Darshana Patel.ty Bba

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A Project Report On A STUDY OF A COMMODITY MARKET Undertaken at: Submitted in partial fulfillment of the degree of Bachelor of Business Administration (BBA) S. S. Agrawal College of Arts, Commerce and Management, Navsari. Submitted by: PATEL DARSHANA B Guided by MRS. JAYA DAKHWANI. Academic Year (2012S-2013) 1

Transcript of Darshana Patel.ty Bba

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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)

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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

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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.

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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.

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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

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INTRODUCTION

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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

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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.

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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.

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COMPANY PROFILE

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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

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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.

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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.

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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.

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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

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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.

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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.

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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

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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.

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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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