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Transcript of Darshana Patel.ty Bba
A
Project Report
On
A STUDY OF A COMMODITY MARKETUndertaken at:
Submitted in partial fulfillment of the degree ofBachelor of Business Administration (BBA)
S. S. Agrawal College of Arts, Commerce andManagement, Navsari.
Submitted by:
PATEL DARSHANA BGuided by
MRS. JAYA DAKHWANI.Academic Year (2012S-2013)
1
Declaration:
I, the undersigned Patel Darshana B., a student of T.Y.BBA of S.S Agrawal
college of Arts, Commerce and Management, Navsari hereby declare that all
the research and information in the project report on ‘‘STUDY OF A
COMMODITY MARKET” is entirely outcome of my own efforts and it has
not been submitted either in part or whole to any other university or institute
for any purpose.
Date: Patel Darshana B.
T.Y.BBA (Finance)
Roll No:- 12
2
Acknowledgment
The project report on “STUDY OF A COMMODITY MARKET” was taken
in partial fulfillment of BBA. Here I wish to express my sincere thankfulness
to those people who helped me throughout my project work.
First of all, I would like to thanks Dr.U.T Desai, the director of S.S Agrawal
College & Mrs.Viashali Parekh, the principal of our college, for allowing me
to undergo my project work.
I am greatly thankful to Mrs.Jaya Dakhwani, the project guides whose
encouragement, guidance and teaching has given a new insight of the
project.
And finally my sincere thanks goes to my family, friend who has helped me
in my project, without their blessing and support this project might not be
successful.
Patel Darshana B.
3
EXECUTIVE SUMMARY
One of the interesting developments in financial market over the last 15 to
20 years has been the growing popularity of derivatives. In many situations,
both hedgers and speculators find it more attractive to trade a derivative on
an asset, commodity than to trade asset and commodity itself. Some
commodity derivatives are traded on exchanges. In this report I have
included history of commodity market. Than I have included commodity
market in India. And after that I have discussed the mechanism of trading in
commodity market in India. In this report I have taken a first look at
forward, futures and options contract and other risk management
instruments. Than after I have discuss the main components of future
commodity trading like contract size, what actual margin is and delivery
system etc. There are mainly three types of traders: hedgers, speculators and
arbitrageurs. In the next section I discuss about the two major commodity
exchanges in India that is MCX AND NCDEX. How they are worked for
developing this commodity market in India. And I have also given the list of
other commodity exchanges in India. Put / call ratio (P/C Ratio) is a market
sentiment indicator that shows the relationship between the numbers of put
to calls traded. One can use put/call ratio as market indicator .Then after I
have discussed about the present scenario of commodity market in India.
In the next I have tried to analyze the trading pattern and investment pattern
of commodity traders and other investors. This I have done through the help
of questionnaire, which contains 15 questions. On the basis of different
charts prepared, I have at the end given the research findings and conclusion.
4
INDEX
Sr No Name of Chapter
1 Title page
2 College certificate
3 Project completion certificate
4 Declaration
5 Acknowledgment
6 Table of content Page No
7 Industry profile 7
8 Company profile 10
9 Research Methodology 74
10 Data analysis and Interpretation 79
11 Finding & Conclusion 91
12 Bibliography 94
13 Annexure 95
5
INTRODUCTION
6
INTRODUCTION
Instability of commodity prices has always been a major concern of the
producers as well as the consumers in an agriculture dominated country like
India. Farmers’ direct exposure to Price fluctuations; for instance, makes it
too risky for many farmers to invest in otherwise Profitable activities. There
are various ways to cope with this problem. Apart from increasing the
stability of the market, various factors in the farm sector can better manage
their activities in an environment of unstable prices through derivative
markets. These markets serve a risk -shifting function, and can be used to
lock -in prices instead of relying on uncertain price developments. There are
a number of commodity-linked financial risk management
instruments,which are used to hedge prices through formal commodity
exchanges, over -the-counter(OTC) market and through intermediation by
financial and specialized institutions who extend risk management services.
(See UNCTAD, 1998 for a comprehensive survey of instruments) These
instruments are forward, futures and option contracts, swaps and commodity
linked -bonds. While formal exchanges facilitate trade in standardized
contracts like futures and options, other instruments like forwards and swaps
are tailor made contracts to suit to the requirement of buyers and sellers and
are available over-the counter .In general, these instruments are classified
based on the purpose for which they are primarily used for price hedging, as
part of a wider marketing strategy, or for price hedging in combination with
other financial deals. While forward contracts and OTC options are trade
related instruments, futures, exchange traded options and swaps between
banks and customers are primarily price hedging instruments. In the case of
7
swaps between intermediaries and producers, and commodity linked loans
and bonds (CL&BS) price hedging are combined with financial deals.
Forwards contracts are mostly OTC agreements to purchase or sell a specific
amount of a commodity on a predetermined future date at a predetermined
price. The terms and conditions of a forward contract are rigid and both the
parties are obligated to give and take physical delivery of the commodity on
the expiry of contract. The holders of forward contracts face spot (ready)
price risk. When the prevailing spot price of the underlying commodity is
higher than the agreed price on expiry of the contract, the buyer gains and
the seller looses. The futures contracts are refined version of forwards by
which the parties are insulated from bearing spot risk and are traded in
organize exchanges.
Both forwards and futures contracts have specific utility to commodity
producers, merchandisers and consumers. Apart from being a vehicle for
risk transfer among hedgers and from hedgers to speculators, futures markets
also play a major role in price discovery.
8
Typology of risk management instruments
The price risk refers to the probability of adverse movements in
prices of commodities, services or assets. Agricultural products, unlike
others, have an added risk. Many of them being typically seasonal would
attract only lower price during the harvest season. The forward and futures
contracts are efficient risk management tools, which insulate buyers, and
sellers from unexpected changes in future price movements. These contracts
enable them to lock-in the prices of the products well in advance. Moreover,
futures prices give necessary indications to producers and consumer s about
the likely future ready price and demand and supply conditions of the
commodity traded. The cash market or ready delivery market on the other
hand is a time-tested market system, which is used in all forms of business
to transfer title of goods.
9
COMPANY PROFILE
10
COMPANY PROFILE
4.1 NAME OF THE COMPANYMARWADI SHARES & FINANCE LTD.
4.2 LOGO OF THE COMPANY
4.3 VISION OF THE COMPANY
“To be a world class financial services provider by arranging all
conceivable financial services under one roof at affordable price
through cost-effective delivery systems and achieve organic growth in
business by adding newer lines of business.”
4.4 COMPANY PROFILE:
Marwadi Sales and Finance P. Ltd. started in the year 1994
when acquired membership of National Stock Exchange of India Ltd. That
was the time when Govt. had just started liberalization. Capital market being
at the base of every thing else was among the first few sectors taken up for
11
liberalization and alignment with global benchmarks. NSE was therefore a
result of Government’s policy to modernize stock market and give our
investors a cost - effective trading and settlement system They enter into the
stock market coincided with Government's initiative to give a modem stock
exchange. Marwadi had then very presciently felt that this development
would change the very structure and content of the market. Then, when
Depository system was introduced to automate the settlement system, we
became the first Corporate DP in 1998 to bring this concept to investor's
doorstep in Saurashtra. Marwadi had very early on seen that the future lay in
the ability to network and use technology to its fullest possible extent.
Relying on your judgment, we used technology extensively which
resulted in efficient client servicing. It also saw the synergy that lay in
providing a bouquet of services under one roof. It is this realization that led
us in the year 2003 to go for membership of National Level Commodity
Exchanges, which were set up as part of Govt's policy to bring commodity
Market on par with the capital market in terms of integrity and practices.
They bold initiatives starting with our journey from capital market up to
commodities market has given us synergies in operations, enabling us to
pass on the advantage to customers. As an organization, have achieved a
leader's position by ensuring total satisfaction of customers through world
class services.
Utilize ultra modern technology for timely, seamless and accurate data
processing. Proactively seek customer’s feedback in improving upon our
service delivery modes. Promptly respond to customer issues in order to
maximize client’s satisfaction.
12
4. 5 HIRARCHY STRUCTURE
4.6 COMPANY INFORMATION:Name: Marwadi Shares & Finance Ltd.Head Office: Marwadi Financial CenterNr. Kathiawad GymkhanaDr. Radhakrishnana RoadRajkot – 360 001C.E.O.: Mr. Jeyakumar A. S.Directors: Mr. Ketan MarwadiMr. Deven MarwadiMr. Sandeep MarwsadiGeneral Manager: Mr. Hareshbhai ManiarE-Mail: [email protected] Site: www.marwadionline.com
4.7 COMPANY’S MILESTONE:
1992: Marwadi Shares And Finance Pvt. Ltd. was incorporated
1996: Became a corporate member of national Stock Exchange of India.
1998: Became a member of Saurashtra Kutch Stock Exchange.
13
1999: Launched Depository services of Depository Participant under
National Securities Depository Ltd.
2000: Commenced Derivative Trading after obtaining registration as a
Clearing and Trading Member in NSE
2003: (MCBPL) became a corporate member of The National Commodity
and Derivatives Exchange of India Ltd.
2004: Became a corporate member of The Stock Exchange, Mumbai.
2004: Launched Depository Services of Depository Participant under
Central Depository Services (India) Ltd.
2006: MSFPL converted to Public Limited (Marwadi Shares And Finance
Limited)
4.8 MEMBERSHIP:
Capital Market:
National Stock Exchange of India Ltd.
Bombay Stock Exchange Ltd.
Saurashtra-Kutch Stock Exchange Ltd.
Over-the-Counter Exchange of India Ltd.
Commodities Derivatives:
National Commodity & Derivatives Exchange Ltd.
Multi Commodity Exchange of India Ltd.
Depository Operations:
National Securities Depositories Ltd. (NSDL)
Central Depository Services (India) Ltd.
14
4.9 SERVICES OF MARWADI:
Stock broking:
Cash Market
Derivatives Trading
Margin Trading
Internet Trading
Commodities Broking:
Commodities Futures
Financing Against Commodities
Depository Service:
NSDL
CDSL
IPO Subscription Services
Mutual Fund Products
Portfolio management
Insurance Services
Qualitative Research in Stock & Commodities
4.10 Products & Services offers:
Equity & Derivatives:
Can look for an easy and convenient way to invest in equity and take
positions in the futures and options market using their research and tools. To
15
start trading in Equity, all you need to do is open an online trading account.
You can call them and they will have their representative meet you. You can
get help opening the account and get guidance on how to trade in Equity.
Commodity:
You can enter the whole new world of commodity futures. Investors
looking for a Fast-paced dynamic market with excellent liquidity can NOW
trade in Commodity Futures Market. The Commodity Exchange is a Public
Market forum and anyone can play in these vital Commodity Markets.
Marwadi Commodity Broker (P) Ltd can certainly be your point of entry to
the Commodity Markets. Marwadi is a registered trading-cum-clearing
member of NCDEX and MCX.
Internet Trading
Making the right trade at the right time! E-Broking service, which brings
you experience of online buying and selling of shares with just a click. A
detail resource like live quotes, charts, research and advice helps you take
proper decisions. Their robust risk management system and 128 bit
encryption gives you a complete security about money, shares, and
transaction documents.
IP0:
Marwadi offer bidding for all booked bills IPOs being floated through
NSE network.Marwadi offer services to customer such as advises on the
minimum lot to applied incase of refer and details and data to be furnished
into IPO form.Marwadi scripts even fill up the form for related clients
Marwadi offer bidding services at all major location in Saurashtra and Kutch
there by enabled the interline investors to subscribes qualitative IPOs.
16
Mutual Funds:
Transact in a wide range of Mutual Funds. Mutual Funds are an
attractive means of Saving taxes and diversifying your investment portfolio.
So if you are looking to invest in mutual funds, Marwadi offers you a host of
mutual fund choices under one roof; backed by in-depth information and
research to help you invest smartly.
PMS:
Can you analyze the prices of 1,500 shares every morning? Can you
afford to gamble? Only on the recommendations from your friends and the
information overload from magazines and financial dailies? And, of course,
more importantly, if you happen to be a High Net worth Individual, do you
have the time to judge which advice is reliable, authentic and has the least
chance of failure? With Marwadi PMS, you can be assured that your
investments are in safe hands! Give your portfolio the expert edge to
smoothly steer towards wealth creation.
Cash Market Services:
Marwadi also provide F & O market to all clients in to entire Saurashtra
and Kutch region, Which they cover through, distributed cover. Marwadi
offer cash market trading services for the both retail and in station clients at
all the certain Saurashtra and Kutch where placed either a branch or
franchise or sub broker.
4.11 THE COMPLETE INVESTMENT DESTINATION:
It provides comprehensive range of investment services. That’s
advantage of having all the services investor need under one roof.
17
Stock broking:
It offers complete range of pre-trade and post-trade services on the BSE
and the NSE. Whether an investor come into its conveniently environment,
or issue instruction over the Phone, its highly trained team and sophisticated
equipment ensure smooth transactions and prompt services.
E-Broking and Web-Based Services:
It is one of the offers online trading on site www.marwadionline.com,
high bandwidth leased lines, secure services and a customs-built user
interface give you an international standards trading experience. It also gives
regular trading hours, and access to information, analysis of information, and
a range of monitoring tools.
Trading Terminals-Money pore Express:
It offer its sub-broker and approved/authorized user fully equipped trading
terminals- Money pore Express, at the location of investors choice. It is fully
functional terminal, with a variety of helpful features like market watch,
order entry, order confirmation, charts, and trading calls, all available in
resizable windows. And it can be operated through the keyboard using F1
for buy, F2 for sell.
Depository Participant Services:
It offers DP services mean hassle-free, speedy settlements. It is depository
participants with NSDL and CDSL.
Premium Research Services:
Its research team offers a package of fee-based services, including daily
technical analysis, research reports, and advice on clients existing
investments. It is research beyond desk and company-provider reports. If
you have an equity portfolio, you know that the pace of life in the world of
18
stocks and shares is frantic. Managing your portfolio means you have to take
firm, informed decisions, and quickly!
4.12 BRANCHES:
Marwadi has spread throughout Gujarat state with our 28 branches and
now taking on Pan - India mantle with branches, now having come up in
Hyderabad, Chennai Bangalore, Pune, Nasik, Kolhapur and Delhi. More
out-of-Gujarat branches are on the anvil in order to be a conspicuous player
at national level. As on today they are serving about 75,000 clients spread
out over 554 pin code locations through a network of about 300
intermediaries such as sub-brokers, franchisees and authorized persons.
19
Also other branches of Marwadi in different cities like…..
Ahmadabad Jamnagar
Amreli Junagadh
Anand Keshod
Baroda Manavadar
Bhavnagar Mithapur
Bhuj Mumbai
Delhi Okha
Dhoraji Porbandar
Dhangadhra Surat
Gondal Surendranagar
Gandhidham Veraval
20
5. ABOUT THE COMMODITY
5.1 INTRODUCTION
Keeping in view the experience of even strong and developed economies
of the world, it is no denying the fact that financial market is extremely
volatile by nature. Indian financial market is not an exception to this
phenomenon. The attendant risk arising out of the volatility and complexity
of the financial market is an important concern for financial analysts. As a
result, the logical need is for those financial instruments which allow fund
managers to better manage or reduce these risks.
The emergence of the market for derivative products, most notably
forwards, futures and options, can be traced back to the willingness of risk-
averse economic agents to guard themselves against uncertainties arising out
of fluctuations in asset prices. By their very nature, the financial markets are
marked by a very high degree of volatility. Through the use of derivative
products, it is possible to partially or fully transfer price risks by locking–in
asset prices. As instruments of risk management, these generally do not
influence the fluctuations in the underlying asset prices. However, by
locking-in asset prices, derivative products minimize the impact of
fluctuations in asset prices on the profitability and cash flow situation of
risk-averse investors
.
5.2 COMMODITIES
Organized futures market evolved in India by the setting up of "Bombay
Cotton Trade Association Ltd." in 1875. In 1893, following widespread
21
discontent amongst leading cotton mill owners and merchants over the
functioning of the Bombay Cotton Trade Association, a separate association
by the name "Bombay Cotton Exchange Ltd." was constituted. Futures
trading in oilseeds was organized in India for the first time with the setting
up of Gujarati Vyapari Mandali in 1900, which carried on futures trading in
groundnut, castor seed and cotton. Before the Second World War broke out
in 1939 several futures markets in oilseeds were functioning in Gujarat and
Punjab.
A three-pronged approach has been adopted to revive and revitalize the
market. Firstly, on policy front many legal and administrative hurdles in the
functioning of the market have been removed. Forward trading was
permitted in cotton and jute goods in 1998, followed by some oilseeds and
their derivatives, such as groundnut, mustard seed, sesame, cottonseed etc.
in 1999. A statement in the first ever National Agriculture Policy, issued in
July, 2000 by the government that futures trading will be encouraged in
increasing number of agricultural commodities was indicative of welcome
change in the government policy towards forward trading.
Secondly, strengthening of infrastructure and institutional capabilities of
the regulator and the existing exchanges received priority. Thirdly, as the
existing exchanges are slow to adopt reforms due to legacy or lack of
resources, new promoters with resources and professional approach were
being attracted with a clear mandate to set up dematerialized, technology
driven exchanges with nationwide reach and adopting best international
practices.
The year 2003 marked the real turning point in the policy framework for
commodity market when the government issued notifications for
22
withdrawing all prohibitions and opening up forward trading in all the
commodities. This period also witnessed other reforms, such as,
amendments to the Essential Commodities Act, Securities (Contract) Rules,
which have reduced bottlenecks in the development and growth of
commodity markets. Of the country's total GDP, commodities related (and
dependent) industries constitute about roughly 50-60 %, which itself cannot
be ignored.
Most of the existing Indian commodity exchanges are single commodity
platforms; are regional in nature, run mainly by entities which trade on them
resulting in substantial conflict of interests, opaque in their functioning and
have not used technology to scale up their operations and reach to bring
down their costs. But with the strong emergence of: National Multi-
commodity Exchange Ltd., Ahmedabad (NMCE), Multi Commodity
Exchange Ltd., Mumbai (MCX), National Commodities and Derivatives
Exchange, Mumbai (NCDEX), and National Board of Trade, Indore
(NBOT), all these shortcomings will be addressed rapidly. These exchanges
are expected to be role model to other exchanges and are likely to compete
for trade not only among themselves but also with the existing exchanges.
The current mindset of the people in India is that the Commodity exchanges
are speculative (due to non delivery) and are not meant for actual users. One
major reason being that the awareness is lacking amongst actual users. In
India, Interest rate risks, exchange rate risks are actively managed, but the
same does not hold true for the commodity risks. Some additional
impediments are centered on the safety, transparency and taxation issues.
23
5.3 WHY COMMODITIES MARKET? India has very large agriculture production in number of agri-
commodities, which needs use of futures and derivatives as price-risk
management system. Fundamentally price you pay for goods and services
depend greatly on how well business handle risk. By using effectively
futures and derivatives, businesses can minimize risks, thus lowering cost of
doing business.
Commodity players use it as a hedge mechanism as well as a means of
making money. For e.g. in the bullion markets, players hedge their risks by
using futures Euro-Dollar fluctuations and the international prices affecting
it.
For an agricultural country like India, with plethora of mandis, trading in
over 100 crops, the issues in price dissemination, standards, certification and
warehousing are bound to occur. Commodity Market will serve as a suitable
alternative to tackle all these problems efficiently.
5.4 COMMODITY FUTURES:
Commodity futures are simply the standard futures contracts traded
through exchange. These contracts have their respective commodity as
underlying asset and derive the dynamics from it. Such contracts allow the
participant to buy and sell certain commodity at a certain price for future
delivery. Futures trading is a natural outgrowth of the problem of
maintaining a year-round supply of seasonal products like agriculture crops.
The best thing about a commodity futures contract is that it is generally
24
leveraged giving opportunity to all types of investors to participate.
Characteristically, such a contract has an expiry and delivery attached with
it.
5.5 WHY TRADE IN COMMODITIES?
1. Big market-diverse opportunities
India, a country with a population of over one billion, has an economy based
on agriculture, precious metals and base metals. Thus, trading in
commodities provides lucrative market opportunities for a wider section of
participants of diverse interests like investors, arbitragers, hedgers, traders,
manufacturers, planters, exporters and importers.
2. Get to the sore
Commodity trading has been a breakthrough in expanding the investment
from investing in a metal company to trading in metal itself.
3. Huge potential
Commodity exchanges see a tremendous daily turnover of more than
Rs.15,000 cores. This gives a lunge potential to market participant to make
profits.
4. Exploitable fundamental
The fundamental for commodity trading is simple “price is a function of
demand and supply” so is hedging, by taking appropriate contract. This
makes things really easy to understand and exploit.
5. Portfolio diversifier
Commodity futures derive their prices from the underlying commodity and
25
commodity prices cannot become zero. Commodity has a global presence
and their prices move with global economics and hence, it’s a good portfolio
diversifier.
5.6 ADVANTAGE OF FUTURES TRADING Futures trading remove the hassles and costs of settlement and storage for
traders who do not want custody. Though, the most lucrative element of
futures trading is that it allows investors to participate and trade at nominal
costs at a much lesser amount: No longer need to put the whole amount for
trading; only the margin is required. No sales tax is applicable if the trade is
required off. Sales tax is applicable only if a trade results in delivery.
Traders can short sell. If a trader buys an equivalent contract back before the
contract expires, he will be able to profit from a falling price. This is
difficult in spot marketers because it requires the seller to borrow the
commodity. It is next to impossible for retail investors in case of something
like gold.
All participants trade exactly the same notional right i.e. those defined
on the standard contract, so the market grows deeper and more liquid in the
standard futures contract than in spot bullion where different qualities of
bullion exit, each of which has different prices. Greater liquidity provides a
reliable real-time price something which is absolutely not available in the
OTC bullion market.
5.7 CHARACTERISTICS OF FUTURES TRADING A "Futures Contract" is a highly standardized contract with certain
distinct features. Some of the important features are as under:
Futures’ trading is necessarily organized under the auspices of a market
association so that such trading is confined to or conducted through
26
members of the association in accordance with the procedure laid down in
the Rules & Bye-laws of the association. It is invariably entered into for a
standard variety known as the "basis variety" with permission to deliver
other identified varieties known as "tenderable varieties". The units of price
quotation and trading are fixed in these contracts, parties to the contracts not
being capable of altering these units.
The delivery periods are specified. The seller in a futures market has the
choice to decide whether to deliver goods against outstanding sale contracts.
In case he decides to deliver goods, he can do so not only at the location of
the Association through which trading is organized but also at a number of
other pre-specified delivery centers.
In futures market actual delivery of goods takes place only in a very few
cases. Transactions are mostly squared up before the due date of the contract
and contracts are settled by payment of differences without any physical
delivery of goods taking place.
5.8 COMMODITY DERIVATIVES IN INDIA
Commodity derivatives have a crucial role to play in the price risk
management process especially in any agriculture dominated economy.
Derivatives like forwards, futures, options, swaps etc are extensively used in
many developed and developing countries in the world. The Chicago
Mercantile Exchange; Chicago Board of Trade; New York Mercantile
Exchange; International Petroleum Exchange, London; London Metal
Exchange; London Futures and Options Exchange; Sidney Futures
Exchange; Singapore International Monetary Exchange; The Singapore
27
Commodity Exchange; Kuala Lumpur Commodity Exchange ; the Buenos
Aires Grain Exchange; Shanghai Metals Exchange; China Commodity
Futures Exchange; Beijing Commodity Exchange, etc are some of the
leading commodity exchanges in the world engaged in trading of derivatives
in commodities. However, they have been utilized in a very limited scale in
India Although India has a long history of trade in commodity derivatives,
this segment remained underdeveloped due to government intervention in
many commodity markets to control prices. The government controls the
production, supply and distribution of many agricultural commodities and
only forwards and futures trading are permitted in certain commodity items.
Free trade in many commodity items is restricted under the Essential
Commodities Ac, 195, and forward and futures contracts are limited to
certain commodity items under the Forward Contracts (Regulation) Act,
1952.
The first commodity exchange was set up in India by Bombay Cotton
Trade Association Ltd., and formal organized futures trading started in
cotton in 1875. Subsequently, many exchanges came up in different parts of
the country for futures trade in various commodities. The Gujarati Vyapari
Mandali came into existence in 1900, which has undertaken futures trade in
oilseeds first time in the country. The Calcutta Hessian Exchange Ltd and
East India Jute Association Ltd were set up in 1919 and 1927 respectively
for futures trade in raw jute. In 1921, futures in cotton were organized in
Mumbai under the auspices of East India Cotton Association. Many
exchanges came up in the agricultural centers in north India before world
war broke out and engaged in wheat futures until it was prohibited. The
exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc were established
during this period. The futures trade in spices was firs organized by IPSTA
28
in Cochin in 1957. Futures in gold and silver began in Mumbai in 1920 and
continued until the government prohibited it by mid-1950s. Later, futures
trade was altogether banned by the government in 1966 in order to have
control on the movement of prices of many agricultural and essential
commodities. Options are though permitted now in stock market, they are
not allowed in commodities. The commodity options were traded during the
pre-independence period. Options on cotton were traded until the along with
futures were banned in 1939. However, the government withdrew the ban on
futures with passage of Forward Contract (Regulation) Act in 1952.
After the ban of futures trade many exchanges went out of business and
many traders started resorting to unofficial and informal trade in futures. On
recommendation of the Khusro Committee in 1980 government reintroduced
futures on some selected commodities including cotton, jute, potatoes, etc.
Further in 1993 the government of India appointed an expert committee on
forward markets under the chairmanship of Prof. K.N. Kabra and the report
of the committee was submitted in 1994 which recommended the
reintroduction of futures already banned and to introduce futures on many
more commodities including silver. In tune with the ongoing economic
liberalization, the National Agricultural Policy 2000 has envisaged external
and domestic market reforms and dismantling of all controls and regulations
in agricultural commodity markets. It has also proposed to enlarge the
coverage of futures markets to minimize the wide fluctuations in commodity
prices and for hedging the risk emerging from price fluctuations. In line with
the proposal many more agricultural commodities are being brought under
futures trading. In India, currently there are 15 commodity exchanges
actively undertaking trading in domestic futures contracts, while two of
them, viz., India Pepper and Spice Trade Association (IPST), Cochin and the
29
Bombay Commodity Exchange (BCE) Ltd. have been recently upgraded to
international exchanges to deal in international contracts in pepper and
castor oil respectively. Another 8 exchanges are proposed and some of them
are expected to start operation shortly. There are 4 exchanges, which are
specifically approved for undertaking forward deals in cotton. More detailed
account of these exchanges has been presented.
The proposed study is primarily based on the visit of seven leading
exchanges viz., IPST Cochin, which deal in domestic and international
contracts in pepper; BCE Ltd., a Multy-commodity international exchange
where futures in castor oil, castor seed, sunflower oil, RBD Palmolein etc
are traded; The East India Cotton Association (EICA) Ltd., Bombay, which
is a specialized exchange dealing in forwards and futures in cotton; South
India Cotton Association (SICA , Coimbatore which deals in forward
contracts in cotton; Coffee Futures Exchange India Ltd., (COFEI) Bangalore
which undertakes coffee futures trading; Kanpur Commodity Exchange
(KCE) which deals with futures contracts in mustard oil and gur; and The
Chamber of Commerce, Hapur which undertakes futures trading in gur and
potatoes.
5.9 MECHANICS OF FUTURES TRADING
Futures are a segment of derivative markets. The value of a futures
contract is derived from the spot (ready) price of the commodity underlying
the contract. Therefore, they are called derivatives of spot market. The
buying and selling of futures contracts take place in organized exchanges.
The members of exchanges are authorized to carryout trading in futures. The
trading members buy and sell futures contract for their own account and for
30
the sac count of non-trading members and other clients. All other persons
interested to trade in futures contracts, as clients must get themselves
registered with the exchange as registered non-members.
5.10 WHAT IS A COMMODITY FUTURE EXCHANGE? Exchange is an association of members, which provides all organizational
support for carrying out futures trading in a formal environment. These
exchanges are managed by the Board of Directors, which is composed
primarily of the members of the association. There are also representatives
of the government and public nominated by the Forward Markets
Commission. The majority of members of the Board have been chosen from
among the members of the Association who have trading and business
interest in the exchange. The chief executive officer and his team in day-to-
day administration assist the Board. There are different classes of members
who capitalize the exchange by way of participation in the form of equity,
admission fee, security deposits, registration fee etc.
a. Ordinary Members: They are the promoters who have the right to have
own –account transactions without having the right to execute transactions
in the trading ring. They have to place orders with trading members or others
who have the right to trade in the exchange.
b. Trading Members: These members execute buy and sell orders in the
trading ring of the exchange on their account, on account of ordinary
members and other clients.
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c. Trading-cum-Clearing Members: They have the right to trade and also
to participate in clearing and settlement in respect of transactions carried out
on their account and on account of their clients.
d. Institutional Clearing Members: They have the right to participate in
clearing and settlement on behalf of other members but do not have the
trading rights.
e. Designated Clearing Bank: It provides banking facilities in respect of
pay-in, payout and other monetary settlements. The composition of the
members in an exchange however varies. In so many exchanges there are
exclusive clearing members, broker members and registered non -members
in addition to the above category of members.
5.11 WHAT IS COMMODITY FUTURES CONTRACT? Futures contracts are an improved variant of forward contracts. They are
agreements to purchase or sell a given quantity of a commodity at a
predetermined price, with settlement expected to take place at a future date.
While forward contracts are mainly over-the-counter and tailor-made which
physical delivery futures settlement standardized contracts whose
transactions are made in formal exchanges through clearing houses and
generally closed out before delivery. The closing out involves buying a
different times of two identical contracts for the purchase and sale o the
commodity in question, with each canceling the other out. The futures
contracts are standardized in terms of quality and quantity, and place and
date of delivery of the commodity. The commodity futures contracts in India
as defined by the FMC has the following features:
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(a) Trading in futures is necessarily organized under the auspices of a
recognized association so that such trading is confined to or conducted
through members of the association in accordance with the procedure laid
down in the Rules and Bye-laws of the association.
(b) It is invariably entered into for a standard variety known as the “basis
variety” with permission to deliver other identified varieties known as
“tender able varieties”.
(c) The units of price quotation and trading are fixed in these contracts,
parties to the contracts not being capable of altering these units.
(d) The delivery periods are specified.
(e) The seller in a futures market has the choice to decide whether to deliver
goods against outstanding sale contracts. In case he decides to deliver goods,
he can do so not only at the location of the Association through which
trading is organized but also at a number of other pre-specified delivery
centers.
(f) In futures market actual delivery of goods takes place only in a very few
cases.
Transactions are mostly squared up before the due date of the contract and
contracts are settled by payment of differences without any physical delivery
of goods taking place. The terms and specifications of futures contracts vary
depending on the commodity and the exchange in which it is traded. The
major terms and conditions of contracts traded in six sample exchanges in
India. These terms are standardized and applicable across the trading
community in the respective exchanges and are framed to promote trade in
the respective commodity For example, the contract size is important for
better management of risk by the customer. It has implications for the
amount of money that can be gained or lost relative to a given change in
33
price levels. I also affect the margins required and the commission charged.
Similarly, the margin to be deposited with the clearing house has
implications for the cash position of customers because it blocks cash for the
period of the contract to which he is a party the strength and weaknesses of
contract specifications are discussed under constraints and policy options.
5.12 WHO ARE THE PARTICIPANTS IN FUTURES MARKET?
Broadly, speculators who take positions in the market in an attempt to
benefit from a correct anticipation of future price movements, and hedgers
who transact in futures market with an objective of offsetting a price risk on
the physical market for a particular commodity make the futures market in
that commodity. Although it is difficult to draw a line of distinction between
hedgers and speculators, the former category consists of manufacturing
companies, merchandisers, and farmers. Manufacturing companies who use
the commodity as a raw material buy futures to ensure its uninterrupted
supply of guaranteed quality at a predetermined price, which facilitates
immunity against price fluctuations. While exporters in addition to using the
price discovery mechanism for getting better prices for their commodities
seek to hedge against their overseas exposure by way of locking-in the price
by way of buying futures contracts, the importers utilize the liquid futures
market for the purpose of hedging their outstanding position by way of
selling futures contracts. Futures market helps farmers taking informed
decisions about their crop pattern on the basis of the futures prices and
reduces the risk associated with variations in their sales revenue due to
unpredictable future supply demand conditions. Above all, there are a large
34
number of brokers who intermediate between hedgers and speculators create
the market for futures contracts.
5.13 COMMODITY ORDERS The buy and sell orders for commodity futures are executed on the
trading floor where floor brokers congregate during the trading hours
stipulated by the exchange. The floor brokers/trading members on receipt of
orders from clients or from their office transmits the same to others on the
trading floor by hand signal and by calling out the orders (in an open outcry
system they would like to place and price. After trade is made with another
floor broker who takes the opposite side of the transaction for another
customer or for his own account, the details of transactions are passed on to
the clearing house through a transaction slip on the basis o which the
clearinghouse verifies the match and adds to its records.
Following the experiences of stock exchanges with electronic screen
based trading commodity exchanges are also moving from outdated open
outcry system to automated trading system. Many leading commodity
exchanges in the world including Chicago Mercantile Exchange (CME),
Chicago Board of Trade (CBOT), International Petroleum Exchange (IPE),
London, have already computerized the trading activities. In India, coffee
futures exchange, Bangalore has already put in place the screen based
trading and many others are in the process of computerization. To add to
modernization efforts, the Bombay Commodity Exchange (BCE) has
initiated for a common electronic trading platform connecting all commodity
exchanges to conduct screen based trading. In electronic trading, trading
takes place through a centralized computer network system to which all buy
35
and sell orders and their respective prices are keyed in from various
terminals of trading members. The deal takes place when the central
computer finds matching price quotes for buy and sell. The entire procedural
steps involved in electronic trading beginning from placing the buy/sell
order to the confirmation of the transaction have been shown in figure -2.1
below.
Order and Execution flows in electronic future trade
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5.14 ROLE OF CLEARING HOUSE
Clearinghouse is the organizational set up adjunct to the futures exchange
which handles all back-office operations including matching up of each buy
and sell transactions, execution, clearing and reporting of all transactions,
settlement of all transactions on maturity by paying the price difference or
by arranging physical delivery, etc., and assumes all counterparty risk on
behalf of buyer and seller. It is important to understand that the futures
market is designed to provide a proxy for the ready (spot) market and
thereby acts as a pricing mechanism and not as part of, or as a substitute for,
the ready market. The buyer or seller of futures contracts has two options
before the maturity of the contract. First, the buyer (seller) may take (give)
physical delivery of the commodity at the delivery point approved by the
exchange after the contract matures. The second option, which distinguishes
futures from forward contracts is that, the buyer (seller) can offset the
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contract by selling (buying) the same amount of commodity and squaring off
his position. For squaring of a position, the buyer (seller) is not obligated to
sell (buy) the original contract. Instead, the clearinghouse may substitute any
contract of the same specifications in the process of daily matching. As
delivery time approaches, virtually all contracts are settled by offset as those
who have bought (long) sell to those who have sold (short). This offsetting
reduces the open position in the account of all traders as they approach the
maturity date of the contract. The contracts, if any, which remain unsettled
by offset until maturity date are settled by physical delivery. The
clearinghouse plays a major role in the process explained above by
intermediating between the buyer and seller. There is no clearinghouse in a
forward market due to which buyers and sellers face counterparty risk. In a
futures exchange all transactions are routed through and guaranteed by the
clearinghouse which automatically becomes a counterpart to each
transaction. It assumes the position of counterpart to both sides of the
transaction. It sells contract to the buyer and buys the identical contract from
the seller. Therefore, traders obtain a position vis -à-vis the clearing house. It
ensures default risk-free transactions and provides financial guarantee on the
strength of funds contributed by its members and through collection of
margins (discussed in section 2.3), marking-to-market all outstanding
contracts, position limits imposed on traders, fixing the daily price limits and
settlement guarantee fund.
The organizational structure and membership requirements of
clearinghouses vary from one exchange to the other. The Bombay
Commodity Exchange and Cochin pepper exchange have set up separate
independent corporations (namely, Prime Commodities Clearing
Corporation of India Ltd, and First Commodities Clearing Corporation of
38
India Ltd., respectively) for handling clearing and guarantee of all futures
transactions in the respective exchanges. While coffee exchange has clearing
house as a separate division of the exchange, many other exchanges like
Chamber of Commerce, Hapur; Kanpur Commodity Exchange and cotton
exchange in Bombay run in-house clearinghouse as part of the respective
exchanges. The clearing and guaranty are managed in these exchanges by a
separate committee (normally called the Clearing House Committee). The
membership in the clearinghouse requires capital contribution in the form of
equity, security deposit, admission fee, registration fee, guarantee fund
contribution in addition to net worth requirement depending on its
organizational structure. For example, in the Bombay Commodity Exchange
the minimum capital requirement for membership in its clearinghouse as
applicable to trading-cum-clearing members is Rs.50,000 each toward equity
and security deposit, Rs. 500 as annual subscription, and additionally,
members are required to have net worth of Rs.3 lakhs. Similarly, coffee
exchange prescribed Rs.5 lakh each towards equity and guarantee fund
contribution and Rs.40,000 towards admission fee for a trading-cum-
clearing member. However, in exchanges where clearing house is a part of
the exchange the payment requirements are lower. For example, Kanpur
Commodity Exchange prescribed only Rs.25,00,000 Rs.1000 and Rs.500
respectively towards security deposit, registration fee and annual fee for a
clearing cum-trading member. For ensuring financial integrity of the
exchange and for counterparty risk -free trade position (exposure) limits
have been imposed on clearing members. These limits which are stringent in
some cases and are liberal in other cases are normally linked to the
members’ contribution towards equity capital or security deposit or a
combination of both and settlement guarantee fund .In Bombay Commodity
39
Exchange the exposure limit of a clearing member is the sum of 50 times the
face value of contribution to equity capital of the clearinghouse and 30 times
the security deposit the member has maintained with the clearinghouse.
While coffee exchange prescribes the limit of 80 times the sum of member’s
equity investment and the contribution to the guarantee fund, the cotton
exchange, Bombay, has stipulated a liberal exposure limit on open positions.
It has a limit of 200 and 1500 units (recall that one contract unit is
equivalent to 93.5 quintals respectively for composite and institutional
members. The Cochin pepper exchange has fixed a net exposure limit of 60
units (equivalent to 1500 quintals) for domestic contract and 90 units
(equivalent to 2250 quintals) for international contract. Moreover, setting up
of settlement guarantee fund ensures enough financial strength in case the
clearinghouse faces default.
The Kanpur Commodity Exchange maintains a trade guarantee fund with
a corpus of Rs.100 lakhs while the coffee exchange in addition to a
guarantee fund the exchange has substituted itself as party to clear all
transactions. Yet another check on the possible default is through prescribing
maximum price fluctuation on any trading day, which helps limit the
probable profit/loss from each unit of transaction. The relevant data on
permitted price limit has been presented. Its clear from the table that the
maximum profit/loss potential from trade in each contract unit varies from as
low as Rs. 800 for potato futures in Chamber of Commerce, Hapur to as
high as Rs. 15,000 in pepper exchange, Cochin. Similarly, given the
permissible open position of 200 units for a trading-cum-clearing member
and maximum price fluctuation of Rs. 150 per 100 kg for cotton futures in
the cotton exchange, Bombay, the maximum potential loss/profit in a trading
day works out to be Rs.28.05 lakhs!
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Margins
Margins (also called clearing margins) are good -faith deposits kept
with a clearinghouse usually in the form of cash. There are two types of
margins to be maintained by the trader with the clearinghouse: initial margin
and maintenance or variation margins. Initial margin is a fixed amount per
contract and does not vary with the current value of the commodity traded.
Margins are deposited with the clearing house in advance against the
expected exposure of the trading member on his account and on account of
the clients. The member who executes trade for them in turn collects this
amount from the clients. Generally, the margin is payable on the net
exposure of the member. Net exposure is the sum of gross exposure (buy
quantity or sale quantity, whichever is higher, multiplied by the current price
of the contract) on account of trades executed through him for each of his
clients and gross exposure of trades carried out on his own account.
However, for squaring-off transactions carried out only at the clients’ level,
fresh margins are not required. The margin is refundable after the client
liquidates his position or after the maturity of the contract.
Maintenance margin which usually ranges from 60 to 80 per cent of
initial margin is also required by the exchange. Variation margin is to
compensate the risk borne by the clearinghouse on account of price volatility
of the commodity underlying the contract to which it is a counterparty. A
debit in the margin account due to adverse market conditions and consequent
change in the value of contract would lead to initial margin falling below the
maintenance level. The clearinghouse restores initial margin through margin
calls to the client for collecting variation margin. In case of an increase in
value of the contract, marking to market ensures that the holder gets the
41
payment equivalent to the difference between the initial contract value and
its change over the lifetime of the contract on the basis of its daily price
movements. If the member is not able to pay the variation margin, he is
bound to square off his position or else the clearinghouse will be liquidating
the position. The margins have important bearing on the success of futures.
As they are no interest bearing deposits payable to the clearinghouse up-
front working capital of any trading entity gets blocked to that extent. While
a higher margin requirement prevents traders from participating in trading, a
lower margin makes the clearinghouse vulnerable to any default due to its
weak financial strength otherwise. Internationally, many developed
exchanges maintain a low margin on positions due to their better financial
strength along with massive volume of trade resulting in large income
accruing to them. However, this has not been the case with many exchanges
in India. For example, as shown in table 2.2 the initial margin liability for
transacting the minimum lot size in pepper is Rs.30, 000 for domestic
contracts and US$ 312.50 for international contracts .Similarly, the volume
of transactions. These clearinghouses deal in many exchanges in India is
abysmally low making their existence financially unviable. Most of the
exchanges in additions to keeping mandatory margins maintain a settlement
guarantee fund. The fund set up with the contribution from members of
clearing house is used for guaranteeing financial performance of all
members. This fund absorbs losses not covered by margin deposits of the
defaulted member. The clearinghouse ensures this by settling the default
transactions by properly compensating the traders paying the amount of
difference at the closing out rate.
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Meaning of Derivatives The term "Derivative" indicates that it has no independent value, i.e.
its value is entirely "derived". A derivative is a financial instrument, which
derives its value from some other financial price. This “other financial price”
is called underlying. The most common underlying assets include stocks,
bonds, commodities, currencies, livestock, interest rates and market indexes.
A wheat farmer may wish to contract to sell his harvest at a future date
to eliminate the risk of a change in prices by that date. The price for such a
contract would obviously depend upon the current spot price of wheat. Such
a transaction could take place on a wheat forward market. Here, the wheat
forward is the “derivative” and wheat on the spot market is “the underlying”.
The terms “derivative contract”, “derivative product”, or “derivative” are
used interchangeably.
There are two broad types of derivatives:
Financial derivatives: - Here the underlying includes treasuries, bonds,
stocks, stock index, foreign exchange etc.
Commodity derivatives: – Here the underlying is a commodity such as
wheat, cotton, peppers, turmeric, corn, soybeans, rice crude oil etc.
5.15 TYPES OF DERIVATIVES
A derivative security can be defined as a security whose value depends
on the values of other underlying variables. Very often, the variables
underlying the derivative securities are the prices of traded securities.
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An example of a simple derivative contract:
Rohan buys a futures contract. He will make a profit of Rss. 1200 if the price
of Infosys rises by Rs. 1200. If the price is unchanged Ram will receive
nothing. If the stock price of Infosys falls by Rs. 1000 he will lose Rs. 1000.
As we can see, the above contract depends upon the price of the Infosys
scrip, which is the underlying security. Similarly, futures trading has already
started in Sensex futures and Nifty futures. The underlying security in this
case is the BSE Sensex and NSE Nifty.
There are basically 4 types of Derivatives and Futures:Forwards
Futures
Options
Swaps
1. FORWARD CONTRACT
A forward contract is an agreement to buy or sell an asset on a specified
date for a specified price. One of the parties to the contract assumes a long
position and agrees to buy the underlying assed on a certain specified future
date for a certain specified price. The other party assumes a short position
and agrees to dell the asset on the same date for the same price. Other
44
contract details like delivery date, price and quantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally
traded outside the exchanges.
The salient features of forward contracts are:They are bilateral contracts hence exposed to counter-party risk.
Each contract is custom designed, and hence is unique in terms of contract
size,
expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the
asset.
it has to compulsorily go to the same counter party, which often results in
high price being charged.
Limitation of forward market:
Forward market world-wide are afflicted by several problems:
Lack of centralization
Illiquidity
Counterparty risk
In the first two of these, the basic problem is that of too much flexibility
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 market trade standardized contracts, and hence
45
avoids the problem of illiquidity, still the counterparty risk remains very
serious issue.
IllustrationSahil wants to buy a Laptop, which costs Rs 30,000 but he has no cash to
buy it outright. He can only buy it 3 months hence. He, however, fears that
prices of laptop will rise 3 months from now. So in order to protect himself
from the rise in prices Sahil enters into a contract with the laptop dealer that
3 months from now he will buy the laptop for Rs 30,000. What Sahil is
doing is that he is locking the current price of a LAPTOP for a forward
contract. The forward contract is settled at maturity. The dealer will deliver
the asset to Sahil at the end of three months and Sahil in turn will pay cash
equivalent to the LAPTOP price on delivery.
FUTURES CONTRACT Futures markets were designed to solve the problems that exist in
forward market. 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. So, the counter party to a future contract is the clearing
corporation of the appropriate exchange. 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. Future contracts are often settled in cash or cash
equivalents, rather than requiring physical delivery of the underlying asset.
A futures contract may be offset prior to maturity by entering into an equal
46
and opposite transaction. More than 99% of futures transaction is offset this
way.
The standardized items in a futures contract are:
Quantity of the Underlying.
Quality of the Underlying.
The date and month of delivery.
The units of price quotation and minimum price change.
Location of settlement.
Distinction between futures and forwards contracts:
Forward contracts are often confused with futures contracts. The
confusion is primarily because both serve essentially the same economic
functions of allocating risk in the presence of future price uncertainty.
However futures are a significant improvement over the forward contracts as
they eliminate counterparty risk and offer more liquidity. The distinction
between futures and forwards are summarized below:
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OPTIONS CONTRACT
Option means several things to different people. It may refer to choice
or alternative or privilege or opportunity or preference or right. To have
option is normally regarded good. One is considered unfortunate without any
options. Options are valuable since they provide protection against
unwanted, uncertain happenings. They provide alternatives to bail out from a
difficult situation. Options can be exercised on the happening of certain
events. Options may be explicit or implicit. When you buy insurance on
your house, it is an explicit option that will protect you in the event there is a
fire or a theft in your house. If you own shares of a company, your liability
is limited. Limited liability is an implicit option to default on the payment of
debt.
Options have assumed considerable significance in finance. They can be
written on any asset, including shares, bonds, portfolios, stock indices
currencies, etc. They are quite useful in risk management. How are options
defined in finance? What gives value to options? How are they valued? An
option is a contract that gives the buyer the right, but not the obligation, to
buy or sell an underlying asset at a specific price on or before a certain date.
An option, just like a stock or bond, is a security. It is also a binding contract
with strictly defined terms and properties.
For example, that Rohit discover a bungalow that Rohit love to purchase.
Unfortunately, Rohit won't have the cash to buy it for another three months.
Rohit talk to the owner and negotiate a deal that gives Rohit an option to buy
the bunglow in three months for a price of Rs.20,00,000. The owner agrees,
but for this option, Rohit pay a price of Rs.50,000.
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.
Types of Options
There are two types of options:
Call Options: - It gives the holder the right to buy an asset at a certain price
within a specific period of time. Calls are similar to having a long position
on a stock. Buyers of calls hope that the stock will increase substantially
before the option expires.
Put Option: - It gives the holder the right to sell an asset at a certain price
within a specific period of time. Puts are very similar to having a short
position on a stock. Buyers of puts hope that the price of the stock will fall
before the option expires.
Participants in the Options Market
There are four types of participants in options markets depending on the
position they take:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of put
People who buy options are called holders and those who sell options are
called writers; furthermore, buyers are said to have long positions, and
sellers are said to have short positions.
Here is the important distinction between buyers and sellers:
Call holders and put holders (buyers) are not obligated to buy or sell.
They have the choice to exercise their rights if they choose.
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Call writers and put writers (sellers), however, are obligated to buy or
sell. This means that a seller may be required to make good on a
promise to buy or sell.
Terminology Associated With The Options Market.
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.
Listed Options: - An option that is traded on a national options exchange
such as the National Stock Exchange is known as a listed option. These have
fixed strike prices and expiration dates. Each listed option represents a
predetermined number of shares of company stock (known as a contract).
In-the-money Option: - An in-the-money (ITM) option is an option that
would lead to a positive cash flow to the holder if it were exercised
immediately. A call option on the index is said to be in-the-money when the
current index stands at a level higher than the strike price (i.e. 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 (i.e.
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 when exercised immediately.
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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 (i.e. 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. Depending on when an option can be exercised, it is classified in on of
the following two categories:
American Options: - American options are options that can be exercised at
any time Up to 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.
TRADING IN OPTIONSIf one buys an option contract he is buying the option, or "right" to trade a
particular underlying instrument at a stated price. An option that gives you
the right to eventually make a purchase at a predetermined price is called a
"call" option. If you buy that right it is called a long call; if you sell that right
it is called a short call. An option that gives you the right to eventually make
a sale at a predetermined price is called a "put" option. If you buy that right
it is called a long put; if you sell that right it is called a short put.
Trading in Call
Suppose a call option with an exercise/strike price equal to the price of the
underlying (100)is bought today for premium Re.1.
Profit / Loss for a Long Call.
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At expiry, if the security’s price has fallen below the strike price, the option
will be allowed to expire worthless and the position has lost Re.1. This is the
maximum amount that you can lose because an option only involves the
right to buy or sell, not the obligation. In other words, if it is not in your
interest to exercise the option you don’t have to and so if you are an option
buyer your maximum loss is the premium you have paid for the right.
If, on the other hand, the security’s price rises, the value of the option
will increase by Re1 for every Re.1 increase in the security’s price above the
strike price (less the initial Re.1cost of the option). Note that if the price of
the underlying increases by Re.1, the option purchaser breaks even -
breakeven is reached when the value of the option at expiry is equal to the
initial purchase price. For our call option, the breakeven price is 101. If the
price of the security is greater than 101, the call buyer makes money.
Profit/Loss for a short call.
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Here profit is limited to the premium received for selling the right to buy at
the exercise price - again Re.1. For every Re.1 rise in the price of the
underlying security above the exercise price the option falls in value by
Re.1. Here again, the breakeven point is 101.
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Trading in Put:
Consider that a put option with an exercise/strike price equal to the price of
the underlying (100) is bought today for premium Re.1
Profit/Loss graph for a Long Put.
At expiry the put is worth nothing if the security’s price is more than the
strike price of the option but, as with the long call, the option buyer’s loss is
limited to the premium paid. The breakeven for this option is 99, so the put
purchaser makes money if the underlying security is priced below 99 at
expiry.
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Profit/Loss graph for a short put.
Here profit is limited to the premium received for selling the right to sell at
the strike price. For every Re.1 fall in the price of the underlying security
below the strike price the option falls in value by Re.1. Here again, the
breakeven point is 99.
SWAP CONTRACT:Swaps are similar to futures and forwards contracts in providing hedge
against financial risk. A swap is an agreement between two parties, called
counter parties, to trade cash flows over a period of time. Swaps
arrangements are quite flexible and are useful in many financial situation.
Two most popular swaps are currency swaps and interest-rate swaps.
These two swaps can be combined when interest on loans in two currencies
are swapped. The development of swaps in the eighties is a significant
development. The interest rate and currency swap markets enable firms to
arbitrage are differences between capital markets. They make use of their
comparative advantage of borrowing in their domestic market and arranging
swaps for interest rates or currencies that they cannot easily access.
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1. Interest rate swaps: - These entail swapping only the interest related cash
flows between the parties in the same currency.
Currency swaps: - These entail swapping both principal and interest
between the parties, with the cash flows in one direction being in a different
currency than those in the opposite direction.
COMMODITY FUTURES EXCHANGES –THE PROFILE AND REGULATORY ENVIRONMENTThe Profile of Futures Exchanges (mcx and ncdex)
5.16 Overview of MCX
MCX an independent and de-mutulised 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. Key shareholders of MCX include Financial
Technologies (I) Ltd., State Bank of India (India’s largest commercial bank)
& associates, Fidelity International, National Stock Exchange of India Ltd.
(NSE), National Bank for Agriculture and Rural Development (NABARD),
HDFC Bank, SBI Life Insurance Co. Ltd., Union Bank of India, Canara
Bank, Bank of India, Bank of Baroda and Corporation Bank. Headquartered
in Mumbai, MCX is led by an expert management team with deep domain
knowledge of the commodity futures markets. Through the integration of
dedicated resources, robust technology and scalable infrastructure, since
inception MCX has recorded many first to its credit. Inaugurated in
November 2003 by Shri Mukesh Ambani, Chairman & Managing Director,
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Reliance Industries Ltd, MCX offers futures trading in the following
commodity categories: Agri Commodities, Bullion, Metals- Ferrous & Non-
ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft
commodities. MCX has built strategic alliances with some of the largest
players in commodities eco-system, namely, Bombay Bullion Association,
Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses
Importers Association, Shetkari Sanghatana, United Planters Association of
India and India Pepper and Spice Trade Association. 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, Industry
Associations, amongst others MCX being nation-wide commodity exchange,
offering multiple commodities for trading with wide reach and penetration
and robust infrastructure, is well placed to tap this vast potential.
5.17 Vision and Mission The vision of MCX is to revolutionize the Indian commodity markets
by empowering the market participants through innovative product offerings
and business rules so that the benefits of futures markets can be fully
realized .Offering 'unparalleled efficiencies', 'unlimited growth' and 'infinite
opportunities' to all the market participants.
Commodities
Gold, Gold HNI, Gold M, I-Gold, Silver, Silver HNI,
Silver M
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Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil,
Cottonseed,
Crude Palm Oil, Groundnut Oil, Kapasia Khalli
(Cottonseed Oilcake),Mustard/Rapeseed Oil, Mustard Seed (Sirsa),
RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Sesame Seed,
Soymeal, Soy Seeds
Cardamom, Jeera, Pepper, Red Chilli
Aluminum, Copper, Lead, Nickel, Sponge Iron, Steel
Flat, Steel Long (Bhavnagar) Steel Long (Gobindgarh), Tin, Zinc
Cotton Long Staple ,
Cotton Medium Staple,
Cotton Short Staple, Cotton Yarn, Kapasii
Chana, Masur, Tur, Urad, Yellow Peas,
Basmati Rice, Maize, Rice, Sarbati Rice, Wheat
Brent Crude Oil, Crude Oil, Furnace Oil Middle East
Sour Crude
Oil
Arecanut, Cashew Kernel, Rubber
High Density Polyethylene (HDPE),
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Polypropylene (PP), PVC
Guar Seed, Guar gum, Gurchaku, Mentha Oil, Potato,
Sugar
5.18 Benefits to Participants The mark of a true exchange market is that it provides equal
opportunities to all participants without any bias. This is the central belief of
MCX and towards that it shall be our endeavor to provide all our participants
with equally rewarding opportunities. MCX would harmoniously meet the
requirements of all the stakeholders in the commodity ecosystem in the most
impartial manner.
Benefits to Industry
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 agri-finance
from Banks to rural households.
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Provide trading limit finance to Traders in commodities Exchanges.
Benefits to Exchange MembersAccess to a huge potential market much greater than the securities and
cash market in commodities.
MCX would leverage on the vast experience of NSE in the capital markets
and NABARD for its strong presence in the rural agricultural markets
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..
5.19 OPERATION
Trading
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 Exchange would gradually also consider providing an internet
based access. 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
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Exchange, which matches on the Central System and sends a confirmation
back to the Member.
Risk Management
The macro objective of MCX's Risk Management System is to
financially secure the marketplace and its participants at all times, without
increasing the operational cost or compliance overheads of market
participants. Some of the basic parameters of Risk Management are as
follows:
Risk Management parameters
Real-time Margining.
Quantity (position) limits.
Exposure limits linked to value of outstanding positions and the capital
Deployed.
Daily Loss Limits.
Daily Price Limits.
Special Margins.
Settlement
The Clearing and Settlement System of the Exchange is system driven and
rule based.
Clearing Bank Interface
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.
Delivery and Final Settlement
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All contracts on maturity are for delivery. MCX specifies tender and
delivery periods. For example, such periods can be from 8th working day till
the 15th day of the month – where 15th is the last trading day of the contract
month - as tender and/or 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 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.
6.20 TECHNOLOGY EDGE Exchange markets and operations will undergo a paradigm shift in
their behavior and would be increasingly driven for providing integrated
processes and services to the trading community. Moreover, Exchanges
today need to deliver highest levels of service backed by strong technology
to bring increased participation at lowest possible costs .It is here that MCX
gets the strategic advantage of having Financial Technologies (India) Ltd. as
its technology partner for delivering technologically advanced solutions to
market participants. FTIL's proven class of end-to-end Exchange Trading
technologies addressing Trading /Surveillance / Clearing and Settlement
operations would deliver a cutting-edge to the MCX Trade Life Cycle i.e.
Pre-Trade, Trade and Post-Trade operations
.
NCDEX PROFILE
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5.21 PROFILE
National Commodity & 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 (formerly the Credit Rating Information Services of
India 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. NCDEX is the only commodity
exchange in the country promoted by national level institutions. This unique
parentage enables it to offer a bouquet of benefits, which are currently in
short supply in the commodity markets. The institutional promoters of
NCDEX are prominent players in their respective fields and bring with them
institutional building experience, trust, nationwide reach, technology and
risk management skills.
NCDEX is a public limited company incorporated on April 23,
2003 under the Companies Act, 1956. It obtained its Certificate for
Commencement of Business on May 9, 2003. It has commenced its
operations on December 15, 2003.
NCDEX is a nation-level, technology driven de-mutualized on-line
commodity exchange with an independent Board of Directors and
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professionals not having any vested interest in commodity markets. It is
committed to provide a world-class commodity exchange platform for
market participants to trade in a wide spectrum of commodity derivatives
driven by best global practices, professionalism and transparency. Forward
Market Commission regulates NCDEX in respect of futures trading in
commodities. Besides, NCDEX is 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 its
working.
NCDEX is located in Mumbai and offers facilities to its members in
more than 550 centers throughout India. The reach will gradually be
expanded to more centers.
NCDEX currently facilitates trading of 45 commodities - Cashew, Castor
Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta, Common Parboiled
Rice, Common Raw Rice, Cotton Seed Oilcake, Crude Palm Oil, Expeller
Mustard Oil, Groundnut (in shell),
Groundnut Expeller Oil, Grade A Parboiled Rice, Grade A Raw Rice, Guar
gum, Guar Seeds, Guar, Jeera, Jute sacking bags, Indian 28 mm Cotton ,
Indian 31 mm Cotton , Lemon Tur, Maharashtra Lal Tur, Masoor Grain
Bold, Medium Staple Cotton, Mentha Oil , Mulberry Green Cocoons ,
Mulberry Raw Silk , Rapeseed - Mustard Seed, Pepper, Raw Jute, RBD
Palmolein, Refined Soy Oil , Rubber, Sesame Seeds, Soy Bean, Sponge
Iron, Sugar, Turmeric, Urad (Black Matpe), V-797 Kapas, Wheat, Yellow
Peas, Yellow Red Maize, Yellow Soybean Meal, Electrolytic Copper
Cathode, Mild Steel Ingots, Sponge Iron, Gold, Silver, Brent Crude Oil,
Furnace Oil. At subsequent phases trading in more commodities would be
facilitated.
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NCDEX PRODUCTSAgro Products
Cashew Castor SeedChana ChilliCoffee – Arabica Coffee – RobustaCommon Raw Rice Common Parboiled RiceCrude Palm Oil Cotton Seed OilcakeExpeller Mustard Oil Grade A Parboiled RiceGrade A Raw Rice Groundnut (in shell)Groundnut Expeller Oil Guar gumGuar Seeds GurJeera Jute sacking bagsLemon Tur Indian Parboiled RiceIndian Raw Rice Indian 28 mm CottonIndian 31 mm Cotton Maharashtra Lal TurMasoor Grain Bold Medium Staple CottonMentha Oil Mulberry Green CocoonsMulberry Raw Silk Mustard SeedPepper Raw JuteRapeseed-Mustard Seed Oilcake RBD PalmoleinRefined Soy Oil RubberSesame Seeds SoyabeanSugar Yellow Soybean MealTurmeric UradV-797 Kapas WheatYellow Peas Yellow Red MaizeBase MetalsElectrolytic Copper CathodeMild Steel IngotsPrecious MetalsGoldSilver
Regulation of Commodity FuturesMerchandising and stockholding of many commodities in India have always
been regulated through various legislations like the Essential Commodities
Act, 1955 (ECA, 1955) and Forward Contracts (Regulation) Act, 1952,
(FCRA, 1952) and Prevention of Black marketing and Maintenance of
Supplies of Commodities Act, 1980. The ECA, 1955 gives powers to control
production, supply, distribution, etc. of essential commodities for
maintaining or increasing supplies and for securing their equitable
distribution and availability at fair prices. Using the powers under the ECA,
1955 various Ministries/Departments of the Central Government have issued
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control orders for regulating production/distribution/quality
aspects/movement etc. pertaining to the commodities which are essential and
administered by them.
The FCRA, 1952 provided for 3-tier regulatory system for commodity
futures trading in India:
(a) An association recognized by the Government of India on the
recommendation of Forward Market Commission,
(b) The Forward Markets Commission and
(c) The Central Government Stock exchanges and futures markets being a
part of the Union list their regulation is the responsibility of the central
government.
All types of forward contracts in India are governed by the provisions of the
FCRA, 1952. The Act divides commodities into three categories with
reference to extent of regulation.
(a) The commodities in which futures trading can be organized under the
auspices of recognized association,
(b) The commodities in which futures trading is prohibited and
(c) The free commodities which are neither regulated nor prohibited. While
options in goods are prohibited by the FCRA, 1952, the ready delivery
contracts remain outside its Purview. The ready delivery contract as defined
by the Act is the one which provides for the delivery of goods and payment
of a price therefore, either immediately or within a period not exceeding
eleven days after the date of the contract. All ready delivery contracts where
the delivery of goods and/or payment for goods is not completed within
eleven days from the date of the contract are forward contracts.
The Act classified forward contracts into two:
(a) Specific delivery contracts and
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(b) Other than specific delivery contracts or futures contracts. Specific
delivery contract means a forward contract which provides for the actual
delivery of specific qualities or types of goods during a specified time period
at a price fixed thereby or to be fixed in the manner thereby agreed and in
which the names of both the buyer and the seller are mentioned. The specific
delivery contracts are of two types: transferable and non-transferable. The
distinction between the transferable specific delivery (TSD) contracts and
non - transferable specific delivery (NTSD) contracts is based on the
transferability of the rights or obligations under the contract. Forward
trading in TSD and NTSD contracts are regulated by the government. As per
the section 15 of the FCRA, 1952 every forward contract in notified goods
(currently 36 commodity items) which is entered into except those between
members of a recognized association or through or with any such member is
treated as illegal or void (see appendix I for the list). As per the section 17(1)
of the Act, 82 items are prohibited for forward contract (see appendix II for
the list). The section 18(1) of the Act exempts the NTSD contracts from the
regulatory provisions. However, over the years the regulatory provisions of
the Act were applied to the NTSD contracts and 79 commodity items are
currently prohibited for NTSD contracts under section 17 of the Act (see
appendix III for the list). Moreover, another 15 commodity items are brought
under the regulatory provisions of the section 15 of the Act out of which
trading in the NTSD contract has been suspended in 12 items (see appendix
IV for the list). At present, the NTSD contracts in cotton, raw jute and jute
goods are permitted only between, through or with the members of the
associations specifically recognized for the purpose. Subsequent to the
report of the Committee on Forward Markets (known as the Kabra
Committee) submitted in 1994 the government has so far permitted futures
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trading in nearly 35 commodities under the auspices of 23 commodity
exchanges located in different parts of the country.
The commodities in which futures trading is permitted are: pepper,
turmeric, gur, castor seed, Hessian, jute sacking, cotton, potato, castor oil
soybeans and its oil and cake, coffee, mustard seed and its oil and oilcake,
ground nut and its oil, sunflower oil, copra/coconut and its oil and oilcake,
cottonseed and its oil and oilcake, kapas, RBD palmolein, rice bran and its
oil and oilcake, sesame seed and its oil and oilcake, safflower seed and its oil
and oilcake, and sugar. This list may get enlarged with the repeal of ECA,
1955 and with further liberalization of farm sector as envisaged in the
National Agricultural Policy, 2000 and the Union Budget, 2002-03. The
exchanges are required to get prior approval of the FMC for opening of each
contract in commodities which are notified under the relevant sections in
FCRA 1952. Regulation is essential especially in a private ownership and
market oriented system to ensure the necessary checks and balances in the
system. However, stringent and continuous regulation for long period of
time would do no good to the system. The initial stringent regulation should
ensure that a foolproof and growth oriented control system in terms of set up
of the exchange and its sound management, a clearinghouse which can
promote trade and its financial integrity, sound and facilitating contract
terms and conditions, etc. is in place.
The exchanges are already assumed to be self-regulatory agencies.
Their role must get strengthened further along with FMC minimizing its role
as a facilitator making the existing regulation an ‘appropriate regulation’.
5. After assessing the market situation and taking into account the
recommendations made by the Board of Directors of the Exchange, the FMC
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prescribes various regulatory measures from time to time, for prudential
regulation of futures/forward trading.
6. Under a World Bank aided Grant Scheme to support development of
commodity futures markets in India, a number of consultancy assignments,
training programmes, study tours, office automation of FMC etc. have been
undertaken. The project was successfully completed on 31st October, 2000.
A Plan Scheme under the 10th Five Year Plan for generating awareness
about the activities, mechanism and benefit of futures trading among farmers
is being implemented.
7. Under a USAID Technical Co-operation programmed on Commodity
Futures, the Government of India has entered into an agreement with
USAID for capacity building in Indian commodities derivatives market. The
capacity building includes training, seminars, consultancy studies and visits
to foreign regulators and exchanges. The short term component of this
programmes likely to be completed by the end of November, 2004.
8. In enhancing the institutional capabilities for futures trading the idea of
setting up of National Commodity Exchange(s) has been pursued since
1999. Three such Exchanges, viz, National Multi-Commodity Exchange of
India Ltd., (NMCE), Ahmedabad, National Commodity & Derivatives
Exchange (NCDEX), Mumbai, and Multi Commodity Exchange (MCX),
Mumbai have become operational. “National Status” implies that these
exchanges would be automatically permitted to conduct futures trading in all
commodities subject to clearance of bye-laws and contract specifications by
the FMC. While the NMCE Ahmadabad commenced futures trading in
November, 2002, MCX and NCDEX, Mumbai commenced operations in
October/ December, 2003 respectively.
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9. The Government has proposed to initiate steps to integrate the
commodities markets
and securities markets. A Working Group set up in this connection has
submitted its report to the Government indicating the road map for
convergence of securities and commodities derivatives markets and their
regulatory systems.
5.22 COMMODITY FUTURES MARKETS IN INDIA: PRESENT SCENARIO Major reforms have been initiated in commodity futures markets in
India since the last few years. An article1 by this author in this Journal
compared the growth trajectories being followed by the commodity
derivatives market vis-à-vis the securities derivatives markets in India at the
dawn of the millennium. It was observed that though derivatives trading
commenced in the securities market only in June 2000 it was growing at
great speed while the commodity derivatives markets which were
operational for about 48 years by then was only gradually waking up.
However, subsequent few years have witnessed major changes in the
commodity spectrum despite the several institutional constraints in which
commodity derivatives markets still function. Commodity futures trading in
India was in a state of hibernation for four decades, which was marked by
suspicion on the benefits of futures trading. This is replaced by policy,
institutional and market activism in the last few years. This is partly a
response to the predominant role being assigned to the market forces in price
determination and the consequent need for providing market-based derisking
tools. It is also the result of a growing awareness that derivatives trading do
perform substantial risk mitigating functions to the stakeholders. This
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resurgence of interest in commodity derivatives is timely since global
commodity cycle is on the upswing, and experts have predicted that we are
in the decade of the commodities. Concomitant to the newfound policy
initiatives the market has responded by setting up modern institutions
(Nation-wide Multi-Commodity Exchanges, (NMCE) and adapting some of
the “best” practices such as electronic trading and clearing.
The projections of commodity derivatives trading, though widely variant in
the range of Rs.30-50 trillion and needs to be calibrated with sound
assumptions, indicate the enormous potential of this sector not only in terms
of trading but also in terms of the opportunities for developing value-added
services in terms of quality warehousing, gradation and certification
services, financial intermediation, modern marketing practices, modern
clearing and settlement mechanism. Once the market becomes liquid the old
complaint, that the Indian commodity derivatives markets do not meet the
basic objectives of price discovery (with many studies indicating
backwardation common place) and risk management may also vanish.
The most important changes that have taken place in the commodity
futures space were the removal of prohibition on futures trading in a large
number of commodities and the facilitation of setting up modern,
demutualised exchanges by the Government of India. These two initiatives
together are becoming instrumental in changing the contours of the
commodity futures markets in India in terms of both participation and
practices. There are, however, still a number of obstacles in fully exploiting
the opportunities available to the commodity ecosystem.
The views expressed and the approach suggested in this paper is of the
author and not necessarily of NSE.
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1. ‘Securities Market and Commodity Derivatives Markets – “Rush” vs.
Slow Growth?’ (NSE News, December 2001). A comparative profile of the
commodity derivatives markets with that of the nascent securities
derivatives market was made since no comparison of the Indian derivatives
markets would be useful with any counter part. This was because of the
chequered history of Indian commodity derivatives trading from that of a
flourishing market formally started in 1875 with the setting up of the
Bombay Cotton Association but which went into disrepute during the
“scarcity decades” of the 1960s and 70s. A comparison revealed that the
rapid strides made by the securities derivatives segment in a short span was
because of its sound institutional frame work in the spot side while the spot
market acted as a drag on the progress of the derivatives markets in
commodities.
2. The NMCEs marked a major paradigm shift in the institutional structure
and market architecture of commodity futures markets. Drawing heavily
from the ‘NSE model’ in the securities markets these institutions are
expected to unleash a chain of value added functions in the commodity
derivatives markets as well as in the commodity spot market through a host
of ‘extra functions’ they are expected to perform. These include warehouse
receipt based deliveries which would require transferability and negotiability
of warehouse receipts and its de-materialization, entry of corporate, banks,
financial institutions and FIIs in commodity futures trading, dissemination of
information relating to the physical markets and prices, adoption of the best
technology in trading, clearing and settlement and so on. The NMCEs have
started exhibiting a penchant for innovations as reflected in their attempts at
co-opting warehousing agencies, bringing about transferability and de-
mating of warehouse receipts account, though in a limited manner (because
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of the absence of a legal frame work) association of banks (for other than
trading activities as trading in commodities is still prohibited for banks)
“polling” of price information from the spot markets(from
mandies)commencement of evening trading session to align domestic
markets with the global markets and so on(see Economic Survey 2003-04).
3. Several studies particularly by Jain & Naik (1999), Thomas (2003),
Sahadevan (2002) etal have indicated that only in a few cases the
commodity futures markets performed its basic objective of discovering
efficient prices. While the studies’ focus were different the general picture
emerging was that only in the case of commodities with reasonable volumes
of trading, like castor seed and pepper, the markets achieved the objective of
price discovery to some extent. However, since the markets in general were
too shallow the results were not unexpected.
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RESEARCH METHODOLOGY
74
6. RESEARCH METHODOLOGY6.1 TITLE OF THE PROJECT REPORT“A study on a commodity market”
Research Design:-
1. Exploratory research:
2. Descriptive research:
First an exploratory research was conducted to get some
insights about the topic. Secondary data analysis was performed. It
was followed by questionnaire filling. Findings of the exploratory
research were regarded as input to further research. This research will
be followed by descriptive design.
Data Collection:-
1) Primary Data:-
Primary data are those, which are collected a fresh and for
through questionnaire, which is filled by respondents.
2) Secondary data:-
Primary data was collected the first time, and thus they are
original data.
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Secondary data means that data which are readily
available from magazines, internet, newspaper etc. Various
sources used in our research are as follow:
Internet
Text-book
Sampling Design:
There are basically two types of survey:
1. Census survey and
2. Sample survey.
In this research study Sample survey method is used, because
in two months time period Census survey is not possible .Sample size of
this study is taken 100 investors of Navsari city.
6.3 FIELDWORK:
In order to gather the primary data associated with my survey commodity traders and government servants over a selected hub of areas in Navsari, i have undergone an extensive fieldwork. The basic purpose of the
fieldwork was, to record responses of target people.
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OBJECTIVES
1. To analyze the views of commodity traders.
2. To make understand the process of future commodity trading in India.
3. To make know the investment pattern of commodity traders & people.
4. To learn awareness of investor about commodity market.
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Limitation
1. This survey restricted to selected area of a navsari city.
2. The sample size for the survey of people was limited to 100
respondents, which might not be representing the whole population.
3. The results are totally derived from the respondents answers. There
might be a difference between the actual and projected results.
4. Research also depends on surveyors bias.
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DATA ANALYSIS &
INTERPRETATION
79
DATA ANALYSIS AND INTERPRETATION:-
Age:
Age 20-30 30-40 Above 4025 45 30
Education Qualification:
Qualification Post graduate Graduate Under graduate40 35 25
Occupation:
Professional Businessman Employee of pvt.sector
Employee of govt. sector
25 30 14 31
1. Where do you invest your saving?
Bank 17%Stock market 41%IPO 2%Government Bonds 4%Mutual funds 10%Insurance 13%Post-office 10%Gold-silver 3%Other 0%
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Interpretation: From the above chart we can interpret that, Most of the people i.e. 41%
invest their savings in stock market, 17% people invest in their savings in
bank, 2% people invest their savings in IPO,3% people are invest their
savings in Government bonds.
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2. If you invest in stock market, where do you invest your saving?
Equity 34%Commodity 56%Derivatives 10%
Interpretation: From the above chart we can interpret that, 34% people invest their
savings in equity, most of the people i.e. 56% people invest in their
saving in Commodity, 10%people invest their saving in derivatives.
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3. How to reach at investment decision?
Self analysis 18%Tips from Expert 36%Tips from Friends 14%Business channels
12%
News paper 20%Other 0%
Interpretation: From the above chart we can interpret that, most of the people i.e. 36%
people are making investment decision through tips from expert, 18%
persons are depend on self analysis for investment decision,14% persons are
taking tips from friends for making investment decision, 12% people are
view news channels for making investment decision and 20% people are
reading news paper for making investment decision.
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4. Which factor plays a crucial Role When You Make a Decision to Invest in Stock Market?
Risk reduction 12%Investment 60%Leverage Benefit 16%Speculative motive 8%Arbitrage Benefit 4%
Interpretation:From the above chart we interpret that, 12% people believe that risk
reduction is main factor behind investment decision, most of the 60%
people believe that investment (savings) is the main factor for decision
making, 16% people are taking decision on the basis of leverage benefit,
8% people depend on speculative motive and 4% people are depend on
arbitrage benefit for making investment decision.
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5. Duration of attachment with commodity market?
Less than 1 year 42%1 to 5 year 50%More than 10 year 4%5 to 10 year 4%
Interpretation: From above chart, we can interpret that 42% people are attached with
commodity market for less than 1 year, mostly i.e. 50% people are attached
with it for 1 to 5 year, 4% people are attached with it for more than 10 year
and 4% people are attached with commodity market for 5 to 10 year.
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6. Which of the following product prefer by you for your investment?
Metal 18%Crops 20%Oil 16%Cereals & Pulse 4%Spices 4%Energy 14%Bullions 20%Other 4%
Interpretation: From the above chart we can interpret that, 18% people prefer metal for
investment, 20% people prefer crops for investment, 16% people prefer
oil for investment, 4% people prefer cereals & Pulse for investment, 4%
people prefer spices for investment, 14% people prefer Energy product
for investment, 20% people prefer Bullions product for investment and
4% people Invest in others.
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7. Which type of trading you prefer to deal with?
Interpretation:From the above chart we can interpret that, 10% people prefer square up
mode, 36% people prefer intraday trading, 44% people prefer delivery
based trading and 10% people prefer hedging for trading.
Square up Mode 10%Intraday 36%Delivery Based 44%Hedging 10
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8. Which exchange you prefer to deal with?
MCX 62%NCDEX 38%
Interpretation: From the above chart we can interpret that, 62% people prefer MCX for
dealing, 38% people prefer NCDEX for dealing.
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9. How do you view your self?
Traders 36Speculators 26Short time investors 38
Interpretation:From the above chart we can interpret that, 36% people are view themselves
as traders, 26 people view themselves as a speculator and 38% people are
view themselves as a short time investor.
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10.In which of the following company you would like to deal more time?
Marwadi 25%Sharekhan 24%Concept 17%IIFL 18%Devine-hub 12%Karvi 4%
Interpretation:From the above chart we can interpret that, 25% people would like to invest
in Marwadi, 24% people like Share khan, 17% people like Concept, 18%
people like IIFL, 12% people like Divine hub and 4% people like Karvi for
their investment.
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FINDINGS & CONCLUSION
91
FINDINGS AND CONCLUSION:-
1) Commodity derivatives have a crucial role to play in the price risk
management process. Especially in any agriculture dominated
economy. Derivatives like forwards, futures, options, swaps etc are
extensively used in many developed as well as developing countries in
the world. However, they have been utilized in a very limited scale in
India
2) The production, supply and distribution of many agricultural
commodities are controlled by the government and only forwards and
futures trading are permitted in certain commodity items.
3) The most things I have seen are that the awareness of future
commodity trading is still not there.
4) People who knows, they believe that operators and big players in the
market drive this future commodity market.
5) Most of people’s feel that the qualities of the commodities are not as
per the requirement.
6) For the process of taking or giving delivery in future commodity
market is lengthy, costly, and required so many documents.
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7) The option trading is still not allowed in commodity market so the
risk management process is incomplete. Because we all know that
future trading has its own limits.
8) The account opening process of future commodity trading is lengthy
and requires more documents.
9) The delivery centers of commodities are very less in India
compare to other developed countries.
10) People still considering that to invest in commodity market is
very risky.
11) People still considering commodity market for speculation
rather than business purpose
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BIBLIOGRAPHY
www.mcxindia.com
www.ncdex.com
www.commodityindia.com
www.Marwadionline.com
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ANNEXURE
Questionnaire
I Darshana Patel Student of T.Y B B A,S.S Agrawal Collage of Arts, Commerce and Management Navsari,Kindly request you to fill up the Questionnaires is on the “Study of a Commodity market” and partial fulfillment for the Degree of ‘Bachelor of Business Administration’. I will be thankful for your Co-Operation.
1. Education:2. Name:3. Contact No:4. profession:5. Age:6. Where Do You Invest Your Saving?
oBank
oStock Market
oIPO
oGovernment Bonds
oMutual Funds
oInsurance
oPost-Office
oGold-Silver
oOther Specify
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7. Where do you Invest your If You Invest in Stock Market, Saving?
oEquity
oCommodity
oDerivatives
8. How You Reach At Investment Decision?
oSelf analysis
oTips From Expert
oTips From Friends
oBusiness Channels
oNews Paper
oOther(Specify) ________________
9. Which Factor Plays a Crucial Role when You Make a Decision to Invest in Stock market?
oRisk Reduction
oInvestment
oLeverage benefit
oSpeculative motive
oArbitrage Benefit10. Duration of Attachment with Commodity Market?
oLess than 1 Year
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o1 to 5 Year
oMore than 10 Year
o5 to 10 Year
11. Which of the Following Product Prefer by you for Your Investment?
oMetal Spices
oCrops Energy
oOil Bullions
oCereals & Pulse Other(Specify)
12. Which Type of Trading you prefer to Deal With?
oSquare up Mode
oIntraday
oDelivery Based
oHedging13. Which exchange you prefer to deal with?
oMCX
oNCDEX
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14. How do you view your self?
oTraders
oSpeculators
oShort Time Investors
15. In which of the Company you would like to deal more Time?
oMarwadi
oSherkhan
oConcept
oIIFL
oDevine-hub
oKarvi
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