almost 65 respondents have ticked the option of all of above all these
benefits are to Govt in indirect way The most important that is possibility of removal of
subsidy by the Govt
67
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 12 How Commodity Market helps in Market Development
Table- 512
Commodity Market helps in Market Development
Options No of responses Percentage
Price Fixation 5 833
Demand Forecasting 30 500
Social Security (Esp to Farmers) 10 1600
All of above 15 2500
Total 60 9933
Diagrammatically Presentation
Figure- 512
Commodity Market helps in Market Development
Interpretation- According to the survey Demand Forecasting (50) is most important tool
in the commodity market
68
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 13 Is Commodity Market is _________________ for Indian Economy
Table- 513
Commodity Market is _________________ for Indian Economy
Options No of responses Percentage
Perfect 5 833
Appropriate 30 5000
Unsuitable 10 1666
Cantrsquo Say 15 2500
Total 60 9999
Diagrammatically Presentation
Figure- 513
Commodity Market is _________________ for Indian Economy
Interpretation- The commodity market is appropriate (50) for the developing agro Indian
economy
69
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 14 How it will influence the Indian Economy
Table-514
Effect of commodity market in Indian market
Options No of responses Percentage
Proximity 12 20
Social security 7 1166
High return to Buyer amp seller 21 3500
Reducing Risk Buyer amp Seller 20 3333
Total 60 10199
Diagrammatically Presentation
Figure- 514
Effect of commodity market in Indian market
Interpretation- This shows that commodity market will reduce the risk (20) and increase
the return (21)
70
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
Q 15 Impact of Commodity market on Business Houses
Table- 515
Impact of Commodity market on Business Houses
Options No of responses Percentage
Increase in Revenues 9 1500
Development of Banks 21 3500
Risk management 15 2500
All of above 15 2500
Total 60 100
Diagrammatically Presentation
Figure- 515
Impact of Commodity market on Business Houses
Interpretation- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues Develop the bank manage the risk effectively
71
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
FINDINGS amp RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs
Government of India (GOI) is committed to strengthening the commodity markets
commodity exchanges and the regulatory authority through training and modernization
GOI will proceed cautiously It wants to encourage multi-commodity exchanges
Futures exchanges must gain the confidence of not only the users but also the
agriculturists the manufacturers the consumers and
The public at large through functional transparency and viability
Clearing guarantee and settlement procedures are important Commodity exchanges are
bound to succeed over time with well designed contracts appropriate technology and
marketing of their services
Regulations are an integral part of futures markets Monitoring and surveillance are
extremely important functions The regulatory authority must be strong but not over-
intrusive The commodity exchanges should provide first level of regulation on a day-to-
day basis
Banks have a critical role to play in the development of commodity futures They need to
provide not only the money but also services With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing For this the banks would need to acquire appropriate skills
Information need of commodity futures markets is not fulfilled Even though government
collects useful information it is not timely There are also good business prospects for the
private sector to provide timely and relevant information
Training for all those connected with commodity futures is absolutely essential Training
needs for every level have to be identified The levels of training have to be different for
different groups and training may have to be imparted in stages
The commodity exchanges outside India which have adopted online trading or screen
based trading have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts
Considering this aspect the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
membersclients the Indian commodity exchanges also stress on development of online
system prevailing now-days
72
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor
There should be more awareness programs for the rural sector people by advertising in
regional newspapers amp TV channels such as Doordarshan Akashvani etc
73
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market Such a practice would bring into the account
a clear picture of the impact of commodities related operations
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios Big individual
investors institutional investors mutual funds etc generally perform all these activities
No doubt that commodities growth towards the progress of economy is positive But
the problems confronting the commodity market segment are giving it a low customer
base The main problems that it confronts are unawareness and bit lot sizes etc these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places
74
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
BIBLOGRAPHY
BOOKS JOURNALS etc
1 NCFM modules
2 Sidhu HS ldquoOutlines of Indian Capital Marketrdquo
3 Indian commodity market review (MCX publications)
4 Capital market dealer modules ndash (NSE publications)
5 Investor education 2003 souvenir released by Ludhiana stock exchange
6 Empowering investors through education souvenir released by Bangalore stock exchange
7 the Indian commodity market derivatives in operation by Dr JN Dhankar
8 BCDE (BSE certificate module on derivatives BSE publications)
9 SEBI (Disclosure amp Investor Protection) guidelines 2005
10 Manual of SEBI act rules regulations guidelines circulars etc (Bharat publications
11 MCX Annual commodity market review
12 LSE Bulletin
13 SEBI Bulletin
14 Listing agreement on commodity exchanges
WEBSITES
wwwncdexindiacom
wwwmcxindiacom
wwwsebigovin
wwwwikipediacom
75
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
APPENDIX
QUESTIONNAIRE
1 You are aan
a) Brokerhelliphelliphelliphelliphelliphellip
b) Investorhelliphelliphelliphelliphellip
c) Financial experthelliphellip
2 You are investing in ________
a) Shares and Bondshelliphelliphelliphelliphellip
b) Derivativeshelliphelliphelliphelliphelliphelliphellip
c) Commoditieshelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphellip
e) Nonehelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
3 Degree of knowledge in commodities market
a) Very high (8-10)helliphelliphelliphelliphelliphellip
b) High (6-8)helliphelliphelliphelliphelliphelliphelliphellip
c) Moderate (4-6)helliphelliphelliphelliphelliphellip
d) Low (2-4)helliphelliphelliphelliphelliphelliphelliphellip
e) Very low (0-1)helliphelliphelliphelliphelliphellip
4 Are you trading in commodity market
a) Yeshelliphelliphellip
b) Nohelliphelliphellip
5 If lsquoNorsquo Why you have not ever invested in Commodity Market
a) Lack of awarenesshelliphelliphelliphellip
b) New concepthelliphelliphelliphelliphelliphellip
c) Less broker initiativehelliphelliphellip
d) Risk factorhelliphelliphelliphelliphelliphelliphellip
6 Which commodities would you like to invest in Future
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshelliphelliphelliphelliphellip
d) Energyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
7 You are trading through _________
a) LSEhelliphelliphelliphelliphelliphelliphelliphellip
b) Master trusthelliphelliphelliphelliphellip
76
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
c) Kotakhelliphelliphelliphelliphelliphelliphellip
d) Apollo sindhoorihelliphelliphellip
8 If yes from how much time you are trading
a) Less than 1 monthhelliphelliphellip
b) 1-3 monthshelliphelliphelliphelliphelliphellip
c) 3-6 monthshelliphelliphelliphelliphelliphellip
d) More than 6 monthshelliphellip
9 In which commodities you are investing
a) Bullionhelliphelliphelliphelliphellip
b) Heavy metalshelliphelliphellip
c) Agro commoditieshellip
d) Energyhelliphelliphelliphelliphelliphellip
10 What is the basis of trading
a) Hedginghelliphelliphelliphelliphellip
b) Speculationhelliphelliphelliphellip
c) Arbitrationhelliphelliphelliphellip
d) Deliveryhelliphelliphelliphelliphellip
e) All of the abovehelliphellip
11 Growth of commodity market in India is
a) Very fasthelliphelliphelliphelliphelliphelliphelliphellip
b) Fasthelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) Moderatehelliphelliphelliphelliphelliphelliphelliphellip
d) Lowhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
e) Very lowhelliphelliphelliphelliphelliphelliphelliphellip
12 How Commodity Market helps in Market Development
a) Price fixationhelliphelliphelliphelliphelliphellip
b) Demand forecastinghelliphelliphelliphellip
c) Social securityhelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphellip
13 Commodity Market is _________________ for Indian Economy
a) Perfecthelliphelliphelliphelliphellip
b) Appropriatehelliphelliphellip
c) Unsuitablehelliphelliphelliphellip
d) Canrsquot sayhelliphelliphelliphellip
77
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78
14 How it will influence the Indian Economy
a) Proximityhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) Social securityhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) High return to buyer and sellerhelliphelliphellip
d) Reducing risk for buyer and sellerhelliphellip
15 Impact of Commodity market on Business Houses
a) Increase in revenuehelliphelliphelliphelliphelliphelliphelliphellip
b) Development of bankshelliphelliphelliphelliphelliphellip
c) Provides platformhelliphelliphelliphelliphelliphelliphelliphellip
d) All of the abovehelliphelliphelliphelliphelliphelliphelliphelliphellip
78